PROFESSIONAL LIABILITY OF REAL ESTATE AGENTS AFTER POLYZOS
by Bradley D. McGraw *
On June 7, 2002, the Supreme Court of Virginia issued its most significant decision for real estate agents since the 1995 enactment of VA. CODE §54.1-2130, et. seq., which comprehensively addressed the duties of real estate brokers and salespersons (the "Act"). In Polyzos v. Cotrupi, 264 Va. 116, 563 S.E.2d 775 (2002), the Court addressed for the first time the standard of care governing agent conduct and liability under the Act. A divided Court issued a 4-3 opinion destined to influence claims against agents. The majority opinion arguably rendered vague the distinction between separate statutory duties clearly articulated by the Virginia General Assembly in 1995. The dissent presented compelling reasoning that would, with one more vote, have preserved the clear standards of the Act. Polyzos should be the beginning point for sharp disparity in trial court decisions affecting agents.
The specific issue in Polyzos was whether expert testimony was necessary to prove claims of negligence and breach of contract against a real estate agent under the facts presented. Regardless of whether one agrees with the majority or the dissent, the holding and rationale of the Court have implications well beyond the narrow decision stated.
THE EVIDENCE
The Polyzoses were the owners of two waterfront residential lots on the Warwick River in Newport News. Their home was on one of these lots, and they had purchased the neighboring lot to adjust the common boundary and increase their water frontage and the area of their backyard. They sought the services of Cotrupi, a licensed real estate agent, to list and sell the residual of the neighboring lot after the boundary adjustment. The address of the neighboring lot was 1108 Patrick Lane.
The surveyor's plat showing the revised boundary line between the two lots was unrecorded. The Polyzoses had decided not to record the plat because their attorney had advised them that doing so would trigger acceleration of their deed of trust note. The opinion does not address which lot the deed of trust affected or whether the attorney's advice was correct.
In addition to having an unrecorded plat showing the new boundary, the Polyzoses had erected a fence and installed landscaping along the new boundary line. The Polyzoses advised Cotrupi of the boundary adjustment and of their desire to sell the reduced neighboring lot. They gave Cotrupi a portion of the surveyor's plat that Mr. Polyzos prepared to show only the reduced lot. Cotrupi was aware that the surveyor's plat had not been recorded.
Cotrupi prepared a listing agreement that referred to the property for sale as "1109 Patrick Lane." He did not attach either plat or refer to the boundary change in the listing. The parties signed this listing and Cotrupi proceeded to market the property.
He later received an offer to purchase the property from Robert and Patricia Pride. The Prides' real estate agent had prepared the offer based on information that Cotrupi had submitted to the multiple listing service. The offer described the property as "/ / / Riverview Estates also known as 1109 Patrick Lane." The backslashes in this description indicated spaces for the lot, block and section in the subdivision.
Cotrupi testified that he did not attach the plat to the contract because the plat previously had been available to the Prides and their agent and, when the Prides viewed the property, the fence and landscaping had clearly indicated the boundary. He said also that he had discussed with the Prides' agent that the lot number should not be included in the legal description because a new number might be assigned to it.
The Prides disputed having any knowledge of the adjustment and demanded conveyance of the full lot without any boundary line adjustment. They contended that the street address used in the contract could only mean the property shown at that address in the land records.
The Prides sued the Polyzoses for specific performance to receive conveyance of the entire original lot. The Polyzoses, in turn, filed a third-party complaint against Cotrupi. They claimed that, if specific performance were required, Cotrupi would be liable to them, for failure to accurately describe the lot, based on claims of both negligence and breach of contract.
After hearing the Polyzoses' evidence, the trial court granted Cotrupi's motion to strike and dismissed the third-party claims against him. The trial court ruled that these claims failed because the Polyzoses did not present expert testimony regarding the standard of care that a real estate agent owes to his clients. 264 Va. at 120, 563 S.E.2d at 777. The trial court then heard the remaining evidence on the Prides' underlying claim and granted them specific performance for conveyance of the entire lot.
THE APPEAL
The Polyzoses appealed the dismissal of their contract and negligence claims against Cotrupi, arguing that the trial court erred in requiring expert testimony on both claims. They did not appeal the specific performance decree in favor of the Prides.
