Broker Tip: New California Supreme Court Ruling and the Implications for Dual Agency
by Tony Ventura and Alexandria Kavalaris
A recent California Supreme Court ruling has potentially far-reaching implications for brokers acting as dual agents in a real estate transaction. On November 21, 2016, the California Supreme Court issued a ruling in Horiike v. Coldwell Banker Residential Brokerage Company, holding that a real estate agent representing a seller owes a fiduciary duty to a buyer in the transaction when the listing and buying agents are licensed under the same broker.
The genesis of the lawsuit was the purchase of a Malibu mansion in which Coldwell Banker acted as a dual agent. The buyer, Hiroshi Horiike, was represented by a Coldwell Banker agent in Beverly Hills. The property was listed by a Coldwell Banker agent from another office. Before completing the purchase, Mr. Horiike signed two agency disclosure forms required by California law (See Civ. Code §§2079.14; 2079.16; 2079.17), as well as the “Consent for Representation of More Than One Buyer or Seller” form.
The dispute arose after Mr. Horiike purchased the property and discovered that the property’s living area was actually 9,434 square feet, as opposed to the “approximately 15,000 square feet of living area” represented in the listing agent’s marketing materials for the property. Mr. Horiike sued the listing agent on the basis that both the agent and the broker Coldwell Banker breached their fiduciary duty by failing to advise him to hire a third party to verify the actual square footage.
The case was tried before a jury and at the close of the case, the listing agent moved for nonsuit as to the breach of fiduciary duty cause of action on the basis that the listing agent exclusively represented the seller in the transaction and therefore did not owe a fiduciary duty to Mr. Horiike. The trial court granted the motion for nonsuit as to the listing agent, and instructed the jury that, in order to find Coldwell Banker liable for breach of fiduciary duty, the jury had to find that a Coldwell Banker agent other than the listing agent (who the trial court found did not owe a fiduciary duty) or the buyer’s own agent (who was never sued) had breached a fiduciary duty to Mr. Horiike. The jury then returned a special verdict in favor of Coldwell Banker on all causes of action.
The Court of Appeals reversed the judgment on the breach of fiduciary claim against the listing agent and Coldwell Banker, concluding that the listing agent, as a salesperson working under Coldwell Banker’s license, owed a duty to Mr. Horiike “equivalent” to the duty owed to him by Coldwell Banker. The court reasoned that because Coldwell banker acted as the dual agent of the buyer and seller in the transaction, it owed a “fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with either the seller or the buyer.” Observing that the listing agent executed the forms on behalf of Coldwell Banker as its associate licensee, the court held that the listing agent owed the same duty to Mr. Horiike and had breached that duty by failing to communicate all of the material information he knew about the square footage, including the apparent contradiction between the marketing materials and the square footage in the public record documents.
Upon appeal to the California Supreme Court, the sole question before the Court was whether the listing agent, as an associate licensee for Coldwell Banker in the sale of the Malibu residence, owed a duty to Mr. Horiike to take certain measures to inform him about the property’s square footage: specifically, to investigate and disclose all facts materially affecting the property’s value or desirability, regardless of whether those facts could have been discovered by Mr. Horiike and his agent.
The Supreme Court affirmed the appellate court’s ruling, finding that listing agents owe fiduciary duties to the buyer when both buyers and sellers are represented by agents from the same brokerage. The Court reasoned that an agent’s relationship is derived from the agency relationship between the broker and the client. As such, the relationship between the broker and agent cannot be uncoupled.
This ruling further complicates the controversial real estate practice of dual agency, which is allowed by California law, but creates a situation in which one person must act as the agent of two parties whose interests inherently conflict. While this inherent conflict cannot fully be resolved, the take-away from the Supreme Court’s ruling in Horiike is as follows: the primary difference between the disclosure obligations of an exclusive representative of a seller and a dual agent is the dual agent has a 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.
That said, the Court acknowledged that more difficult questions about the scope of a real estate salesperson’s fiduciary duties when functioning as a dual agent may be raised in future litigation. For example, does the dual agent need to disclose confidential information obtained from the seller or otherwise compromise the agent’s ability to fulfill obligations to the seller? These are questions for another day. At present, the Supreme Court ruling underlines the fact that real estate agents in a dual agency transaction must be careful to observe their fiduciary duties to both the buyer and the seller and must carefully consider the risks of dual agency transactions in general.
If you have further questions regarding copyright issues, please feel free to contact either Tony Ventura or Alexandria Kavalaris at Ventura Rossi Hersey & Muller, LLP.