This article discusses the use of cancellation agreements containing release and waiver of rights provisions as a method of eliminating future liability exposure in disputes arising out of listings and purchase agreements.
Known and unknown claims
The vocation of providing real estate brokerage services to members of the public is, in the long run, a rewarding profession. Inevitably, however, the occupational hazard of a dispute with a client or another party to a transaction will eventually surface. Disputes arise even though the licensed brokers and sales agents have fulfilled all of their agency duties, acted diligently and cooperated fully with the client and other parties.
Unless the conflict with the client or other party is resolved at the earliest possible moment, the continuing aggravation will take a toll on the agent’s time and effort, and possibly on his cash reserves as well.
Also, disputes with a client tend to make the continued representation of the client less effective. At some point in an extended dispute, the broker or agent may well be rendered incapable of logically making normal discretionary decisions in the course of fulfilling agency obligations owed the client.
The unreasonable interference of an uncompromising client, who either claims to have all the right answers or is listening to other advisors who are not privy to the circumstances surrounding the dispute, creates a stressful condition which can easily lead to errors in an agent’s judgment.
As always, disputes need to be put to rest quickly, lest they turn into correspondence with attorneys or worse, litigation. When a settlement is not promptly worked out and the agency relationship clarified so the employment can continue on sound footing, the relationship should be terminated.
To terminate an agency relationship due to a dispute, a release and waiver must be entered into by all concerned to put an end to an otherwise unresolvable disagreement.
Agency disputes arise during one of three periods in the representation of a client, i.e.:
- the marketing period beginning on the agent’s entry into an authorization to sell, locate, finance, lease or manage a property and ending on the client’s entry into an agreement to sell, buy, finance or lease the property in question;
- the escrow period beginning on the client’s entry into a purchase agreement, loan agreement or lease and ending on the close of escrow, the transfer of possession or the failure of the transaction to close; or
- the post-closing period following the closing of the purchase agreement, loan or lease transaction.
Marketing period disputes
Misunderstandings sometimes occur regarding the extent of the marketing services a client expects out of his broker and the broker’s agents. The client’s extraordinary expectations might have existed before entering into the employment agreement or have come about when the agent explained what will be done to market or locate property. Also, outside influences during the marketing period, by others or by a change in the real estate market, may cause the client to believe the agent should be doing more.
Conversely, a seller may become uncooperative in the marketing of the property or simply refuse to hand over property information needed by the listing agent to succeed in his effort to locate a buyer willing to make an offer to buy the property.
For example, a listing agent’s marketing efforts to present the current status and integrity of a property to prospective buyers, such as providing home inspection reports, natural hazard disclosures, common interest development documents, local ordinance compliances, property operating expense sheets and rental income data, are interfered with when the seller refuses to cooperate or make them available. Without proper disclosures, prospective buyers cannot readily, if ever, ascertain the value of the property and distinguish it from other properties they are considering.
To resolve disputes when a compromise has been attempted and is unattainable, it becomes prudent to consider terminating the agency. If the client decides to unilaterally withdraw the property from the market, cancel the employment (listing/management) or continue to interfere in the sales effort, the client owes the broker the fee called for in the employment agreement. Of course, the listing agent must have diligently performed the brokerage services owed the seller under the listing, whether or not a buyer has been found.
Here, a cancellation agreement form should be prepared and entered into to end the relationship forever. The broker might agree to a mutual cancellation of the listing in exchange for the client’s payment of the brokerage fee. The consideration for cancellation ranges from payment of the entire fee to some lesser arrangement. For example, the client might agree to pay a fee should the client relist the property with another broker or sell the property, lease it, etc., during a fixed period of months after the mutual cancellation of the listing. [See first tuesday Form 121]
Further, the broker, on entering into a cancellation, release and waiver agreement, eliminates his exposure to future claims based on a purported failure of agency duties.
Escrow period disputes
After opening a sales escrow for the purchase of real estate, disputes which arise do so under two types of conditions. Either one may ultimately require the termination of relationships. One set of disputes is of the type classified as agency disputes. Agency disputes arise between the agent and his client after the client has entered into a purchase agreement. The agency, if the dispute cannot be resolved and the representation continued, is terminated in the same manner as the listing period disputes discussed in the previous section.