Considering the evidence in the light most favorable to the Polyzoses under the applicable standard of review, the Supreme Court concluded that (1) Cotrupi knew that the Polyzoses were retaining him to sell the reduced lot, (2) the Polyzoses and Cotrupi understood that use of the street address in the listing agreement meant the reduced lot, (3) Cotrupi had not advised the Prides or their agent of the changed boundary before they signed their contract, (4) Cotrupi should have known that the Prides' contract "did not contain a complete and accurate legal description of the property to be conveyed," and (5) Cotrupi relied on the fence and the landscaping as viewed by the Prides to conclude that the contract pertained only to the reduced lot. 264 Va. at 121-22, 563 S.E.2d at 777-78.
The specific issue on appeal, as stated in the majority opinion, was whether the trial court erred in ruling that expert testimony was necessary to establish that Cotrupi breached his professional duty to the Polyzoses in obtaining the contract with the Prides, or whether he breached the listing agreement with the Polyzoses. 264 Va. at 122, 563 S.E.2d at 778. As will be addressed later, the dissenting opinion stated the issue differently.
The majority opinion recognized two statutory duties of a listing agent under the Act to "[p]erform in accordance with the terms of the brokerage relationship" and to "[e]xercise ordinary care." 264 Va. at 122, 563 S.E.2d at 778 (citing VA. CODE §54.1-2131). The Court also recognized that, under the Act, "[t]he common law of agency relative to brokerage relationships in real estate transactions to the extent inconsistent with this article shall be expressly abrogated." Id. (citing VA. CODE §54.1-2144).
The Court then stated that the existence of these statutory duties does not dictate that expert testimony is always necessary to understand proper practices of real estate licensees. 264 Va. at 122, 563 S.E.2d at 778. The Court said that a bright-line rule is unnecessary and that whether expert testimony is required should be determined on a case-by-case basis. Id. The Court also said that, in cases dealing with other professionals, it has held that "expert testimony is unnecessary when the alleged negligent acts or omissions of certain professionals clearly lie within the range of the common knowledge and experience of the trier of fact." Id. It then turned to Cotrupi's reliance on his oral communications and the visual appearance of the new lot line in lieu of a more accurate description in the contract.
Applying this case-by-case analysis to the facts in Polyzos, the Court said:
[I]t is manifest that any person of ordinary intelligence would grasp that a realtor [sic] should take care not to offer for sale property which he has not been contractually authorized to sell, nor should a Realtor [sic] present to his client a contract which clearly fails to sufficiently reflect the accurate legal description of the property to be conveyed. The failure of a Realtor [sic] in either regard is negligence. Similarly, it is not beyond the realm of common knowledge and understanding that when a contract gives authority to an agent to sell a specific portion of property, and the agent then offers for sale and procures a buyer for more than that portion of the property within his authority to sell, he has breached his contract with his principals.
264 Va. at 122-23, 563 S.E.2d at 778. The Court then held that the Polyzoses had presented sufficient evidence, without expert testimony, to establish a prima facie case of professional negligence and breach of contract. 264 Va. at 123, 563 S.E.2d at 778-79. The Court remanded both the negligence and contract claims to the trial court.
The dissenting opinion disagreed with the majority opinion's framing of the issue and its application of the stated rules to the facts of the case. The dissent's rationale and conclusion are compelling.
The dissent said that both the negligence and contract claims turn on the sufficiency of the legal description in the contract. 264 Va. at 124, 563 S.E.2d at 779. The dissent said that expert testimony was necessary to answer its understanding of the issue presented:
[W]hether Cotrupi's use of the term "1109 Patrick Lane" as the sole description of the property to be sold, and his reliance on his oral communications and the Prides' visual inspection, violated his professional duty to "perform in accordance with the terms of the brokerage relationship" and to "exercise ordinary care," Code §§54.1-2131(A)(1) and B2131(A)(4), or breached the terms of the listing agreement.
Id. It stated that the sufficiency of a property description is not a matter within the common knowledge of lay persons. It said that the real challenge for the that the trier of fact was to determine whether Cotrupi should have used a different legal description or whether he was justified in relying on his oral communications or the visual appearance of the property to identify the portion being sold. 264 Va. at 125, 563 S.E.2d 779-80. Although the dissent agreed with the majority that expert testimony was not required in every case, it said that determining the sufficiency of a property description used by a real estate licensee under the circumstances required expert testimony.
ANALYSIS
The Supreme Court's split decision in Polyzos arguably undermines some of the clarity that the Virginia Association of Realtors® sought in its lobby of the 1995 General Assembly leading to codification of the Act. Although the Court correctly recognized that expert testimony is not necessary in every case to evaluate a licensee's professional liability, it incorrectly identified the types of claims to which expert testimony on the standard of care should apply, and misapplied its stated rules to the facts presented.
