June 9, 2015
This past month, I experienced wonderful changes in my life which drew me temporarily away from my passion for blogging about property rights. On May 1st, I started my own solo law practice, Cowherd PLC. The new law firm continues my professional focus on the types of legal matters discussed in “Words of Conveyance.” On May 27th, my lovely wife and I welcomed our beautiful newborn daughter into the world. I would like to thank my friends and family for their love and support, including those who follow this blog. As a parent, I want the best home environment for my child to grow up in. As a trial attorney, I want to advocate for rights that are precious to clients.
When smart prospective buyers search the market for a home, they need to investigate the property. Typically, buyers use home inspectors to help them. Unfortunately, some defects cannot be easily discovered during the home inspection. For example, a structural defect may be concealed by drywall or other obstructions. With other houses, flooding problems may only be apparent after heavy rains.
Often, buyers will ask the seller’s agent whether there is a history of flooding or other problems. Agents know that if potential buyers learn negative information about the property they may move on to another listing. After a buyer completes a sale, the property may turn out to have defects that were concealed or contrary to representations made in the sales process. Who is legally responsible in those situations? Can a buyer sue a sellers real estate agent? Virginia courts considering this question draw varying conclusions.
“Great Party Room:”
The Circuit Court of the City of Norfolk recently considered whether a buyer can sue a sellers real estate agent under the Virginia Real Estate Broker’s Act. Megan Winesett is an active duty servicemember who bought her first home in 2010. The property listing described the basement as a “great party room.” During the walk-through, Ms. Winesett asked her own agent about basement flooding. The buyer’s agent told her that the seller’s agent explained that flooding was not a problem. A few years later, Winesett renovated the property and discovered rotting and termite damage in vertical support beams in the basement under her kitchen. She also found cracks in her foundation.
Buyer’s Relationship with the Seller’s Agent:
Winesett sued the seller, seller’s agent, her own agent and the real estate brokerages for $75,000 for repairs plus $350,000 in punitive damages. She sued the seller for fraud and the realtors for violation of the Real Estate Broker’s Act (“REBA”). The seller’s agents sought to dismiss the lawsuit on the grounds that the statute does not create a private cause of action against the agents. They argued that the REBA only allows for professional discipline by the Real Estate Board and not lawsuits by individuals. In a 1989 decision, Allen v. Lindstrom, the Supreme Court of Virginia observed that:
The [seller’s agents]’ primary and paramount duty, as broker and broker’s agent, was to the sellers, with whom they had an exclusive contract. While there may be some type of general duty to the public owed by every realtor, it is not the type of duty that converts into a liability against a seller’s agent for improper conduct to one in the adversary position of prospective purchaser, where there is no foreseeable reliance by the prospect on the agent’s actions.
In that case, the Court rejected the buyer’s attempt to sue the listing agent for violation of a duty arising out real estate agent regulations.
Ms. Winesett brought her case against the agents on the Virginia Real Estate Broker’s Act, which also governs the practices of real estate agents. That statute creates duties for agents (licensees) to their own clients and also the opposite parties in the transaction:
Licensees shall treat all prospective buyers honestly and shall not knowingly give them false information. A licensee engaged by a seller shall disclose to prospective buyers all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee. Va. Code Sect. 54.1-2131(B).
The Act requires such disclosures to be in writing. The realtor doesn’t need to be an expert in every issue. An agent is entitled to pass on information provided by the seller, the government, or a licensed professional. However, the agent may not rely upon information provided by others if he has actual knowledge of falsity or act in reckless disregard for the truth. Va. Code Sect. 54.1-2142.1.
On May 21, 2015, Judge Mary Jane Hall denied the seller’s agent’s motion, finding that the REBA does create a private cause of action for buyers against seller’s agents for violations. Judge Hall focused her analysis on language in the statute providing that, “This includes any regulatory action brought under this chapter and any civil action filed.” This case is currently set for trial in August. While the Court allowed this claim to move forward, Ms. Winesett bears the burden of proving it at trial.
Judge Hall’s legal conclusion is not consistently reached by all courts in Virginia. Unlike other consumer protection statutes, the REBA does not contain specific provisions about how a civil action may be brought and what remedies are allowed.
