Because I’ve represented real estate professionals in a number of matters over the years, I’m always watching for cases throughout the country that make for good teaching lessons. My latest find is from Michigan, and it provides three important warnings. First and foremost, be extremely careful when striking out provisions in a listing agreement or any type of contract. The strikethroughs aren’t always as effective as you’d like. Second, even if a contract says it can only be modified in writing, there’s a good chance it can be modified orally. Third, make sure you have support for your listing price or rental value recommendations.
Elissa Koopmans Schwartz owned a house in Bloomfield Hills, Michigan, which she hoped to sell or lease. She entered into a listing agreement with Real Estate One (“REO”), whereby REO agreed to sell or lease the home. REO was working through its broker, Christopher Lee. In the listing agreement, Lee represented that a sales price of $1.57 million was reasonable and that the fair market rental rate was $8,000 per month. In the event REO was able to lease the property, REO would receive a commission in the amount of one-month’s rent.
Schwartz did not like the lease provisions. Prior to signing the listing agreement, she struck both the rental rate and the rental commission provisions from the agreement. She did not, however, strike the introductory provision that authorized REO to sell or lease the property.
Several months into the listing, Schwartz’s existing tenants decided to vacate the property prior to the end of their lease. While Schwartz believed she could recover rent through the end of the lease, she also believed she first needed to mitigate her damages by trying to find another tenant. She instructed Lee to move forward with a potential lease by including a rental listing in the MLS.
Several days later, Schwartz asked Lee to confirm that he had followed her instruction. He said he had not. According to Lee, Schwartz’s attorney said there was no need to mitigate her damages. Schwartz disputed this and again instructed Lee to add a rental listing. Lee agreed to do so.
Schwartz later received an offer to purchase the home that was substantially lower than the asking price, and she ultimately agreed to a sales price that was well below her original cost for the home.
Prior to closing, Schwartz noticed a moving van at a nearby home. After some investigation, Lee and Schwartz discovered that the new residents were renting the other property for $13,500 per month. Schwartz was bewildered. Why would a smaller, older house with a smaller lot and less private backyard rent for so much more? Had these tenants even considered her house for rent?
It turns out they had not, because Lee never included the rental listing in the MLS.
SCHWARTZ V. REAL ESTATE ONE, INC. - THE LAWSUIT
Schwartz filed suit against REO and Lee, and the trial court dismissed all of her claims. The appeals court, however, decided that many of Schwartz’s claims should proceed to trial. These claims include breach of fiduciary duty, breach of contract, negligence, and fraud. While REO and Lee are now in the case for the long haul, here’s what you can do to avoid a similar situation.
1. Be Careful When Marking Out Anything
REO and Lee tried arguing that they had no obligation to lease the property, because Schwartz had stricken the rental rate and the rental commission from the listing agreement. Surely that indicated her intent that she did not want REO and Lee to rent the property.
The court pointed out that Schwartz only struck some of the details about leasing the home. She did not strike out the original language giving REO the power to sell or lease the property. Thus, REO’s obligation to sell or lease the property remained. By failing to try to lease it, REO very well might have dropped the ball.
If you ever find yourself striking out terms of a listing agreement, or any agreement for that matter, be careful. Sometimes, there might still be a provision elsewhere in the agreement that you forgot about, and this can come back to bite you. Make sure you’ve addressed all the relevant provisions.
2. Be Mindful That Contracts Can Be Changed Orally
REO and Lee tried claiming that since the listing agreement could only be altered or modified in a writing signed by the parties, none of Schwartz’s later, verbal instructions were effective. While the listing agreement did contain a typical “no oral modification” clause, the court pointed out that “the freedom to contract means that two parties can always agree to modify a written agreement orally.” Therefore, even if Schwartz had stricken all of the language about leasing the property, she and REO modified the listing agreement when Lee orally agreed to add a rental listing.
Because of the Statute of Frauds, oral modifications don’t work for sales contracts and many leases. But when it comes to listing agreements, you and your clients can orally modify those any time. Be careful.
3. Document Your Price Estimates
Schwartz not only asserted claims for breach of fiduciary duty, breach of contract, and negligence, she also asserted a claim for fraud. She contended that REO and Lee misrepresented that a fair market monthly rental rate was $8,000 per month. According to Schwartz, other real estate professionals later advised her that the fair market rate would have been at least $15,000. Schwartz alleged that “had defendant informed her of the actual fair market rental value, she would have chosen to rent the property, instead of selling it, for as long as it took the fair market sales value to reach approximately $1,600,000.” Presumably, Schwartz alleged that REO and Lee misled her into selling instead of renting, as the commission for the former would have been much higher.
While it’s possible a jury might not believe Schwartz’ fraud claim, it’s important to remember that you should always have documentation for your estimates, whether they are for rental values or potential asking prices. If there is ever a dispute, and a client claims you purposefully misled him or her into agreeing to a lower price, having documentation to back up your estimate will greatly help your case.
Time will tell what becomes of Schwartz’s claims, but adhering to these three lessons will greatly reduce your chance of being in a similar situation.
For another legal update affecting real estate agents, be sure to check out "Chasing Commissions: When Realtors Get Shut Out Of The Deal," also on our Litigation Blog.