Concerns over the state of the commercial real estate market due to high interest rates, shifting demand, and decreased values have largely been focused on the potential impact to the economy, commercial real estate owners, and banks. From a risk management perspective, however, if you are a property manager or real estate agent or broker, the emerging situation raises some very interesting questions for you as well. For instance, what should you do if you learn that a commercial property owner that you represent (client) is about to default on their mortgage or is on the verge of foreclosure?
- What disclosures are you legally and contractually required to make to potential and current tenants? And do these disclosure requirements change in any way if you know a tenant is about to incur, or has recently incurred, significant costs to customize the space for their specific business needs?
- What disclosures are you legally and contractually allowed to make to potential and current tenants? To the extent that any disclosures could adversely impact your client’s interests, what are you allowed to share with potential and current tenants and under what circumstances?
Implications for Property Managers and Real Estate Agents/Brokers
Failure to make a required disclosure could result in claims against you by disgruntled tenants for damages relating to your client’s financial struggles. These may include but are not limited to losses caused by neglected spaces, high vacancies, or even leases nullified by a foreclosing lender. Making a disclosure, however, could also result in claims against you by disgruntled clients for damages related to your disclosure(s), including but not limited to lost accounts or subsequent lawsuits by tenants that amplify your clients’ financial woes.
Risk Management Considerations
When your disclosure obligations to prospective or current tenants conflict with your confidentiality and fiduciary obligations to your clients, how should you proceed? The answer is it depends. While your confidentiality and fiduciary obligations to a client are significant, there are typically exceptions that allow for, and may even require, disclosure to prospective and current tenants of material information. What constitutes material information is best determined after consultation with your attorney and, if applicable, insurance broker, who can advise you based on your specific circumstances and jurisdiction. The terms of the leasing agreement between the client and tenant or the terms of the retainer agreement between you and your client may create additional considerations. By way of example, but not limitation, does the leasing agreement require notice to tenants or endow them with certain rights in the event of financial difficulties by your client? Does your retainer agreement inform your clients about their disclosure obligations as well as your disclosure obligations in your capacity as their agent? Prior notice can prevent clients from feeling blindsided when a disclosure must be made, and if incorporated into the retainer agreement or some other written document, can be referred to at a later date, if necessary.
Benefits and Protections offered by your Real Estate E&O policy
We highlight the above scenario to illustrate the types of thorny situations that can arise during the course of your career. Sometimes, determining the “right” course of action can be complicated, to say the least, and you may find yourself between a rock and a hard place. Proper risk management practices, such as those suggested above and outlined in our article, Risk reduction tips for real estate professionals, can help minimize the likelihood of certain claims, but even the most robust risk management strategies can’t predict or prepare you for all the potential events that could give rise to a claim.
In these situations, being appropriately insured and protected through an errors and omissions (E&O) policy can prove incredibly beneficial. Victor and CNA’s real estate E&O policy responds to allegations of your negligence or failure to meet the standard of care in the performance of your professional services. There is also coverage under the policy for related costs, such as those associated with engaging a public relations firm, responding to subpoena requests, and proceedings before your state licensing board, to name just a few examples. Even in the absence of a claim, the policy can help you proactively manage your risks through pre-claims assistance. This provides you with legal, forensic, and other assistance, as needed, to help mitigate or prevent incidents from evolving into claims without triggering your deductible obligation or eroding your policy limits. These coverages are all subject, of course, to the conditions outlined in your specific policy.
To learn more about the protections and benefits offered by our E&O policy or to receive a quote, speak with your insurance agent or broker today. You can also visit our website for additional information on the features of our E&O policy.