The Court drew from its requirements for expert testimony on the standard of care applicable to other professionals. In so doing, the Court failed to recognize that real estate licensees can be liable on both contract and tort principles under the Act, but that these distinct causes of action are not viable in common law principles governing other professionals. Because of the real estate licensee's statutory duties, this key parallel with the liability of other professionals is lacking.
For example, the professional liability of a lawyer is based on common law contract liability, not on tort or negligence per se. See Oleyar v. Kerr, 217 Va. 88, 225 S.E.2d 398 (1976) (lawyer's duty to examine a title, though sounding in tort, arose from oral contract, so contract statute of limitation applied). Although evaluating a lawyer's professional performance may be couched in terms of her adherence to a stated standard of care, the underlying basis for liability is the existence of a contract, either oral or written, between the attorney and the client. The Act changes this common law concept for real estate licensees.
Under the Act, the General Assembly established two distinct duties for a real estate licensee: (1) to perform under her contract and (2) to exercise ordinary care. See VA. CODE §54.1-2131. These specific statutory duties distinguish licensees from attorneys whose professional liability is based on common law principles under which all claims are treated as contract claims even if couched in terms of negligence. The Act clearly imposes two separate duties on licensed agents. One is the duty to exercise "ordinary care." See id. §54.1-2131(A)(4). Breach of this duty results in negligence liability. This duty is the one to which the standard of care evidence is relevant. The other duty is to perform in conformance with the "brokerage relationship." Id. §54.1-2131(A)(1). The Act defines the "brokerage relationship" as the contractual relationship between a real estate licensee and his client. Id. §54.1-2130.
This distinction is underscored by the articulation in the Act's definition of "brokerage relationship" that explicitly permits a licensee to avoid all statutory duties other than those stated in the contract between the licensee and her client. See id. §54.1-2130. If the parties agree in writing that the licensee is acting as an independent contractor and not as an agent, then the agent has none of the duties set forth in VA. CODE §§54.1-2131 through 54.1-2135, including the duty of ordinary care. Polyzos is silent regarding whether the listing agreement designated Cotrupi as an independent contractor or an agent. With such a closely divided Court, a future case presenting this issue may provide an opportunity to clarify the distinction between contract and tort claims that is seemingly blurred by Polyzos.
Whether a real estate licensee has breached her contract with her client should not involve the standard of care. Expert testimony generally should not be an issue on contract claims under the Act. Because the Act distinguishes the agent's duty to perform under her contract from her duty to exercise ordinary care, the sole question should be whether the agent breached a particular obligation in the contract.
Under the Act, the standard of care should not even be an issue in a breach of contract claim. The issue under the Polyzoses' contract claim should have been whether Cotrupi breached a particular contractual obligation. The Court should have identified the provision of the listing agreement at issue then, under the applicable standard of review, evaluated the evidence to determine if the Polyzoses had proven a breach of the provision. The Supreme Court erred by (1) never identifying any provision in the listing agreement that Cotrupi allegedly breached, (2) never addressing any evidence supporting a breach, and (3) failing to distinguish between negligence and contract principles governing an agent's duties. In Polyzos, the brokerage relationship that Cotrupi allegedly breached was the listing agreement with the Polyzoses. This raises the issue, therefore, of which provision of the listing Cotrupi breached. No such provision is identified in the opinion. The only indication in the opinion regarding the content of the listing is the statement that the listing referred to the property to be sold as "1109 Patrick Lane." 264 Va. at 119, 563 S.E.2d at 776. Although Cotrupi may have been incorrect, or even negligent, in so describing the property in the listing, that was the description in fact used in the listing. It also was the description used in the Prides' contract. This evidence does not support that Cotrupi breached any contractual obligation to the Polyzoses. The Supreme Court erred, therefore, in remanding the contract claim against Cotrupi.
The Supreme Court also erred in its application of the expert witness rule it articulated to the negligence claim. The Court should have affirmed dismissal of the negligence claim.
A real estate lawyer may quickly see the folly of describing property solely by its street address when a lot line change has occurred. The Court's reasoning begs two questions: (1) Should an agent be judged by the same standard as a real estate lawyer, and (2) Should the propriety of an agent's choice of a legal description be judged by lay persons?
