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Judges gavel on wooden table on light backgroundSay what you want about California: a state with a dysfunctional state government and/or political climate, a very litigious state, or a state having high tax rates and real estate prices. Yet despite these issues, California still remains one of the most desired states to live in according to the Harris Interactive poll.

California is also a state that tends to be at the forefront for many of the laws and regulations governing real estate agents (and agency) which are eventually emanated by other states.

Recently, a bad decision was handed down by the California Court of Appeals affecting real estate agency.  The jury in the trial court found in favor of the real estate brokerage and its agents, yet upon appeal by the claimant, the Appellate Court reversed the decision concluding that if the broker is the fiduciary to a particular principal, then so are both agents in a dual agency situation—even though two different sale agents where involved in the transaction (one representing the seller and the other buyer).  In other words, the California Court of Appeals found that “Sales Agents, Not Only the Broker, Owe Fiduciary Duties to Buyer and Seller in Dual Agency Transactions.”

The question agents and brokers outside of California should ponder is whether or not this recent bad decision could somehow find its way into their state?

Below is a synopsis of this bad decision by the California Appellate Court (i.e. Horiike v. Coldwell Banker Residential Brokerage Company) provided by Fredric W. Trester, Esq. of Manning & Kass, Ellrod, Ramirez, Trester LLP.

In Horiike, Coldwell Banker represented both the buyer and seller in a high-end property transaction, through two different sale agents. The buyer alleged a breach of fiduciary duty against Coldwell Banker claiming its listing agent significantly overstated the property’s square footage in advertising materials. The listing agent listed the property as being approximately 15,000 square feet, notwithstanding the building permit listed the total square footage as 11,050 square feet. After one cancelled transaction, the listing agent deleted the square footage from the MLS. When the buyer made an offer, he was given a flyer by his agent, which contained the 15,000 square foot representation. The buyer’s agent also provided the buyer with the permit which specified the smaller square footage.

The Trial
At trial, Coldwell Banker took the position that it could not be liable to the buyer for breach of fiduciary duties arising from the listing agent’s conduct, even in a dual agency situation, because the listing agent was not a fiduciary to the buyer.
The trial court accepted that position. The jury found that there was no intentional misrepresentation or concealment by the listing agent. Although he made a negligent misrepresentation, he had a reasonable basis for believing the representation was true (apparently based on a letter from the architect confirming the higher square footage).

The Appeal
The Court of Appeal reversed the decision to the extent the court ruled Coldwell Banker and the listing agent could not be liable for breach of fiduciary duty. The court analyzed the statutory scheme and found if a broker is the fiduciary to a particular principal, then so are both agents in a dual agency situation.

The Impact of the Decision on Brokers
The Horiike decision is palpably a bad decision for brokers. Most agents do not fully comprehend when they are representing the seller in a dual agency situation, they owe the same duties to the buyer. And, why would they?

Civil Code § 2079.16 provides for the dual agency disclosure. It states in the section describing dual agent as “agent representing both seller and buyer.” It continues “a real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the seller and the buyer in a transaction.” Further, in a “dual agency situation, the agent has ‘affirmative obligations to the both the seller and the buyer,’ ” including “[a] fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with either the seller or the buyer.” California Civil Code § 2079.16.

These provisions are confusing because of the use the term “agent.” To understand the meaning of the term, one must consult definitions in Civil Code § 2079.14 through 2079.24 which include:

“‘agent’ means a person acting under the provisions of Title 9 … in a real property transaction, it includes a person who is licensed as a real estate broker under Chapter 3 … of the Business and Professions Code, and under whose license the listing is executed or an offer to purchase is obtained.” Civil Code §2079.13(a).

“‘associates licensee’ means a person who is licensed as a real estate broker or sales person … and who is either licensed under a broker or who has entered into a written contract with a broker to act as the broker’s agent …” Civil Code § 2079.13(b).

“‘dual agent’ means agent (i.e. broker) acting, either directly or through an associate licensee, as agent for both the seller and buyer in a real property transaction.” Civil Code § 2079.13(d).

The Real Estate Reference book published by the DRE, states:

“some have suggested that dual agency conflicts may be mitigated by assigning separate salespersons or broker associates within the same office to each principal to the real property transaction. Under the circumstances, each principal would receive the benefit of an individual presumably concerned only about their interest. However, individually assigning salespersons or broker associates to the principals does not alter the fact that the real estate broker by whom the associate licensee is engaged is the dual agent of the principals to the transaction. …”