Claims and Releases

By David Hamerslough

My last two articles discussed common claims currently being made in real estate transactions. The resolution of any claim should involve the signing of a release of liability so that, at a minimum, those claims that were made cannot be made again in the future. This article identifies some issues relating to the drafting of such a release. These issues may also apply when repairs or a credit in lieu of repairs are agreed to by a seller or in other instances where a buyer and seller have negotiated the resolution of some disputed issue in the transaction.

A release of liability is a contract whereby one party gives up (or both parties give up) rights against the other in exchange for some bargained-for consideration or benefit. If only one party gives up the right to pursue a claim, the release is a "unilateral" one. Where both parties give up rights against each other, that is a "mutual" release. A release of liability is different than a hold-harmless or indemnity agreement. Generally speaking, a hold-harmless or indemnity agreement is an agreement whereby one party assumes the risk or responsibility of responding to a claim made by a third party.

The following issues may exist with respect to the drafting of a release of liability:

(1) Understand the distinction between a release of liability and a hold-harmless/indemnity agreement and use language consistent with the intent of the document being drafted;

(2) Identify who will be parties to the release and use language that makes it clear whether there are other parties who are intended to receive the benefits of the release (for example, if the release is between the buyer and seller, are the real estate brokers and agents also part of the release? If so, are they specifically identified by name? Where there is a fiduciary relationship between the agent and the party or parties giving the release, evaluate the fiduciary duties that exist between the party giving the release and the party receiving it. Where a release refers to "all other persons" or "agents and representatives" or other similar broad language, is it the parties' intent to release all other third parties from a potential claim?);

(3) Use language that identifies when the release will become effective and whether the release is contingent upon any other act or event taking place. If so, include language identifying what the relationship of the parties will be in the event that the contingency or event does not occur;

(4) What is the scope of the release? What claim or claims are specifically being given up by one or both parties? What act, consideration, or benefit is required of the party who is receiving the release and when and how is that going to take place?

Releases of liability are often characterized as specific versus general. A specific release limits its scope or subject matter; an example would be where there is a dispute over a particular condition(s) of a property and money is paid to resolve that specific dispute, in which case a specific or narrowly drafted release would narrow its scope to just the defect or condition that was in dispute. A broader or general release would attempt to release liability for not only those specific defects and conditions but also for any other defect, condition, or issue with the property that might exist at any time in the future. California law (Civil Code § 1542) recognizes the ability of the parties to waive their rights with respect to not only issues that they know about at the time they sign the release but also issues they do not currently know about. Generally, the law requires that the specific language from the Civil Code be quoted within the body of the release in order for that waiver to apply. Most industry forms do not include this language, so if it is the parties' intend to include not only known but also unknown claims, then including this specific additional language may be necessary to accomplish that intent. Consultation with your manager/broker and/or a qualified real estate attorney would be appropriate at that point in time. The same would also be true if you are presented with a release containing a Civil Code § 1542 waiver or other language with whose scope and interpretation you are not familiar. Again, fiduciary duties to a client may be involved when you are presented with a release containing such language.

(5) Is the release subject to the review and approval of any third party, and, if so, when will those acts take place, what standard of approval will or will not apply, and what is the relationship of the parties going forward if review and approval does not take place?

The foregoing are some very general issues to consider when drafting a document intended to be a release of liability. Depending on the level of review and scrutiny of the release, the interpretation of a release can involve a number of other legal and factual issues, all of which could impact the enforceability of the release. The knowledge, training, skill, and experience of those involved in the transaction can also impact the enforceability of a release. Taking the time to either draft or review a proposed release and understanding all of its terms and conditions is the safest way to ensure that the intent of the parties is accurately memorialized. Review and consultation with your manager/broker and/or a qualified real estate attorney is often the appropriate action to take.

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