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Liability: what to know when buying abroad

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Selling real estate is a highly regulated sector in most Western countries and agents run many risks if a deal goes wrong. They are liable for a vast number of issues and often financially responsible for their failures. Other essential features of overseas markets include:

  • Liability laws for agents in the UK and USA: professional failures are penalised.
  • Mandatory real estate licenses in France, Germany and USA.
  • Notaries more liable than agents in France, Germany, Latvia and Spain.

Legal liability

In the USA, laws regulate real estate activities and protect the interests of buyers. “Client relations are governed by the Agency Law prescribing six fiduciary duties for which the real estate agent is liable, also known as OLD CAR,” explains Ilja Bitkov, realtor at American firm Coldwell Banker. The acronym OLD CAR stands for the following responsibilities:

  • Obedience, strict observation of client requirements;
  • Loyalty to the client and their interests;
  • Disclosure of all available information;
  • Confidentiality: compliance with confidentiality requirements;
  • Accountability and reporting
  • Reasonable Care/Diligence in collecting information that could positively or negatively affect the property after its acquisition.

Agents should not advise clients on issues beyond their professional competency such as legal, engineering or construction questions. The Fair Housing Act requires them to act fairly and abstain from discrimination of any party and the US National Association of Realtors has a mandatory code of ethics to which members must subscribe.

Unlike some European countries, American notaries only certify the authenticity of signatures. Ilja Bitkov explains: “Before the transaction is concluded, there are title companies that check the legitimacy of the property deed. Buyers and sellers also hire lawyers to protect their interests during the transaction.”

In the UK, real estate agents are governed by several legal acts including Estate Agents Act 1979, Consumers, Estate Agents and Redress Act 2007 and 2012 Consumer Protection Regulations. There are also organisations controlling their activities like the Independent Network of Estate Agents (INEA) and the National Association of Estate Agents (NAEA). MRICS (Members of RICS) agents are qualified chartered surveyors and reputable professionals accredited by the Royal Institution of Chartered Surveyors (RICS).

In Spain, real estate agents are as liable to clients as any other professional. “The law applies to everyone without discrimination and the guilty individual or organisation will have to bear responsibility for any illegal acts and deeds or damage inflicted in accordance with the applicable law. Meanwhile, note that an agent is just an intermediary between the buyer and the seller of the property for sale in Spain and cannot be responsible for one of the parties' failure to perform its obligations to the other party,” says Mary Dunne, managing director at MP Dunne Properties that sells real estate in Marbella and Costa del Sol.

Notaries bear much more liability in Spain. “If the notary sees that something is wrong with the documents they will not sign them, it is as simple as that. Before signing the documents, agents perform due diligence on the transaction, checking the property for encumbrances and other issues and the notary receives the drafted documents. Real estate agents would never bring documents to the notary if there are any issues,” says Natalia Sobol, commercial director at Costa Blanca Info Property and Grupo Terrasun.

In Latvia, the question of liability is more about ethics and integrity of the agent. “This notion is not established in any legal documents and the only thing the agent risks in their reputation. But this is not a meaningless word in Riga, Jūrmala and Latvia in general. As the real estate market is rather modest, nearly all the market players know each other and negative feedback from a client can nearly end an agent's career. Clients often come to us on the advice of friends and colleagues. Reputation is a critical driver of the image and financial success of the company and agent,” says Julija Kuharjonoka, rental and sales associate at MGroup Estate. She believes Latvia does not need to tighten laws to regulate agents as transactions are executed transparently and governed by other tools like the notary's work, so the buyer is protected. “In Latvia the notary guarantees the legitimacy of the transaction to their clients. No registration is completed without a notary as they are responsible for reviewing the seller's title to the property, potential encumbrances and will have to inform the buyer about issues if they arise. Notaries here are subject to strict licensing, their numbers are restricted, it is difficult to enter this profession and all the candidates are carefully selected after years of academic studies,” she adds.

