STANDARD OF CARE & ANATOMY OF A LAWSUIT-BMC #3 – Supervision

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The Standard of Care:

In developing standards of care, it is important to discuss how standards of care evolve and how they transition based on the influences in the real estate profession.

The Standard of Care is defined as the degree of care a reasonably prudent person would exercise in the same or similar circumstances.  It is also the “average” degree of skill, care and diligence exercised by members of the same profession.  In addition, it is regarded as conforming to established practices and the level of service that the party has the right to expect.

Delivering the Standard of Care does require a broker to perform his or her duties with reasonable skill and care which includes a duty of due diligence and duty to be careful.  In addition, it also requires the agent to protect and promote the interests of the client.  This standard also requires that the agent exercise diligence in effecting a sale to the client’s best advantage and requires treating all parties honestly and fairly.

There are two reasons why it is so important that an agent meet the standards of care:  First is the protection of the public which is also the mandate of the Arizona Real Estate Commissioner.  The second is that by meeting the standards, the agent is practicing prudent risk management in exercising his or her duties.

Quick Quiz

Fill in the Blank:
Delivering the of Care does require a broker to perform his or her duties with reasonable skill and care which includes a duty of due diligence and duty to be .

The Commissioner’s Standards on the responsibility for a broker to provide the services that meet the standards of care are expressed in AAC R4-28-1101(H) which are stated as follows:

The services that a salesperson or broker provides to a client or a customer shall conform to the standards of practice and competence recognized in the professional community for the specific real estate discipline in which the salesperson or broker engages.  A salesperson or broker shall not undertake to provide professional services concerning a type of property or service that is outside the salesperson’s or broker’s field of competence without engaging the assistance of a person who is competent to provide those services, unless the salesperson’s or broker’s lack of expertise is first disclosed to the client in writing and the client subsequently employs the salesperson or broker.

In conjunction with this, Article 11 of the REALTOR® Code of Ethics states:

The services which REALTORS® provide to their clients and customers shall conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage; specifically, residential real estate brokerage, real property management, commercial and industrial real estate brokerage, land brokerage, real estate appraisal, real estate counseling, real estate syndication, real estate auction, and international real estate.

REALTORS® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any persons engaged to provide such assistance shall be so identified to the client and their contribution to the assignment should be set forth.(Amended 1/10)

Quick Quiz

Fill in the Blank:
REALTORS® shall not to provide specialized professional services concerning a type of property or service that is outside their field of unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the .

Standard of Practice 11-1

When REALTORS® prepare opinions of real property value or price they must:

  1. Be knowledgeable about the type of property being valued,
  2. Have access to the information and resources necessary to formulate an accurate opinion, and
  3. Be familiar with the area where the subject property is located

unless lack of any of these is disclosed to the party requesting the opinion in advance.

When an opinion of value or price is prepared other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, the opinion shall include the following unless the party requesting the opinion requires a specific type of report or different data set:

  1. Identification of the subject property
  2. Date prepared
  3. Defined value or price
  4. Limiting conditions, including statements of purpose(s) and intended user(s)
  5. Any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants
  6. Basis for the opinion, including applicable market data
  7. If the opinion is not an appraisal, a statement to that effect
  8. Disclosure of whether and when a physical inspection of the property’s exterior was conducted
  9. Disclosure of whether and when a physical inspection of the property’s interior was conducted
  10. Disclosure of whether the REALTOR® has any conflicts of interest (Amended 1/14)

Standard of Practice 11-2

The obligations of the Code of Ethics in respect of real estate disciplines other than appraisal shall be interpreted and applied in accordance with the standards of competence and practice which clients and the public reasonably require to protect their rights and interests considering the complexity of the transaction, the availability of expert assistance, and, where the REALTOR® is an agent or subagent, the obligations of a fiduciary. (Adopted 1/95)

Standard of Practice 11-3

When REALTORS® provide consultative services to clients which involve advice or counsel for a fee (not a commission), such advice shall be rendered in an objective manner and the fee shall not be contingent on the substance of the advice or counsel given. If brokerage or transaction services are to be provided in addition to consultative services, a separate compensation may be paid with prior agreement between the client and REALTOR®.(Adopted 1/96)

Quick Quiz

Fill in the Blank:
When REALTORS® consultative services to clients which involve advice or counsel for a fee (not a commission), such advice shall be rendered in an manner and the fee shall not be contingent on the of the advice or counsel given.

Standard of Practice 11-4

The competency required by Article 11 relates to services contracted for between REALTORS® and their clients or customers; the duties expressly imposed by the Code of Ethics, and the duties imposed by law or regulation. (Adopted 1/02)

There is a possible ambiguity here in that both Article 11 and R4-28-1101H say that a licensee can disclose his or her lack of expertise and/or engage a qualified person to work with them in providing these services.  Some attorneys have expressed that to just provide the service with disclosing that the licensee may be incompetent to provide this service is contradictory to prudent (Standard of Care) real estate practice and could still inflict major liability upon the salesperson and broker.

