E&O Commercial Real Estate Services Claims Scenarios
Failure to Secure Collateral for Tenant Build Out
In this case, a property manager secures lease with a new tenant on behalf of a property owner. As part of the lease agreement the tenant is responsible for paying for their own build out for the space. The property manager engaged a contractor to build out the space on behalf of the tenant. The tenant ultimately does not move into the space and has no credible assets. The contractor sues the building owner for the payment of approximately $250,000, which is ultimately paid by the building owner. The building owner sued the property manager to recover its losses. The alleged negligence was that the property manager failed to obtain proper collateral and to investigate the financial credibility of the tenant.
Failure to Secure Credible Tenant
A broker representing a prospective tenant negotiated a long-term lease on a commercial building. The tenant moved in and paid rent for approximately 6 months. Subsequently, the tenant was unable to pay the rent and sold the company’s assets. Because the building was single tenant occupancy and the economy in this region became depressed, the building owner was not able to rent the space to another tenant. Further, if and when they could rent the space, they would not be able to obtain the original rents as the market was now depressed. The owner sued the broker for the value of the uncollected rent. The alleged negligence in this case was that the tenant’s broker had an obligation to disclose any information regarding the financial condition of the tenant to the building owner. This case raises the legal issue of what obligations does a tenant/buyers broker have to the owners of the property and vise versa.
Failure to Disclose Dual Agency
A buyer’s broker of a commercial property received an offer from their client. In good faith they presented the offer to the owner for review. Subsequently, the same broker received an unsolicited offer from another prospective buyer on the same property and also presented the offer to the property owner. The second buyer’s offer was less than the first offer. The buyer’s broker did not disclose that they were representing both buyers. The original buyer was successful. The second buyer alleged that their broker did not properly represent them. They have sued for the value of the lost opportunity, in excess of $500,000.
Failure to Disclose Environmental Hazard
A building owner hired a real estate broker to sell a commercial property. The owner completed a seller’s disclosure form with the help from the broker. The disclosure form listed minor water seepage in basement, which had been repaired. The buyer bought the piece of property and held onto it for 8 years at which time they sold the property. As part of the new sale it was discovered that there was mold in the basement of this commercial property that had to be mitigated. The new buyer (now 9 years later) sued for failure to disclose the hazard. Although, the Statute of Limitation in this state was only two years, the new buyer did not discover the issue until 8 years after the sale. Therefore, the statute of limitations did not start until the damage was discovered and thus within the statute of limitations. The payout on this case was $800,000 from the building owner and $150,000 plus legal expenses from our broker client.
Failure to Obtain Proper Value
A seller’s broker negotiated a deal on behalf of a building owner for approximately $4 million for the sale of a commercial building. The seller agreed, however, refused to close the transaction. The seller believed the sales price was too low, even though they had already agreed to sell the property. The buyer sued the seller for specific performance and after 3 ½ years the courts compelled the owner to sell the piece of property. At the new closing the broker requested they be paid their commissions on the sale and the seller refused as they felt they had not received the proper value originally. To make matters worse, the seller now believed the property was now worth $8 million. The seller sued the broker for $4 million in lost appreciation, plus legal, plus punitives, etc.
Failure of Space to Meet Zoning Requirements
In this case a selling broker sold a space to a restaurant owner whose intention was to open a restaurant with an outdoor café. An overview of the plans for the café was presented to the seller’s broker and the owner and a sale was consummated. Upon purchase, the buyer sought to obtain approval for the outdoor café. Unfortunately, outdoor café’s were prohibited by ordinance in this town and the plans could not be approved. The alleged negligence was that the broker should have been aware of the zoning restrictions relating to this property. The building owner settled for $175,000 split between the owner and the broker.
Failure to Advise of Easement
In this case a broker for a commercial property leased a space to a large tenant that utilized many large trucks in their business. Over the years, they had parked their trucks in an adjacent parking lot. This had gone on for many years and at least one lease renewal. In this case, the same broker was involved in both the lease and also the sale of the adjacent building. The new owner of the second building was unaware of the arrangement with the prior owner to allow this tenant to use the parking lot for parking their trucks. The new owner contacted the tenant and agreed to a lease for the portion of the parking lot, which amounted to several thousand dollars per month over the entire lease term. The tenant sued our broker to recoup the cost of the additional rent (approximately $100,000). The tenant finally settled for some rent relief from the owner and approximately $25,000 from our broker.
Failure to Cure Mold Problem
In this case several employees of a large employer group became ill with “Sick Building Syndrome.” These employees sued their employer under workers compensation insurance for their disability, medical, pain and suffering, etc. The insurer for the large employer spent $5 million dollars defending the claim as they did not want to set a precedent. The insurer ultimately won the case and settled for statutory workers compensation limits with the employees. However, the insurer then sued our property manager for $5 million dollars to recoup their costs. Over $250,000 has been spent in defense of this claim so far.
Failure to Timely Process Lease
A tenant seeking a space for a restaurant submitted a signed lease with a real estate broker. The lease was not signed yet by the building owner. The broker requested additional information such as financial records, business plan, etc. The broker was evaluating other options as well at the time. Somewhere in the process, the broker allegedly led the prospective tenant to believe that the lease was a done deal even though the papers were not signed. The prospective tenant quit his job, moved his family and prepared to start his business. Unfortunately, there was never a signed lease and the space was eventually leased to another party. The Plaintiff sued for a multitude of issues, primarily deceptive trade practices. The suit is for $250,000.
Failure to Appraise at Purchase Price
A real estate appraiser was asked to conduct an appraisal with the caveat to not appraise the property unless they could guarantee the purchase price value. This was a property in eminent foreclosure where timing was an issue. The appraiser performed the appraisal, which did not appraise at the purchase price. The deal ultimately fell through and the buyer of the property and the seller why felt they had a way out of foreclosure ultimately sued the Appraiser. On the surface the suit appears to have no merit, however, because of the disclosures up front, the Plaintiff believes another appraiser might have appraised to the purchase price.