How to avoid legal pitfalls and misrepresentation in real estate
Over the last few years, the real estate market in Greater Phoenix has soared, in both the residential and commercial markets. In May, the median sale price of a home in Phoenix was $460,000, constituting a 21.1% year-over-year increase, according to Redfin. With such a flurry of activity, bad faith actions and honest mistakes are bound to happen. Here’s what local legal experts have to say about misrepresentation and contract issues in the current real estate market.
The pandemic forced people to change how they worked, and the way business was conducted, if operations were even feasible under the restrictions made to address the public health crisis. Some sectors, such as residential real estate, experienced a boom as folks adjusted their lives to “the new normal” of social distancing and spending more time at home.
Benjamin Gottlieb, co-founder of MacQueen & Gottlieb, observed a novel trend resulting from the white-hot housing market.
“A couple of years ago, [waiving inspections] would be very unlikely or even unheard of,” Gottlieb explains in the May episode of Real Estate Pulse with MacQueen & Gottlieb. “Over the pandemic, the real estate market here in Arizona and elsewhere evolved and the dynamic became very seller biased. It’s common to have four or five buyers bidding on a property within a week.”
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That dynamic has led to fierce competition, meaning buyers are doing everything in their power to win the sale, including forgoing an inspection. Doing so, however, comes with risks for the seller. Say, for example, a buyer believes relevant information about the home was hidden and wants to sue for damages. Typically, an inspector would’ve surveyed the property and memorialized the findings in a report prior to closing. Without that report, it is harder for the seller to avoid allegations of misrepresentation.
“So, it’s actually a fact that’s used to protect the seller,” Gottlieb says.
MacQueen & Gottlieb handles commercial misrepresentation cases as well. Gottlieb says this particular area of law is interesting because it applies to both residential and commercial transactions. A big misconception in non-disclosure law, according to Gottlieb, is that sellers think that having a buyer sign an ‘as is’ clause absolves them of all liability.
“That’s not true,” he says. “As the buyer, you can still sue for fraud even if you did take the property ‘as is,’ and Arizona law makes clear those claims will go through if you have the evidence to prove your case.”
As the Valley continues to be a top destination for people to relocate to, Metro Phoenix’s landscape is changing to reflect that growth.
The construction industry, however, has faced headwinds throughout this boom. Like many sectors, supply chain issues have made conducting business difficult — including being unable to meet contractual obligations.
“I recently had a client where there may have been some fault involved in terms of delayed ordering of the materials,” says Michael Dulberg, senior construction attorney and shareholder at Burch & Cracchiolo. “We were dealing with some specialty items that were being imported from Europe, and because things weren’t ordered as timely as they should have been, freight costs literally quadrupled.”
Some contracts have force majeure provisions that relieve the parties from their obligations under certain unforeseen circumstances, such as the COVID-19 pandemic.
“With force majeure provisions, I’ve heard people argue, ‘What is an unanticipated delay at this point into the pandemic? Is it still really unexpected?’” Dulberg notes. “I don’t know the answer to that, frankly. I would argue that it’s still an unanticipated delay. But who knows what the courts will do if it ever gets to that point.”
Moreover, Dulberg says that there’s no such thing as a perfect contract, and even if it’s well thought out, litigation is possible when dealing with intractable problems or people. A fair contract can help avoid a dispute escalating to that point, he adds, and so can having open lines of communication between parties.
“I’ll put in material escalation clauses so if prices go up by a certain percent between the time of contract and the time of procurement, there has to be discussion of alternatives,” Dulberg explains. “ It doesn’t resolve all disputes, but at least there’s some discussion going on.”
As far as some of these issues smoothing themselves out as the pandemic fades and supply chains mend, Dulberg is hesitant to say things will go back to how they were. “I’m not sure what normal is anymore,” he says. “Maybe we get beyond this and there’s a new problem that we never anticipated. It’s hard to foresee what the future holds.”