Legal Update

CALIFORNIA SUPREME COURT RULES THAT DUAL AGENCY CREATES DOUBLE FIDUCIARY DUTY FOR AGENTS

  • November 28th, 2016
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The California Supreme Court ruled that both sales agents working for the same broker in a dual agency transaction owe fiduciary duties to both the buyer and seller. This means the listing agent in a dual agency transaction has a fiduciary responsibility to inform and advise the buyer, someone whom the listing agent has probably never met and with whom he/she traditionally does not communicate directly. Conversely, the buyer’s agent has the same fiduciary responsibility to inform and advise the seller.

Horiike Facts

Horiike v. Coldwell Banker Residential Brokerage Co. (2016) involved a claim by a buyer who alleged that he was not properly advised and informed regarding a discrepancy in the square footage of a residential property he purchased in Malibu.

The building permit listed the total square footage of the property as 11,050 square feet, including a single family residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified area.  The listing agent (Cortazzo) listed the property for sale on the MLS which provided Cortazzo with public record information for reference, which stated that the living area of the property was 9,434 square feet.  The listing that Cortazzo created, however, stated the home “offers approximately 15,000 square feet of living areas.” Apparently Cortazzo added the garage and basement square footage to the total.  Cortazzo prepared a flier which also represented the property with 15,000 sf of living area.

The first buyers interested in the property were a couple whose offer was accepted.  In the disclosures, Cortazzo advised buyers to hire a qualified specialist to verify the square footage.  Instead, the buyers cancelled the purchase.   When the property was put back on MLS, Cortazzo changed the listed square footage to “0”.

A second buyer, Horiike, was shown the property by another CB sales agent, Namba. Namba gave Horiike the flyer (15,000 sf) and also gave him a copy of the building permit (11,050 sf).  However, this time, Cortazzo (listing agent) did not advise Horiike to verify the square footage.  The disclosures to buyer contained the customary disclaimers that tax records may be unreliable, that broker did not have expertise and that broker had not verified the square footage.  Horiike purchased the property and later discovered there was not 15,000 sf of living space.  He sued.

The buyer brought several claims against CB and Cortazzo (listing agent), including misrepresentation, concealment, and breach of fiduciary duty. The jury found there was no misrepresentation because Cortazzo honestly believed he had reasonable grounds for believing the representation was true.  The jury found no concealment, because Cortazzo did not intentionally fail to disclose an important or material fact that Horiike did not know and could not reasonably have discovered.

The trial court granted a nonsuit on the claim for breach of fiduciary duty against Cortazzo on the ground that Cortazzo did not have a fiduciary duty to the buyer and dismissed the buyer’s cause of action.  Buyer appealed.

 Horiike Holding

On appeal, the buyer contended that the listing agent had a fiduciary duty to the buyer that was equivalent to the duty owed by the broker, and the trial court incorrectly granted the nonsuit and erroneously instructed the jury.  Cortazzo (listing agent) contended that he exclusively represented the seller and therefore could not have breached any fiduciary duty toward buyer, who was exclusively represented by Namba (buyer’s agent).

Horiike‘s argument rested primarily on the final sentence of Civil Code 2079.13 (b) which states in part that when an associate licensee owes a duty to any principal in a real property transaction, that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.  The Supreme Court agreed.

The court ruled that when a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller, as the broker.

Cortazzo argued that forcing salespeople into a dual agency with buyers and sellers whose interests inherently conflict, will require them to breach their clients‘ confidence and harm their clients‘ interests.  The court acknowledged the potential for conflicts of interest in the dual agency context, but said the narrow fiduciary duty at issue in this case presented no such conflict.

The primary difference between the disclosure obligations of an exclusive representative of a seller (only) and a dual agent representing both the seller and the buyer, is the dual agent ‘s duty to learn and disclose facts material to the property‘s price or desirability, including those facts that might reasonably be discovered by the buyer.

Horiike contended that Cortazzo breached his fiduciary duty by making representations to Horiike about the square footage of the residence‘s living area that he did not know to be true, failing to disclose the discrepancy between these representations and the information about the residence‘s square footage contained in publicly recorded documents, and neglecting to specifically advise Horiike to hire a specialist to verify the square footage, as he advised the couple who made the earlier offer on the property.  The court expressed no opinion on the merits of this argument but said that the jury should have been given the opportunity to decide.

Ok, So Now What.

The importance of this case is not trying to puzzle through how a listing agent should best disclose conflicting square footage information. The court made no ruling whether Cortazzo was right or wrong in the way he handled the disclosures, only that the jury should have decided.

The real significance here is that sales agents in a dual agency transaction must now realize and accept the reality that they each represent the buyer and the seller.  It is not “my seller” and “your buyer”.  The correct reference for dual agency should be “our buyer” and “our seller”.

The practical implementation of this legal requirement is for both sales agents in a dual agency transaction to fully communicate with each other and make sure that all material facts affecting value or desirability (whether reasonably discoverable by the buyer or not) be disclosed to the buyer.  It is also important that any advice that either agent has, must be communicated to both buyer and seller.

I do not recommend that listing agents in a dual agency transaction start communicating directly with the buyer, nor should the buyer’s agent start communicating directly with the seller.  Rather, the two agents should confer with each other to make sure that material information and advice is communicated through each of them to their respective clients.

It is also important to remember that despite the double fiduciary duty created by dual agency, confidential information of one party must not be disclosed to the other party or his/her agent.  The best price that the buyer will pay or that the seller will accept is obviously confidential and should not be disclosed despite the fiduciary duty. However, there will most certainly be a plethora of facts and circumstances affecting buyers and sellers in future transactions that will require difficult decisions (with the help of wise legal counsel) whether to disclose or not.  Such is the inherent risk of dual agency.  Dual at your own risk.

Full text of decision: www.courts.ca.gov/opinions/documents/S218734.PDF

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This case was recently decided and is subject to change by further appellate proceedings or legislation.  You should consult legal counsel to evaluate this legal precedent in the context of your specific facts.  The distribution of the SLF Legal Update does not by itself create an attorney-client relationship with the reader.