Cultom v. Heritage House Realtors: Washington Supreme Court Finds Broker Not Engaged in Unauthorized Practice of Law Upon Completing Pre-Printed Earnest Money Agreement

In 1985, the Supreme Court of Washington held that a real estate agent does not commit the unauthorized practice of law by completing a pre-printed earnest money agreement, provided the transaction is simple and the form was drafted by an attorney. The court held that in drafting such agreements and their addenda, an agent is held to the standard of care of a practicing attorney. Because the agent failed to follow the instructions of the client, she was held liable for damages and interest.

In 1980, Cultom contacted Heritage House Realtors (Heritage) regarding the purchase of a home. Ramey, a Heritage agent, showed Cultom a home owned by Smith. Cultom decided to make an offer, but was concerned about the structure of the house. She told Ramey she wanted to have the house inspected and to be able to withdraw her offer based on that inspection. Ramey prepared an earnest money agreement on a standardized form drafted by an attorney. The form contained a clause providing that in cause of suit, the successful party would receive court costs and a reasonable attorney's fee. This offer was rejected, but a month later Ramey resubmitted the earnest money agreement with an addendum raising the purchase price. Cultom later discovered that the agreement did not contain the structural inspection contingency clause, so Ramey prepared a second addendum regarding this. Both addenda were on forms drafted by an attorney. Ramey merely inserted the desired modifications in a blank space, and did not select the form, as Heritage only used a single standard form.

Smith accepted the later offer and Heritage deposited Cultom’s earnest money into a non-interest account. Thereafter, Cultom received the inspector's report which included a detailed list of problems including leakage, deterioration, and inadequate roof support. No major problems were found in the plumbing, heating, or electrical systems. Cultom found the report unsatisfactory and demanded the return of her earnest money. Smith claimed that there was nothing structurally wrong with the house and threatened to sue Heritage if it returned the money to Cultom. Cultom hired an attorney and Heritage eventually returned the earnest money.

Cultom sued Heritage seeking damages for loss of the use of her money. She requested an injunction restraining Heritage from engaging in the unauthorized practice of law and sought attorney fees under the Consumer Protection Act (CPA). The trial court found that Ramey’s conduct constituted the unauthorized practice of law and a violation of the CPA. It enjoined Heritage from similar conduct, awarded Cultom $178 in lost interest and $32,000 in attorney's fees under the CPA. Heritage appealed.

The Court stated that “for a long time suppression of the practice of law by nonlawyers has been proclaimed to be in the public interest, a necessary protection against incompetence, divided loyalties, and other evils.” The court found that the completion of form earnest money agreements by real estate sales persons fit its definition of the practice of law. However, it noted that there are sound and practical reasons why some activities which meet this definition should not be “unauthorized” simply because they are done by laypersons. The court noted that it was in the public interest to permit real estate professionals to complete standardized forms. It cited several rationales, including: (1) limiting costs to buyers and sellers; (2) public convenience; (3) allowing licensed real estate professionals to participate in an activity in which they have special training and expertise; and (4) the interest of such professionals in drafting form earnest money agreements which are incidental and necessary to their main business.

The Court put several restrictions on the completion of forms by real estate professionals. The court held that a real estate broker or salesperson is permitted to complete simple, printed standardized real estate forms that are approved by an attorney, provided the forms are used only on simple real estate transactions that arise in the usual course of the broker's business. Further, the completion of such forms must be done at no charge. The court then held that Ramey’s actions in completing the earnest money agreement did not constitute the unauthorized practice of law. It also lifted the injunction from Heritage.

The Court also noted that the standard of care necessary for completing such forms and their addenda was that of a practicing attorney. The court addressed Ramey’s failure to include a subjective right in the contingency clause contained in the second addendum regarding a satisfactory inspection. It stated that “an attorney is liable for all losses caused by his or her failure to follow the explicit instructions of the client.” It also noted that “when a broker undertakes to practice law and prepares a contract at variance with the client's instructions, he or she is liable for negligence.” The court held that because Ramey was practicing law and failed to comply with Cultom’s wishes, she was liable for all damages caused by her negligence. Thus, the court affirmed the award of $178 in lost interest.

Regarding attorney's fees under the CPA, the Court held that the act did not apply because Ramey had not committed the unauthorized practice of law. However, because the earnest money agreement contained the “attorney's fee” clause, the court remanded this issue for a determination of whether Cultom had a contractual claim for attorney's fees.

Cultom v. Heritage House Realtors, Inc., 103 Wash. 2d 623, 694 P.2d 630 (1985).