In France, much like Latvia and Spain, the notary is more liable than the agent. “Agents make the contracts and sales arrangements (mandats) with sellers and then act as intermediaries. Thus, the main liability of an agent is one to the seller. The notary registering the transaction has primary liability for the acquisition and provision of all the documents. However, we provide all the documents available like technical checks to the buyer and then notary. If any undisclosed defects are found in the property despite all these precautions, there is a solution. Special buyer insurance, dommages-ouvrage (DO), can be taken out during the purchase process that guarantees all defects will be eliminated,” says Maria Dichenskova, spokesperson for Michaël Zingraf Real Estate — Christie’s.

In Germany, notaries bear more liability than real estate agents too as they ensure the protection of the different parties during the transaction. “The agent is essentially an intermediary between the buyer and the seller. All the other technical, legal and financial checks are made by the buyer at their discretion and own expense,” says Ilya Gordon, head of Gordon Commercial. “Say the buyer has acquired a house for €1M and found after the acquisition that its technical condition is not what was expected, they can certainly sue the agent. However, the judge would ask them why they did not commission a technical review before signing a sales contract. In fact, there is an explicit clause in the notarised contract that the buyer has checked the condition of the property and has no claims.”

Professional liability insurance

Bona fide agents have their activities insured so if the transaction falls out of escrow, their insurer will reimburse the damage.

Nevertheless, insurance in Spain is voluntary. “Professional liability insurance is available but not mandatory. It covers legal costs or reimburses damages in certain cases like the loss of a client's confidential documents or a professional error,” says Mary Dunne. The same is true of Latvia where the law does not obligate agents to have insurance either.

However in France and the USA, realtors must insure themselves. “Real estate agents, lawyers, professionals that arrange mortgage application documents and title companies must be insured in America. Moreover, before a transaction is made, the buyer usually also gets insured for title registration and formalisation errors, but this insurance is only considered mandatory if they take out a mortgage,” explains American realtor Ilja Bitkov. “Nevertheless, I don’t know any lawyer or title company that would agree to a transaction without insurance. I had some cases when the buyer didn’t need a loan and didn’t want insurance because it cost over $5,000. The lawyers would rather be fired than agree to anything of the kind because they could be accused of failing to protect their client by not explaining the implications of not having insurance,” Mr Bitkov added. According to his professional experience, the real estate agency is often responsible for the professional liability insurance of its agents that generally covers any errors and omissions.

Dispute resolution

Real estate agents who make professional errors in the UK and USA do not escape punishment.

For instance, sanctions for NAEA members in the UK range from a warning to a penalty of up to £5,000. Alternatively, many agencies are members of the Ombudsman for Estate Agents (OEA) which resolves disputes between agents and their clients. If consumer rights are violated, agents may be required to reimburse clients up to £25,000.

In the United States, disputes between clients and agencies are resolved by a special commission in each state. “There is a list of potential violations punishable by the commission ranging from license suspension to total revocation or material pecuniary penalties, even for petty offenses. An agent or agency can even be penalised for negligent record maintenance, like missing forms in the company's files. Meanwhile, the client may go to court for major offenses. Insurance payment caps are high and often cover the expenses,” says Mr Bitkov.

Real estate agent licenses

Many countries, but not all of them, require agents to be licensed for professional activities, which is usually earned after completing a special training course. Other countries, however, have alternative safeguards.

For instance, real estate agent licenses are not mandatory in Latvia. “There is a private licensing company here called Lanida. They are busy lobbying for a law on mandatory licenses but this will take a long time. Generally, they organise training sessions, seminars, various open forums and companies or agents are paying members of this association. But this license from Lanida only proves that the agent has successfully completed their training course,” Julija Kuharjonoka points out.

In Spain, licensing rules differs from region to region. “While it’s not mandatory to have a license in Alicante and Costa Brava to open an agency, it’s compulsory in Barcelona. At the same time, anyone can open an agency on the Costa Blanca, even without any special education,” says Natalia Sobol. “Our agency has a license which gives us a competitive edge because when developers start selling their properties, they contact the licensing company IP which forwards the properties to only licensed agencies.”