Legal descriptions can be simple or complex, and determining the sufficiency in either case can require the expertise of a lawyer or a surveyor. The Court was correct that an expert is not always necessary to find negligence. For example, no expert should be necessary if the agent used only the street address of a property six doors away. But Cotrupi used the correct address, and he exercised professional judgment in deciding to use that address. His professional judgment involved considering his specific communications with the buyers' agent and the obvious, physical characteristics of the lot. Whether that professional judgment was in error required an expert to address.
Whether Cotrupi, as a real estate licensee, was entitled to rely on his communications with the Prides' agent regarding the new plat, and the Prides' viewing of the fence and landscaping, is not controlled by the parole evidence rule. The parole evidence rule clearly would apply to the Prides' contract claim against the Polyzoses, thereby precluding extrinsic evidence of prior communications to vary the contractual meaning of the property's street address. By definition, however, the parole evidence rule is limited in application to claims between parties to an unambiguous contract. It does not apply to nonparties to the contract and does not apply to claims other than contract claims. Accordingly, because Cotrupi was not a party to the contract between the Prides and the Polyzoses, the trial court was at liberty to rely on extrinsic evidence of the prior dealings between the Prides, the Polyzoses, and Cotrupi in determining whether expert testimony was necessary.
THE IMPLICATIONS
Viewed narrowly, Polyzos should change how real estate licensees draft contracts. Determining whether they have clearly and accurately described the property to be conveyed now appears to be within the domain of the lay person. Surely this was not the intent of the Supreme Court, but future litigation will be needed to clarify this.
Viewed broadly, Polyzos potentially subjects agents to lay person assessment of their performance in other aspects of contract drafting or marketing. For example, the Act imposes on agents engaged by buyers a duty to disclose to the buyer "material facts related to the property or concerning the transaction of which the licensee has actual knowledge." VA. CODE §54.1-2132(A)(2)(c). Plaintiffs now may assert that materiality does not require the perspective of an expert.
The overlap between contract and tort liability now apparent from Polyzos raises the question of how the Court will view circumstances in which the listing agreement expressly disclaims any statutory tort liability, as permitted under the Act's definition of "brokerage relationship." See id. §54.1-2130. Under those circumstances, the agent's obligations should be limited to those arising from the contract, and standard of care evidence including expert testimony generally should not be at issue.
One theory of agent liability absent from Polyzos was a claim for breach of fiduciary duty. The last reported decision of the Supreme Court recognizing that a real estate agent had a common law fiduciary duty came in 1994, before the Act. See Van Deusen v. Snead, 247 Va. 324, 441 S.E.2d 207 (1994) (agent had fiduciary duty to disclose known defects) (discussed in the FEE SIMPLE 54 (May 1994)). In Polyzos, the Court quoted the provision of the Act expressly abrogating the common law of agency in brokerage relationships to the extent inconsistent with the Act. See 264 Va. at 122, 563 S.E.2d at 778 (citing VA. CODE §54.1-2144). Fiduciary duty is a common law agency principle abrogated by the Act and replaced by specific statutory duties, such as duties to promote the interest of a seller client by disclosing material facts and accounting for money received for the seller's benefit. See VA. CODE §54.1-2131(A)(2)(c) & (d).
Despite abrogation of the common law fiduciary duty, however, fiduciary duty claims regularly continue to appear in claims against licensees. See, e.g., Bosher v. Hometown Realty Services, Inc., 47 Va. Cir. 1 (Richmond 1998) (recognizing fiduciary duty, but holding it was not breached). A recent publication of the Virginia Law Foundation also mistakenly suggests that numerous common law agency principles existing before abrogation by the Act still are viable. See Contract Law in Virginia, "Real Estate Brokerage Law," §17.4 (Va. Law Foundation 2002). The Court should limit claims against agents to those permitted under the Act and not resurrect more general common law claims like fiduciary duty that the Act was designed to supplant.
CONCLUSION
After Polyzos, real estate attorneys should advise their licensee clients to confirm the actual legal description of the property in listings and contracts, take steps to ensure that the contract is accurate, not rely on oral communications with parties or other agents, and leave a paper trial documenting all their related actions and communications. Given that the standards by which their conduct may ultimately be judged may not be as foreseeable as the Act suggests, they should take care to ensure that matters of professional conduct within their control are properly and clearly documented.
*Mr. McGraw is a principal in the Roanoke law firm of WootenHart PLC and a former member of the Board of Governors of the Real Property Section.