In 2004, the Circuit Court of Loudoun County entertained the same issue and concluded that a buyer is not entitled to a private cause of action against a seller’s agent for violation of the REBA. In Monica v. Hottel, Judge Thomas Horne decided instead that a buyer may allege a negligence per se claim against the seller’s agent for violation of the duty of ordinary care set forth in REBA.
I have a few observations about what these recent decisions mean to current and prospective real estate owners in Virginia:
- Discipline vs. Liability: In these cases, the sellers argued that the General Assembly contemplated that the statute would only be enforced by professional discipline, not private lawsuits. To a professional, the prospect of having one’s license suspended or revoked is a different type of threat than a jury award of a large money judgment. To the buyer saddled with a house requiring more repairs than they can afford, money is much more of a consolation than the knowledge that an agent is no longer selling real estate.
- Virginia Consumer Protection Act: Unlike auto dealers, construction contractors and many other types of businesses, licensed real estate agents are excepted from liability under the Consumer Protection Act. To the extent seller’s agents have responsibilities to buyers, liability would have to arise out of some other legal theory, such as the REBA, negligence or fraud.
- Challenges and Advantages of Suing for Fraud: Trial attorneys know that it is much easier to prove negligence or breach of contract than claims based on misrepresentation. In fraud, the standard tends to be higher and there are many recognized defenses. For example, expressions of opinion may not normally serve as the basis for a fraud suit. It is unclear what the standard of proof is for a civil action under the REBA and whether the usual defenses permitted in fraud cases apply. Buyers aren’t normally privy to the private conversations of the seller and his agent. Proof of “actual knowledge” may be hard to come by in many cases. However, there are advantages for suing for fraud. The plaintiff may be entitled to attorney’s fees and punitive damages. Fraud is a flexible legal theory which may provide a remedy in situations that statutes don’t cover.
- REBA Standard for Agents: Normally, a buyer must follow the traditional principle of Caveat Emptor (“Buyer Beware”). The REBA imposes a higher standard of professionalism on seller’s agents by requiring them to affirmatively disclose material adverse facts under many situations. Broad legal enforcement of REBA may change the way that real estate is sold in Virginia.
Although they construe the REBA in different ways, these recent court decisions demonstrate a trend towards greater consumer protection against predatory conduct in the real estate industry. In my experience litigating cases under common law fraud, consumer protection statutes, breach of contract and warranty law, I have learned that there is usually a legal theory that provides a consumer with a remedy. However, claims have a defined time period in which they may be brought. If you fell victim to dishonest conduct in your real estate purchase, discovered that a defect was concealed during your property inspection or your requests for relief under a warranty are being stonewalled, contact a qualified real estate litigation attorney before the passage of time may prejudice your rights. As an owner, you make a tremendous commitment and personal sacrifice to acquire and keep real estate. You are entitled to the legal protections owed by others.
P. Fletcher, “Homeowner Can Sue Agents Under Brokers’ Act,” Va. Lawyers Weekly, (Jun. 5, 2015)
April 16, 2014
What tasks can real estate brokerages assign to employees lacking a real estate license? What risks does a brokerage run from allowing unlicensed agents to manage relationships with clients and other parties to the transaction? On April 4, 2014, Judge Anthony Trenga decided that a prominent commercial broker forfeited a $6.6 million dollar commission because a leading member of its team lacked a Virginia salesperson’s license. This blog post discusses how the brokerage lost the commission on account of the unlicensed manager.
The Hoffman Town Center is a 56 acre mixed-use development in Alexandria, Virginia. (Yours truly lived in Alexandria for 9 years. AMC Hoffman was my local movie theater. I ran across the finish line in the George Washington’s Birthday 10K race at the Town Center.)
The Landlord, Hoffman Family, LLC, sought office tenants for the development. In August 2007, Hoffman retained Jones Lang LaSalle Americas, Inc. (“JLL”) as its leasing agent. JLL itself has a valid Virginia broker’s license.
