Pearl Insurance: Think twice about making guarantees about properties for sale

Situation: An agent marketed commercial property with street-level retail and residential units on upper floors. The owner operated a failing video rental business and was eager to sell the building before foreclosure action. On the other hand, the residential units produced steady revenue and were occupied by longtime occupants.

Problem: The agent erroneously believed a retail operation could be successful. Additionally, the agent assumed the rent payments could increase since the tenants were comfortable and unlikely to move.

Mistake: The agent guaranteed that a prospective buyer’s greeting card shop would generate positive cash flow and the tenants would be able to absorb a rent increase.

Result: Given these assurances, the buyer acquired the property and notified the tenants of the rent increases. Within the first few months, four of the six tenants indicated they could not afford the increase and moved. The buyer had trouble finding new tenants willing to pay the rent necessary to make the residential component successful. In addition, the greeting card shop did not see the desired foot traffic and corresponding revenue. Eighteen months later, the buyer sued the agent, alleging the agent intentionally misrepresented the property’s profit potential. Damages sought included lost business profits and rental income. The parties resolved the litigation for $100,000 in lieu of a two-week trial.

Prevention: An agent should never make guarantees about the revenue potential or future value of property for sale. Acting outside the scope of expertise is dangerous and should be left to a buyer as part of their due diligence obligation. Always recommend buyers seek counsel of qualified accounting and financial experts to help them make decisions about acquiring revenue-producing property. This practice will not only result in satisfied buyers but will also avoid unwanted litigation. Most errors & omissions policies do not provide coverage for claims arising out of promises, warranties or guarantees about the future income/value of property or the performance of a business.

DISCLAIMER: This article was produced by Pearl Insurance, a WRA exclusive partner. Please note that not all information above may be consistent with Wisconsin license law.