Claims to FARCIQ: Commercial transactions are no exception!

Although the claims most frequently submitted to FARCIQ mainly concern residential real estate brokerage transactions, some commercial transactions are also the subject of claims.

Year after year, claims involving commercial transactions cost on average three times as much in defense and indemnity costs as residential claims. Given this fact, it seems a good idea to discuss prevention in the context of commercial transactions.

Lack of knowledge or skills

Claims relating to commercial brokerage transactions often arise in situations where the licence holder has ventured into an area that he did not fully master.

Many of the errors made in the course of commercial real estate brokerage transactions are the result of insufficient knowledge of this field of activity. This is an area that requires specific knowledge and skills, and these requirements can vary depending on the type of property or the commercial activity involved.

While holding a full-service licence is all it takes to be authorized to practise commercial real estate brokerage, the prudent licensee will remember that under section 73 of the Regulation respecting brokerage requirements, professional conduct of brokers and advertising (RBR) he or she “may not agree to engage in a brokerage transaction […] that is outside his or her field of expertise without seeking the necessary assistance.”

Some examples include agricultural land, office and retail space, vacant lots, residential multiplexes and housing complexes.

How can a licensee uncover all the adverse factors in a transaction if he does not grasp all the subtleties of the transaction because of a lack of experience or knowledge? Also, how can he properly advise and inform his client about next steps, required verifications and the particularities of this sector if he himself is unfamiliar with them, as he has never carried out such a transaction in the past?

All these factors increase the risk of claims and the likelihood for the licence holder of incurring his professional liability.

Most common claims and preventive behaviours to adopt

Whether it is due to false or inaccurate information on the description sheet, a buyer who learns at the last minute that the property being purchased is taxable, an inadequate zoning verification or some other complaint, commercial claims mainly revolve around three duties incumbent upon the licence holder, i.e. the duties to verify, to inform, and to advise. Consult the guideline to this effect.

Duty to verify

The licensee’s obligation to verify stems directly from his duty to inform the parties objectively, without exaggeration, concealment or misrepresentation, of all the facts relevant to the transaction.¹

The licence holder must therefore take steps to discover the factors that could adversely affect the parties or the object of the transaction.² This information must be obtained from reliable sources since the licensee must be able to demonstrate its accuracy.³

The courts will penalize brokers who deviate from the conduct that a normally prudent and diligent licensee would have adopted, by performing verifications without respecting generally accepted practices.

The courts will also sanction a licensee who, despite having performed a multitude of verifications and gathered numerous documents, fails to review the results thus obtained. Verification is a positive obligation, meaning that a licensee cannot simply limit himself to requesting documents. He must acquaint himself with them, and inform and advise his client based on the information they contain.

Duty to inform and advise

The obligations to inform and advise are tightly linked to the obligation to verify. The purpose of verification is to inform, so the results obtained must absolutely be communicated.

Furthermore, it is clear that if the Act were to require verification and yet allow subjective or incomplete information to be communicated, the objective of protecting the public would not be achieved. Thus, not only must verifications be made in order to inform, but the results obtained must also be communicated objectively, without concealment or misrepresentation.

It is important to know that the obligation to inform is continuous. This means that if any new relevant information comes to light, the licence holder has an obligation to share it with the parties concerned. This could include a new tax bill, a new report on the condition of the immovable, or any other information that could have an impact on the informed consent of the parties.

In fulfilling his duty to inform and advise, it is important that the licence holder never assume what is or is not known to a party. Consider, for example, a rental property that is subject to a right of first refusal in favour of a lessee. Although the seller is a party to the lease, the right of first refusal may have been granted several years in the past, and the commercial lease may have been renewed year after year. The licence holder who comes across such a clause should inform the seller without presuming that the latter is already aware of it. This naturally applies to any information uncovered.

Likewise, one should not make assumptions as to the importance of a given piece of information. What may appear insignificant to the licensee might be of vital importance to a future buyer.

Record documentation and document conservation are critically important

Too often, situations arise where the claimant’s version of events differs from that of the licensee, for instance a claimant alleging that he or she was never informed or advised of a given situation, whereas the broker certifies that he did caution the claimant.

Keeping proof of the information and advice provided can be invaluable in the event of a liability claim based on the licence holder’s failure to fulfill his obligations. This documentation will make it easier to demonstrate the relevance and accuracy of the work that was carried out.

As a preventive measure, any information or advice given verbally should always be confirmed in writing.

The licence holder should strive to minimize the risk of professional liability claims by acting in a professional manner while recognizing his own limitations.

Remember: Prevention is your best solution!

Learn more about your professional responsibilities and about prevention by consulting the Prevention tools section of the FARCIQ website. It contains tools and videos, including a capsule entitled: When commercial matters come into play in transactions and the latest Prevention Guide.