In October 2007, Arthur M. Turowski retired from the U.S. General Services Administration. JLL hired him as a Senior Vice President and assigned him to manage the Hoffman account. Torowski saw an opportunity to lease the property to the National Science Foundation. He marketed the property to the GSA, who successfully bid on behalf of the NSF. Turowski negotiated with GSA and city officials. He signed documents on behalf of JLL. In May 2013, Turowski achieved a $330 million lease for his client from the federal government. The NSF will be an anchor tenant in the development. See Jonathan O’Connell, Wash. Post, Judge Rules for Developer in $6.6 million National Science Foundation Suit.
Mr. Turowski helped Hoffman outshine other suitors and land a sought-after tenant. Unfortunately JLL made one oversight: Turowski lacked a real estate agent’s license while performing the work. Hoffman discovered this fact while defending a lawsuit brought by JLL for payment of the $6.6 million dollar commission (JLL rejected Hoffman’s offer of $1 million).
In its ruling, the U.S. District Court for the Eastern District of Virginia discussed the broad scope of activities for which Virginia law requires a license:
1. Activities Requiring a Licence. The legal definition of “real estate salesperson” is “clearly intended to capture the realities and breadth of activities that make up the leasing process.” This strengthens the real estate sales profession by recognizing business realities and restricting the scope of activities unlicensed persons may engage in. Va. Code Sect. 54.1-2101 “Negotiation” is a broad professional activity not limited to agreeing to a property and a price and signing documents.
2. Activities Not Requiring a License. The Virginia Code provides for a narrow set of activities an employee of a broker may do without a license, such as (a) showing apartments if the employee also works on the premises (b) providing prospective tenants with information about properties, (c) accepting applications to lease and (d) accepting security deposits and rents. Va. Code Sect. 54.1-2103(C). These do not include relationship management and negotiation on behalf of a client. JLL’s lawyers argued that Turowski did not engage in activities requiring a license. If that was the case, what licensee-level work earned the commission? The opinion notes that GSA opted to deal with some matters with Hoffman directly because JLL represented other landlords competing for the NSF tenant.
Judge Trenga found that Virginia law required Turowski to hold a license to work under JLL’s agreement with the Hoffman Family. Since he did not, the Court denied JLL’s request for any portion of the commission. The Court observed that a realtor agreement between an unlicensed agent and a client is void. JLL did have a broker’s license and Hoffman’s contract was with JLL. However, Virginia law does not allow brokers to use unlicensed employees as sales persons. The Court decided that JLL’s use of Turowski voided its commission. Even if a listing agreement is valid at the time it was signed, if the brokerage performs under it through an unlicensed salesperson, that performance violates public policy and voids the commission.
The opinion does not discuss whether any other JLL personnel worked on the Hoffman account. I wonder whether JLL would have received a monetary award if licensed sales persons performed some of the work? Perhaps the outcome would have been less harsh if Turowski was not the leader?
Could a licensed real estate sales persons have achieved a greater result for Hoffman? The opinion does not discuss specific damages that arose out of JLL’s failure to use licensed sales persons in performance of the agreement. The underlying agreement was not per se void. In the end, Hoffman got a $330 million lease negotiated by an (unlicensed) agent with deep familiarity with the agency he negotiated with. Unless the verdict is disturbed on appeal, Hoffman does not have to pay anything except its attorney’s fees defending this suit.
Daniel Sernovitz of the Washington Business Journal observes that this litigation gave both the developer and the broker black eyes. Sernovitz points out that JLL’s lawsuit cast a cloud over the project. The possibility of reversal on appeal keeps a shadow of doubt on whether Hoffman will have an extra $6.6 million to help finance the next phase in the development. Lastly, the Hoffman-JLL relationship was mutually beneficial prior to this fee dispute. JLL’s relationships could procure additional tenants. Hoffman may have to rely upon other brokerages moving forward.
Do you think that use of an unlicensed real estate agent presents the same risk to residential brokers?
case cite: Jones Lang LaSalle Americas, Inc. v. Hoffman Family, LLC, No. 1:13-cv-01011-AJT, 2014 WestLaw 1365793 (E.D. Va. Apr. 4, 2014)(Trenga, J.).