Court clarifies realty agent responsibility

It will likely come as no surprise that the downturn in Nevada's real estate market has given rise to a flood of litigation. Foreclosure lawsuits, receiverships and efforts to recover deficiencies have filled the dockets of Nevada's courts. In a recent opinion in the case of Davis v. Beling, the Nevada Supreme Court weighed in on a different type of real estate issue: the statutory limitations on monetary damages that can be awarded against listing agents and brokers in conflicts arising from real property transactions.

The amount of monetary damages for which a defendant can be held liable is typically referred to as the "exposure" in a case. The Davis case turned on whether the full extent of such exposure for brokers and listing agents had been delineated by the Nevada legislature through statute or whether additional damages can be imposed on a Realtor through judge-made law that has developed through the course of Nevada's history, also called "common law."

As background, the Legislature has created a framework of laws to guide the conduct of real estate professionals. Those laws, set forth in Nevada Revised Statutes sections 645.252 through 645.254, define the duties of a real estate agent, which include, among other things, an obligation to disclose material information and conflicts of interest. An agent also owes a duty to exercise reasonable skill and care with respect to all parties to the real property transaction.

The Davis decision involved a series of related transactions facilitated by a listing agent and the brokerage firm with which she was associated. The couple alleged that the agent violated her duties to them by failing to make an offer contingent upon the sale of their existing home and by making false misrepresentations that induced the couple into closing on the purchase of the second home. The second home subsequently lost significant value as the real estate market suffered.

The couple sued the agent for, among other things, fraud by misrepresentation and concealment, a common law claim that can give rise to punitive damages. In addition, the couple sued the agent under NRS 645.257, which provides a cause of action for the victim of a real estate licensee's breach of the various statutory duties. The couple invoked this same statute to sue the brokerage firm based upon a common law theory that the firm was responsible for the acts of its agent.

At issue in the Davis case was NRS 645.251, which states: "A licensee is not required to comply with any principles of common law that may otherwise apply to any of the duties of the licensee as set forth in NRS 645.252, 645.253 and 645.254 and the regulations adopted to carry out those sections." According to the firm and the agent, this statute prevented the couple from recovering damages for common law fraud. The couple disagreed.

Why is this dispute important to agents and brokerage firms? The answer is simple: liability exposure. If the couple prevailed on their fraudulent concealment claim, the agent could be liable for far more than the amount of money necessary to compensate the couple for their monetary losses. This is exactly what occurred in the Davis case; the jury awarded punitive damages of $122,500 above and beyond the couple's actual financial harm. If the exposure had been limited to statutory liability, such punitive damages would be unavailable.

On review, the Nevada Supreme Court rendered a decision that, in most respects, shields real estate professionals from runaway liability. The court ruled that NRS 645.251 precludes recovery under common law theories of liability when the conduct alleged is covered by the licensee's duties listed in the statute. Looking at the couple's allegations, the court determined that the fraud by concealment claim fell within the statute's disclosure requirements and was therefore barred. With the fraud-based claim unviable, the punitive damages award in favor of the couple could not be upheld.

The court's ruling leaves exposure for punitive damages only in cases where a licensee's conduct strays far beyond the confines of the statute. While this aspect of the Davis decision is protective of real estate professionals, other aspects of the opinion are not. First, the court ruled that a brokerage firm can be liable for its agent's statutory violations. Second, the court ruled that not only can a client recover out-of-pocket expenses arising from a licensee's breach of statutory duties, but also the reduction in value of the property, plus carrying costs (taxes, insurance, etc.), between the time of the licensee's wrongdoing and commencement of the resulting lawsuit. Third, the court ruled that damages can exceed those allowed by a brokerage agreement where the claims are predicated on the agent's intentional breach of separate duties distinct from the parties' contractual dealings.

So how does the Davis decision guide real estate professionals going forward? License holders must continue to know and comply with their statutory duties, with the understanding that a breach can render them liable for damages beyond the client's out-of-pocket expenses. Although only in very limited circumstances will exposure to punitive damages exist, nevertheless, reasoned and objective deliberation is warranted throughout the agent's representation to ensure compliance with the law. To that end and in light of their own potential liability, brokerage firms would be well served to provide regular training so that agents can readily identify behaviors that stray outside of permissible conduct. Ultimately, through greater awareness and education, the profession and the public it serves can only benefit.

Debbie Leonard is a partner at the law firm of McDonald Carano Wilson LLP and co-chair of the firm's appellate practice group. She practices primarily in the areas of real property and natural resources law. Contact her at 775-788-2000 or through www.mcdonaldcarano.com.