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April 2024 E&O RISK Manager Newsletter

Apr 4, 2024

AVOID PITFALLS WITH PROPERTY ASSOCIATION DOCUMENTS

Sellers need to provide current homeowners association (HOA) or other association documents to buyers based on the requirements in the governing Purchase Agreement.

It is vital that listing agents do not obtain HOA documents for sellers from sources other than the HOA since their governing documents may have been amended to include severe restrictions impeding buyers from using the property as they intended to.

Learn from this agent and ensure the HOA documents you receive and provide are accurate and updated.

THE SITUATION

A seller listed a high-end home in a prestigious development governed by an HOA. Recently, the HOA changed their Declaration of Covenants, Conditions, and Restrictions to prohibit three breeds of dogs: Dobermans, Pit Bulls, and Rottweilers.

The listing agent was busy and asked her assistant to obtain the Declaration rather than directly asking the seller for the documents. The assistant acquired an outdated copy of the Declaration from the website of a reputable title company and provided it to the buyers’ agent.

This transaction was technically an in-house transaction since the buyers’ agent and listing agent are affiliated with the same real estate company, but it was not a technical limited agency under relevant state law. The transaction was then closed seemingly without issue.

THE PROBLEM

The outdated copy the assistant obtained from the title company website did not contain the updated version of the Declaration of Covenants, Conditions, and Restrictions with the recent amendment banning the three breeds of dogs.

Unfortunately, the buyers and new homeowners owned a Doberman—one of the prohibited breeds. When the HOA became aware of their Doberman, they demanded the new homeowners immediately relocate their beloved Doberman show dog, who they consider a family member and much more important than any million-dollar home or esteemed neighborhood.

To make matters worse, the homeowners were in the hospital after a complicated birth with their first child, which added to the heightened emotions.

The homeowners were adamant that their Doberman was no mut or junkyard dog—their canine companion was a pedigree, championship caliber show dog, highly trained in obedience, and supervised 24/7 by a dogsitter.

However, the HOA held their ground and even threatened to file a lawsuit if the homeowners did not relocate their dog as soon as possible, claiming the Doberman was an ongoing, immediate danger, a direct threat to neighborhood safety, and an unacceptable liability risk for all HOA members.

THE MISTAKE

The listing agent did not obtain the current Declaration directly from the seller.

The Purchase Agreement language clearly required the seller to provide the HOA documents to the buyer within a specific time, and the buyer could then object within a certain number of days.

Instead of asking the seller to obtain the HOA documents directly from their HOA, the assistant took a shortcut and got them from a title company’s website instead.

The assistant then, on behalf of the listing agent, provided the outdated Declaration to the buyers’ agent, who worked at her same real estate company, and the buyers’ agent then sent the outdated version to the buyers.

THE RESULT

While still in the hospital after the birth of their first child, the new homeowners contacted their agent in a panic. The mistake became glaringly obvious, and the homeowners obtained legal counsel.

The real estate agents also obtained a lawyer who then negotiated with the homeowners’ counsel and the HOA lawyer, who also happened to be the HOA President.

In the end, the real estate company for the two agents agreed to assist the buyers in relocating their family—including their Doberman and new baby—to their prior apartment, which was fortunately still under a long-term lease with the buyers.

The real estate company then relisted the property for sale at no commission on the listing side, agreeing to pay the commission of the future buyer’s agent.

The real estate company paid all expenses related to the resale and compensated the new homeowners for all losses connected to the purchase of the property as well as their relocation to the temporary apartment.

Additionally, the real estate company agreed to provide services of a buyer’s agent for the buyers’ subsequent purchase of a new home. The new buyers signed a release of liability after they closed on the re-sale of the property in the HOA with the breed restrictions.

The settlement included a significant payment to the new homeowners for all their losses along with damages associated with the fluke HOA provision banning the three dog breeds in the HOA documents.

This avoided expensive, protracted litigation involving the HOA, sellers, new homeowners as buyers, and the listing and buyers’ agent based on the clear mistake.

The settlement was also an attempt to prevent any potential negative publicity or a “made-for-TV” type story since this highly sympathetic situation involved:

• Two highly specialized and accomplished doctors—members of a protected class under fair housing and civil rights laws—who endured all of this frustration with their “dream” home while in the hospital after giving birth to their first child;

• A well-known, prolific real estate agent who was somewhat of a local legend;

• An exclusive, discreet, wealthy property development with a rate and possibly unreasonable ban on the three dog breeds; an HOA restrictive rule that could be subject to severe constitutional and fair housing challenges in federal court as well as emerging legal questions regarding the regulation of service animals under state and federal laws;

• A highly aggressive HOA President, who was also an experienced lawyer, threatening an immediate temporary restraining order, police intervention, and monetary damages for the HOA;

• And clear liability by the agents with no mitigating factors or liability defenses.

PREVENTION

It is imperative that listing agents obtain current homeowners association governing documents directly from the seller. Agents should advise sellers to obtain these documents directly from the HOA instead of collecting old copies from their company library, a title company, or any other unreliable source.

Agents should not make promises or offer any opinions about what may or may not be allowed or prohibited by any HOA.

It’s also vital to be mindful of fair housing laws in connection with any property association or HOA.

Make sure to be aware of all deadlines in a transaction—including the timing of when a seller must provide HOA documents and the relevant time period for a buyer to object to any restrictions of the HOA’s rules.

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