In general, licenses here are issued by professional associations. “Like other organisations (attorneys, notaries), the real estate association has insurance that guarantees to a certain extent professionalism and quality of the services rendered by member companies. Companies are only admitted as members if they fulfil all the requirements and conditions of the association,” says Mary Dunne.

In the USA, licenses are mandatory and obtained after training and passing exams. There are up two or three levels of license depending on the state: the primary license (real estate salesperson’s license), real estate broker’s license and broker associate. To sell real estate, the agent must have the sales license while the broker and broker associate licenses allow holders to manage and own agencies. In some states, there is only one broker’s license. Training and exams are mandatory to obtain these permits.

There is also the notion of realtor in the USA: it is registered trademark of the National Association of Realtors (NAR) which reserves this title to its members only. “I have some $4,000–5,000 in annual expenses to keep the license and membership in various professional organisations valid. It would be much less if membership and participation in these communities were minimal.”

In France, the agent cannot claim their commission if they do not have a “professional card” (carte professionnelle) issued by local authorities which confirms their ability to perform their duties correctly. As in the United States, there are three levels: T card for property sales (T for transaction), G card for managing an agency (G for gestion, i.e. management) and a card for listing merchants (marchand de listes) allowing individuals to sell property listings but not participate transactions. Only individuals with university degrees in specific subjects (i.e. law, economics, architecture) or proving extensive experience as a subordinate employee of a real estate agency (i.e. 4–10 years dependent on job position) may apply for these licenses. Unlicensed employees of agencies are not authorised to draft contracts or give legal advice.

In Germany, agents have been through rigorous professional training to obtain their mandatory broker's license. It is not issued to persons previously convicted of theft, fraud or voluntary bankruptcy. Qualifying courses are offered by the German real estate agents association (Immobilienverband Deutschland or IVD). “Unlicensed real estate activities can lead to the lifetime revocation of the right to do business in Germany. Licenses are issued by the business and entrepreneurship authorities of cities, but only to German citizens and permanent residency holders,” says Ilya Gordon.

Buyer guarantees

Overseas real estate agents provide buyers with various guarantees of transaction safety.

In France, real estate agents must collect all the required documents, technical documentation, checks and title proof. All the information about a property is contained in the cadastre plan. As the buyer receives all this information before the sale is closed, the risks are mitigated.

In the UK, real estate agents are legally bound to inform the buyers about all known issues with the desired property. For instance, they need to tell clients of prospective construction in the area, factories and power units, noisy neighbours, crime rates, etc.

In the USA, transparency and safety are also guaranteed. “Before a transaction is made, certified professionals conduct a general inspection, particularly when buying mansions. The house undergoes complete review from foundations to roof including utilities like heating, water, electrics, pipes as well as windows, kitchen appliances and air-conditioning. A general inspection costs $400–650,” says Ilja Bitkov. There are other guarantees too. For example, when a newly-built house is sold in New Jersey, the developer guarantees the installed appliances and owns insurance protecting general property structure. At the same time, homeowners marketing their property often fill out a special Sellers Disclosure form, binding them to disclose any issues, repairs, etc.

Real estate agents in Spain do not hide any information from the buyers either. “We inform the client if a supermarket or railway line are planned nearby for example. We tell them everything we know. There is no law imposing penalties for an agent’s non-disclosure but we provide full information to our clients anyway to avoid any problems,” says Natalia Sobol.

What to remember

When searching for property abroad, it is always better to work with a solid agency which can provide proof of licensing and affiliation with national real estate associations. Depending on where the purchase is planned, buyer protection may be covered by the law or independent professional organisations. A trustworthy agent will openly disclose any negative information about the property and is willing to direct clients to a lawyer who can help them navigate liability laws in that country. For overseas purchases, it is never recommended to engage in a transaction directly with the owner as the buyer will most likely bear liability for any undisclosed faults or contractual issues that arise. In any case, clients should never hesitate to ask the real estate agent for proof of their professional qualifications, affiliation to national associations and what failsafe guarantees are in place to protect the buyer during and after the transaction.

Yulia Kozhevnikova, Tranio

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