Commissioner’s Rule AAC R4-28-1101A states that a licensee owes a fiduciary duty to the client and shall protect and promote the client’s interests.  The licensee shall deal fairly with all other parties in the transaction.

Fiduciary duties include confidentiality, accounting, loyalty, obedience, accountability, full disclosure and reasonable care and diligence.  When a licensee delivers services that could be inferior even though they disclose their lack of expertise or competence, this seems contradictory to many attorneys.  Therefore, if a licensee is confronted with an opportunity to provide a service on a type of property that is outside of his or her field of competence, conventional wisdom says for the licensee to (1) disclose his or her lack of expertise and (2) engage an agent who is qualified to deliver the service to work with the licensee.  This is perceived as a win/win for all parties, especially the client.

A broker should consider setting boundaries for their agents in the services they provide under the broker’s employment that might include working in such areas as:

  • Property management
  • Commercial properties – retail, industrial, office, raw land, land for development, multi-family properties, investment properties, etc.
  • Lot splitting
  • Timeshares
  • Resort, luxury & second homes
  • Business opportunities (which does require a special ADRE credential)
Quick Quiz

Fill in the Blank:
Fiduciary duties include: , accounting, loyalty, obedience, accountability, full disclosure and care and diligence.

Other Ways of Establishing the Standards of Care:

There are a number of ways that a standard of care can be established that include:

  • Real estate statutes:  These, of course, includes the real estate statutes in the Arizona Revised Statutes that are contained in Titles 32 & 33.
  •  Substantive Policy Statements:  These are interpretations of the statutes and rules.
  • Commissioner’s Rules:  These are part of the Arizona Administrative Code in Chapter 28.
  •  ADRE Bulletin:  This is available online where the ADRE offers their insight into rules, statutes, and policies.  The Bulletin also includes the administrative actions that were consented to which can provide interpretations of the standards of care.
  •  ADRE News Releases:  From time to time the ADRE will release a news bulletin when they are confronted with complaints to a specific area such as short sales or commingling/conversions on property management trust accounts.
  • Commissioner’s Public Statements:  The Commissioner will issue statements from time to time on specific issues in the real estate profession.
  • Broker/Agent Representatives:  Salespersons and associate brokers who deliver services may affect the standards of care.
  • Trade Publication Articles:  Articles that appear in such publications as the NAR “Today’s REALTOR®” magazine or AAR’s Arizona REALTOR® magazine can have an effect on the standards of care.
  • Approved Class Outlines:  When an approved instructor delivers an ADRE approved course either continuing education or pre-licensing, this too can have an influence on the standards of care.
  • Industry Forms:  Forms that are mandated by a trade association like the Arizona Association of REALTORS®, such as the residential purchase contract can become standards of care of the industry.  The AAR Residential Contract is a standard of care for a licensee to use in a residential transaction even though the statutes don’t technically require its usage.
  • The REALTOR® Code of Ethics:  The Code of Ethics provide statements called “Articles” and the subheadings are called “Standards of Practice (SOP)”.  These are most definitely industry standards.
  • The Broker’s Policies:  The policies of the designated broker, especially if they are included in the broker’s policy manual, can be regarded as standards of care.
  • The Attorney General’s Opinions:  An official opinion issued by the Arizona Attorney General’s Office can be regarded as a standard of care.  One example of this is an opinion issued by the AG that held that since licensees in Arizona have the constitutional authority to draft agreements, that the licensee must act as an “agent” to have that authority based on what was stated in Article XXVI of the Arizona Constitution.
  • Published Court Opinions:  These often have a very major effect on the standards of care.  Even out-of-state court opinions may have influence.  An example is the Aranki vs. RKP Investments (Arizona) case that found that an agent is not responsible for investigating or discovering latent defects on a property.  The Easton vs. Strassberger case (California) is the reason that the SELLER PROPERTY DISCLOSURE STATEMENT (SPDS) is a standard of care in Arizona even though the law does not require the seller to provide one.  However, the AAR Residential Contract does require the seller to provide it and sellers, by law, must disclose all known material facts about their property to the buyer.
  • Actual Practice:  When brokers start adopting particular practices in providing services to the public, these practices, in and of themselves, can become standards of care.
  • Expert Witnesses:  The contributory input of an expert witness is a very influential factor in determining the standard of care.
Quick Quiz

Fill in the Blank:
When start adopting particular practices in providing services to the public, these practices, in and of themselves, can become standards of .

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