WARNING TO MARYLAND HOMEBUYERS!

Maryland realtors use a form residential contract of sale (“Contract”) produced by the Maryland Association of Realtors (“MAR”) that bears scrutiny. It contains a clause that makes the homebuyer responsible for the realtor’s attorney’s fees under certain circumstances. All agents and brokers in Maryland use either the MAR or the Greater Capital Area Association of Realtors (“GCAAR”) Contract. The GCAAR Contract contains a similar provision. For the sake of simplicity, the MAR Contract is addressed, with the understanding that the same analysis applies to both types of Contracts.

Liability for Realtor’s Attorney’s Fees

If a dispute arises between the realtor and its homebuyer client, the Contract modifies the usual Maryland law that each party pays for its own legal fees. The MAR Contract contains a provision, buried in the middle of the 11-page Contract, that says its client must pay the realtor’s legal fees if the realtor prevails in the litigation.

Litigation Against Realtors

Realtors typically aggressively defend when sued by dissatisfied clients. These deep-pocketed defense efforts are funded by the broker’s E&O insurance company. This could result in the court awarding legal fees against the realtor’s client in an amount greater than the cost of the purchase price of the home. This could happen even if the homebuyer proves fraud by the preponderance of the evidence. Typically, homebuyers lack the financial resources to pay such a judgment, which can lead to financial ruin. Is this fair, or do realtors intentionally use this hidden fee-shifting contract provision to punish or discourage its clients from seeking a legal remedy for the negligence or fraud of the realtor?

The MAR Contract Favors Realtors.

Realtors have a legitimate business interest in discouraging its clients from filing suit and recouping its legal fees when it prevails, but how about the homebuyer? Does the MAR residential contract of sale provide the homebuyer with the same protection? If the homebuyer painstakingly reads the Contract and parses the language of the attorney’s fees clause, the homebuyer will learn that the realtor is not obligated to pay the homebuyer’s attorney’s fees if the homebuyer prevails against the realtor. In other words, the contract provision is wholly one-sided, in favor of the realtor to the detriment of realtor’s client.

The lopsided contract of sale provision is typically not highlighted or brought to the attention of the client. As a form contract used by the real estate industry in Maryland, as a practical matter, it is not subject to negotiation. Clients who encounter a problem after closing, who may wish to pursue a legal remedy against a negligent agent, rightfully feel that this one-sided contract provision has been slipped-in to their detriment.

No Consumer Protection Act Remedy

The aggrieved homebuyer may not seek attorney’s fees under the Maryland Consumer Protection Act (“MCPA”), because the MCPA exempts realtors from its remedies for deceptive and unfair trade practices.

Adverse Impact on Homebuyer

One example of how detrimental this can be arises out of the agent promising the client that he will arrange for the Wood Destroying Insect (“WDI”) Inspection. This inspection is critical for protection of the homebuyer. Yet, due to admitted negligence, the agent fails to arrange for a WDI Inspection, and informs the client that everything is ready for closing. After the client moves into his new home, he discovers major termite damage which would have been discovered during a typical WDI Inspection by a licensed pest control inspector. According to one estimate, the cost of repair exceeds the value of the house. This magnitude of damage would have allowed the homebuyer to terminate the Contract and get his deposit refunded.

The homebuyer files suit against the agent who admits to having failed to order the WDI Inspection but raises a defense, unique to Maryland and about two other states, that the suit is barred by the homebuyer’s contributory negligence. Based on this defense, the agent aggressively defends, attends a court-ordered settlement conference and, despite his negligence, offers zero to settle. The case proceeds with the agent attempting to pressure the homebuyer into dismissing the case to avoid exposure to legal fees. As the case progresses, the agent’s legal fees actually exceed the purchase price of the home, thereby missing the opportunity for an early settlement for half that amount to pay for repairs. Because of the one-sided attorney’s fee clause, the agent feels no pressure to avoid payment of the homebuyer’s attorney’s fees if the homebuyer prevails. The lack of mutuality can destroy the usual dynamics of settlement negotiation. The agent’s attorney may actually gloat that he has a track record of defending cases for a particular high profile real estate brokerage notorious for scorched earth litigation tactics, where six-figure attorney’s fees have been granted for the prevailing broker, leaving one to surmise that the broker’s former clients, if ordinary people with large mortgages, faced financial ruin.

The Duties Owed By Realtor Are Ignored.

Under Maryland law, real estate licensees (including agents and brokers) owe their clients a duty of honesty, good faith, reasonable care and due diligence; and must disclose material facts about a property which they know or should know. Moreover, real estate licensees owe a duty of loyalty to the client. The typical Buyer Brokerage agreement further provides that the agent and broker will represent the interests of its client. Maryland case law describes the agent and broker as a fiduciary. Despite these duties, the MAR Contract takes unfair advantage of homebuyers who are not expecting the agent and broker who represent their interests to include such a provision in the Contract they have to sign to purchase their home.

Corrective Legislation is Needed.

The one-sided fee-shifting provision in residential contracts of sale is contrary to public policy. Such predatory behavior should be addressed by corrective legislation. Either the provision should be declared void by law or it should be modified to apply to whoever prevails in order to put the agent and homebuyer on an equal footing.

Is Litigation Viable?

When a homeowner faces major economic losses due to the negligence or fraud of the realtor, experienced counsel must evaluate the strength of the case and likelihood of success. This requires an investigation of the facts and assessment of any legal issue that might be raised in defense. With an understanding of the potential risks and benefits, litigation may be the only option to obtain compensation to repair and restore the home.

Whitney, LLP represents homebuyers in claims and litigation against negligent and dishonest real estate agents, and those that commit fraud.  Contact our office for a Legal Consultation at  410 583 8000 or use our online Quick Contact Form.