The other set of disputes is classified as principal disputes. They develop between the buyer and seller and result in a refusal of one or the other to act further to close escrow. The refusal to proceed with the transaction might be excused, justified or constitute a breach of the purchase agreement.
Negotiations to resolve the misunderstandings or differences and close escrow might not be successful. If the escrow dispute becomes unresolvable, the agents should consider recommending that the buyer and seller terminate the purchase agreement. At the same time the buyer and seller cancel the transaction, they should release each other from any claims they may have against one another, by entering into a cancellation, release and waiver agreement. [See first tuesday Form 181]
As for the agent’s concern about his liability exposure for any type of claim the disgruntled buyer or seller may assert against each other or the broker, the cancellation, release and waiver agreement entered into by the buyer and seller also releases everyone involved in the transaction. Thus, any liability exposure the agents and client may have due to the transaction is eliminated.
After closing a transaction, brokers and their agents are occasionally brought into annoyance disputes by buyers disgruntled over the condition of the property, its improvements, the neighborhood, hazards of the location, zoning, easements held by neighbors, fence locations, operating expenses, tenant problems, etc. The expectations of a buyer are always high, as with any new owner of property. The condition of a property is almost never as rosy as it appeared before taking possession.
Buyers, believing they have gotten less than they bargained for, often attempt to shift responsibility for payment of expenses they have incurred to cure typically insignificant obsolescence, deterioration, wear and tear or inadequacies in electrical or plumbing needs. Worse yet, they may seek to recover a portion of the purchase price on a claim the property value received was measurably less than the price they paid.
In context, the listing broker is not the guarantor of any obligation the seller may owe the buyer for defects. However, it usually is the broker who is the first person put upon by a disgruntled buyer to “cure the problem.”
Brokers and agents often pay some of these claims to permanently remove themselves from the disputed purchase. However, on the first payment by anyone in a settlement to resolve a dispute in a closed transaction, the broker should demand a release and waiver agreement. Once the buyer has “raided the cookie jar,” he may well be back for more. This agreement puts an end to it. [See first tuesday Form 540]
A mutual cancellation agreement, which does not include a release of claims or a waiver of rights, merely serves to terminate any further activity under the existing agreement or agency relationship. Thus, all parties are excused from further performing since the agreement and relationship have been terminated.
In essence, the cancellation “does away with” the remainder of the purchase agreement that has not yet been performed. A cancellation, by itself, does not affect the responsibilities of the buyer, seller, brokers or agents, for their activities which proceeded the cancellation.
Conversely, a rescission and restoration agreement returns the parties to the respective positions they held before entering into the terminated agreement, more commonly called a release and waiver of rights.
A release agreement, signed by all parties to a transaction as part of a cancellation agreement, retroactively extinguishes all known claims in disputes the parties have between themselves. Thus, the release agreement is general in that it ends all liability between the parties for those claims actually known to the parties to exist in the dispute.
However, a general release does not affect unknown claims later uncovered. [
Thus, a category of claims remain unresolved, i.e., those which might exist, come into existence or be later established and are unknown to the parties on entering into a general release, called unknown and unsuspected claims. To eliminate these unknown claims, a waiver of the right to later pursue these claims must be included with a general release and made part of the mutual cancellation agreement. [CC §1542]
A written, signed release agreement does not require new consideration to be paid for the cancellation, release and waiver to be enforceable as a bar to further claims. [CC §1541]
Waiving unknown claims
A release is the relinquishment of a known right. Rights or claims unknown at the time of a release are not extinguished by a general release agreement. [CC §1541]
To protect oneself from unknown claims and prevent further disputes, an agent must use a release and waiver of rights agreement to eliminate all future claims arising out of the canceled purchase agreement or agency relationship.
A waiver of rights to unknown claims bars recovery on later and different claims arising out of the same transaction or agency relationship.
A person involved in a real estate dispute may waive his right to sue on truly unknown claims he may have against an agent which exist in the transaction and later come to his attention. [
For a client or party to a purchase agreement to waive their rights to assert unknown claims which later come to their attention, the person signing the waiver of rights must be aware of the legal consequences of what he is agreeing to in the waiver.
To meet this awareness test, the waiver of rights agreement should include copy from the statutory release law as a provision agreed to in the waiver agreement. [See first tuesday Form 540]