Real Estate Agents: Are You Giving Your Clients Legal Advice? Here’s What You Should Know

Think about the following scenario:

A newly married couple has excitedly embarked upon buying their first home and have hired a real estate agent to help them locate their new home.  The husband and wife’s respective parents have given them money for a large down payment.  The couple called a mortgage lender and have been pre-approved for their loan.  The mortgage lender happens to be a college friend of the wife and has assured them she can get them a loan given their strong down payment, incomes, and credit ratings.  Believing they would have no problem obtaining a loan, they decide to make an offer on the home of their dreams contingent on obtaining financing.  The seller accepts the buyers’ offer over the other two offers they received.  There is a 14-day due diligence period.  Closing is scheduled 45 days from the date of contract.  Furthermore, feeling confident, the buyers decide to put an earnest money deposit of $15,000.00 down.

Due diligence goes well and the 14-day due diligence period lapses without an issue, leaving a month to go before closing.  In the interim, the buyers buy new furniture for their new home, spending $25,000.00.

The husband works as a programmer and a week before closing, is advised by his employer that the company is shutting down immediately and filing for bankruptcy. Two days before closing, the buyers’ lender calls the employers of each of the buyers to verify employment.  The husband’s employer has a recorded voicemail greeting at the number the husband gave on his loan application that says the company has shut down and terminated all employees effective three days earlier.  Because the husband is no longer employed, the lender refuses to make the loan and the buyers cannot close.  The buyers call their real estate agent and ask her what will happen if they do not close? Will they be liable to the seller and lose their large earnest money deposit? Will  they be able to return the furniture they purchased for the new home and get a full refund?

Let’s look at a few various responses the agent might give her clients.  See if you can determine which response constitutes legal advice:

  1. The seller will not have an issue terminating the contract and releasing the earnest money.
  2. There is time yet to figure something out with your lender.
  3. Your failure to close will not be a breach of contract because the circumstance will qualify as a “force majeure” and be excused.
  4. It should not be hard to still find you a home you can buy despite the circumstances.

The obvious question is, what is legal advice?  Legal advice involves applying a certain, discreet set of facts to the law.  To become licensed to sell real estate, agents essentially take a class in real property law, endowing them with enough knowledge to tempt them to advise their client on the legal implications of some set of facts existing.

In this hypothetical, scenario, the third response is legal advice.  Force Majeure is a legal doctrine that excuses performance under a contract because of some event that is unforeseen and uncontrollable to the parties.  However, for an event to constitute Force Majeure, it has to be the result of something defined in the contract.  If not, the breach will not be excused, and whether the loss of a job qualifies requires legal judgment rooted in an understanding of the law of the doctrine of Force Majeure.  Whether the job loss does or does not excuse performance is not the issue.  The issue is the advice given under the third option by the real estate agent above is a legal opinion she better hope turns out to be accurate.  However, she will not know until after a few years of litigation to avoid fingers being pointed at her by her clients for assuring them the job loss would be excused.

Put another way, legal advice involves applying the fact the husband lost his job and that his lender refused to go forward with the loan and making a determination whether these facts fall under the Force Majeure provision.

Without the application of the facts to the law, there is no legal advice.  One can state the facts.  One can say what the state of the law is in a particular situation.  It is the application of the fact to the law that creates legal advice.  People make decisions based upon the legal advice they are given.  In this instance, since the closing date had not yet come and gone, the buyers had time to possibly raise the cash and pay cash, but since their real estate agent assured them the failure to close would be excused, they may not have pursued alternative plans to close and expected the seller to refund the earnest money.  However, most likely the seller would not do so claiming the buyers breached the contract. This would not be a pleasant place for the buyers to find themselves, because it would probably be a court of law that would decide the question.

We hope this helps clarify the fine line of giving legal advice.

To schedule a real estate closing with us, e-mail a Title Order or contract to titleorders@reallonglaw.com.