Legal audit

When was the last time you were feeling healthy, but went to see a doctor because you wanted to avoid future illnesses? Usually we wait until we are sick and ready to go to the hospital before we take the time and spend the money to see the doctor. It is sometimes hard to get motivated to get preventive health care. Unfortunately, in some cases, waiting until we are sick can have lasting negative consequences.

The same holds true for our MLS businesses. Sometimes we do not know what potential business illness might be lurking inside. A business illness usually translates into litigation and damages, as well as lost sleep, lost productivity, anxiety, low employee morale, and other very negative conditions. I have done presentations for MLS and associations called “The Joy of Litigation.” Few appeared to enjoy the irony of the title, but it is probably safe to say that, except for litigators, most of us do not care for litigation. How do we know if our MLS business is in good business shape, or if there are potential litigation claims hiding in the wings? Does our MLS have a low grade business fever, or is there a major business artery ready to burst, and we do not know it.

Legal audits are the answer. Simply stated, legal audits are preventative health care for businesses. Lawyers trained in applicable substantive areas of law, and in conducting legal audits, pull out the legal stethoscope, blood pressure machine, and thermometer and check the health of the business. The first step in a legal audit is to provide a questionnaire to obtain basic information about your MLS. With this information, a checklist of documents and additional information is generated. The lawyer reviews the documents and information, and determines whether the MLS has a business fever, or an even greater potential business health problem. Thereafter the lawyer generates a report which identifies the potential problems, together with a list of recommendations to correct the problems and avoid future liability and legal concerns.

The legal audit will either help confirm the MLS appears to be in good business health, or disclose some problems that need to be resolved. Either result is a good result. Discovery of a legal health issue before a lawsuit is filed and served gives the MLS time to consider alternatives and develop a strategy to make the MLS well again. If the legal audit discloses nothing, as an executive officer you have acted prudently in making sure the appropriate steps are taken keep the company healthy. Some executive officers might ask, “Why would I want to discover latent issues that will make me look bad?” I do not ever recall a situation where an officer of a business discovered a problem before it exploded, and the officer was criticized for the discovery and resolution of the problem.

What business ailments might a legal audit disclose? For example, data feeds should not be given without a license agreement. The legal audit first determines if appropriate license agreements exist, and if they do, will determine if the critical legal issues have been covered. The purpose of the legal audit is not to rewrite all contracts and pick away at every detail. There is no written contract on the planet that cannot be improved. A legal audit reviews the documents at a much higher level. Another example, each MLS should have an antitrust compliance policy. The legal audit will reveal whether or not there is a policy, and if the answer is yes, whether or not the MLS is in compliance with the policy. Plaintiffs’ counsel love well drafted policies that have been adopted and discussed within the organization, but have been ignored when it comes to compliance. The non compliance establishes for the judge and jury the MLS knew what needed to be done to legally comply, but failed to do so. Non compliance with a policy is the proverbial “smoking gun.” The legal audit reviews rules and regulations to determine if key provisions are included, and if the MLS is a National Association of REALTORS® MLS, determine if there will be insurance coverage issues. These are only a few of the issues covered by an MLS legal audit. The list goes on.

The concept is the MLS gets a legal body scan and determines if there are any major concerns to address. Is a legal audit perfect? Will it catch every possible legal sore throat? No, just as a medical body scan cannot identify all potential health issues, a legal audit will not identify every possible legal risk. At a time when MLS are operating in a complex and rapidly changing environment, it is a risky course of action to ignoring what you do not know, and focus only on that which you know.

Another question: Does it make sense to conduct a legal audit at a time when revenues are falling, or at least not increasing, the subscriber base is weakening, and the board of directors is asking you to focus on the implementation of better and more efficient technology? The answer is there may not be a better time to be prepared for the future. The present may be considered a time of calm waters before the next surge in the housing market, or before your neighbor MLS knocks on your door and says, “Should we consider data sharing?” Now is the time to do an internal examination and make sure there are no surprises in the closet or latent business health issues.

A legal audit is therefore an efficient and a quick tool for measuring the business health of the MLS. The results of the legal audit will either help you, as an executive officer, sleep a little better at night knowing there are no obvious concerns, or they will give you an opportunity to identify and resolve potential business health issues before they grow and develop into major problems which may take much more money and effort to resolve.

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