I referred a client and received a referral fee and a lawsuit!

By James L. Goldsmith, Esquire

That's right. A licensed salesperson in one state referred her buyer client to a buyer agent in another and she received both a referral fee and a lawsuit! Worse than that, the buyer she referred was her son to whom she gave every cent of that referral fee. This article explores why she was brought into the suit and what she could have done to avoid it.

A lawsuit was filed by the son who ultimately purchased a property with a contaminated well. His suit named as defendants the buyer agent (for failing to draft an appropriate addendum to the agreement once it was determined there were problems with the water), the sellers (for allegedly concealing known water potability problems), and the listing agent (also for failing to disclose known problems). The sellers joined the referring buyer agent (mother) as an additional defendant to the lawsuit on the theory that she was acting in the capacity of an advisor and that her own negligence contributed to her son's purchasing a home with water problems. The referring agent, the buyer's mom, defended on the ground that she had no license in Pennsylvania and therefore was not acting in the capacity of a buyer's agent. Further, she was merely acting as any concerned mother would by giving advice from time-to-time when her son would discuss the status of the transaction with her.

Most of you would have never dreamed that the mere referral of a client could backfire as it did for dear old mom. The fact is, the likelihood of being sued because of a referral is very remote. There are steps you can take, however, to assure that the referral only will result in your receipt of a referral fee and not a lawsuit.

The best advice I can give is that you remember why you are being paid: for the referral, not for acting as an agent for a party. Therefore, don't act as an agent. Make the referral and await your check. There is certainly nothing wrong with inquiring as to the status, but if the referred client asks a question of you, remind him that you made the referral for a purpose. Either the transaction is in a jurisdiction in which you have no authority to act or is at a location in Pennsylvania remote to you and with which you are not familiar. Remind your client to rely on the agent to whom he was referred. If your client is having difficulty getting answers from that agent, there is nothing wrong with making a call and imploring the referred agent to do his or her job.

Thus far, Pennsylvania has not recognized a cause of action (basis for a lawsuit) for negligent referral. That does not mean that you shouldn't consider the expertise and knowledge of the person to whom you will make the referral. A referral to a broker for assignment to an affiliated licensee is certainly appropriate.

While I have not seen it in practice, seeking indemnification from the referred agent/broker is reasonable. In other words, in exchange for making the referral, you will be paid a referral fee and receive the broker's promise to indemnify you in the event you are joined in litigation arising from the transaction. Consult legal counsel when considering putting together a referral agreement that includes an indemnification.

Referral fees may not rival commissions, but when you consider the work that is required, it is a great source of income. Keep it that way.

Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2012
All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.