Here’s how to avoid claims when the zoning does not match the intended use.
Your buyer clients just purchased a large home they hope to turn into a daycare for 20 children. Unfortunately, that’s not allowed; the property is zoned for single-family residences, not commercial businesses. They could open a small, home-based business—say, a daycare for three or four children—but your clients don’t want that.
They allege they never would have purchased the property if they knew they couldn’t use it for their intended purpose. Now they are threatening to sue you and your broker for failure to disclose this information.
Zoning and restrictions, or use of property, was among the top categories of claims handled in 2022 and 2023 by AXA XL, an insurance provider that works with Texas REALTORS® risk management partner Pearl Insurance.
Daycares are an example of this type of claim, says Lee Santos, AXA XL TX Claim Manager. But he’s also seen cases where buyers cannot live in commercially zoned properties. Santos is working on a case in Arizona in which the buyers did not realize their scenic mountainside getaway was next door to an active mining facility.
Buyer’s agents and brokers could be at risk if they knew the buyer’s intentions and did not warn them to check with the relevant entities to make sure the property would meet the buyer’s needs. Or if they knew and did not want to stop a potential deal.
“It may be difficult to steer clients away from that property,” Santos says. “But erring on the side of caution may cost less than getting into trouble down the road.”
TREC requires all license holders to be knowledgeable and competent on conditions affecting real estate in the geographic area where they are providing services. That includes disclosing material information about zoning or other developmental regulations of which the license holder is aware.
However, license holders are not obligated to investigate the zoning of a particular property or do proactive research. License holders must share with clients the information they know, such as information from the seller’s disclosure or the property survey. Once a license holder learns about material information regarding the property, the license holder must share it with the client.
One thing you can do to be sure you get the right information from your client is to ask if your brokerage has a standardized checklist of topics to discuss during the first client meeting. If so, use this checklist with every client. It may include asking about a client’s needs and wants for the property.
If your clients mention plans to use the property in a way that may conflict with local zoning, a license holder should suggest that your clients research the property’s zoning. Direct your clients to the local zoning office to get more specific information.
Reach out to your broker and errors and omissions provider if you are contacted about complaints or possible litigation.
As with most E&O claims, the best defense is transparency: Document, disclose, and discuss, Santos says. “Be proactive. Ask questions and don’t assume anything.”