BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Dual Agency Supreme Court Decision
Horiike v. Coldwell Banker
BOTTOM LINE: This past week the California Supreme Court rendered a decision in Horiike v. Coldwell Banker. The bottom line is the court ruled that, in a dual agency transaction, the listing agent owes the same fiduciary duty to the buyer as does the buyer agent, and the brokerage itself.
FACTS: This case involved the sale of a home in Malibu where Chris Cortazzo represented seller and Chizuko Namba represented the Horiikes, the buyers. Both worked for Coldwell Banker. Cortazzo prepared a flyer showing the home consisted of “approximately 15,000 sq. ft. of living areas.”
Cortazzo also provided the buyers with several documents on the square footage and statements which advised that the broker had not verified the square footage. The Tax Assessor’s information indicated 9,434 square feet, while the building permit indicated a total of 11,050 square feet, including a guest house and a garage. However, the home’s architect stated the City of Malibu defines square footage differently for purposes of development, perhaps including outdoor living area and therefore, the architect indicated that the size was 15,000 square feet by that standard. Cortazzo also used forms that advised the buyers to use an appraiser, architect, surveyor, or civil engineer to verify the square footage.
However, the court goes on to note that Cortazzo “neglected to specifically advise Horiike to hire a specialist to verify the square footage” as he had done in a previous failed transaction.
THE COURT’S HOLDING: The narrow issue on appeal to the Supreme Court was whether the listing agent, Cortazzo, also owed a fiduciary duty to the buyers equivalent to that owed by the buyers’ agent and the broker. The Court held that both agents in a dual agency transaction owe fiduciary duties to the buyer.
“As this case comes to us, it presents a single, narrow question concerning the associate licensee’s duties to the buyer in the transaction: whether the associate licensee owed to the buyer a duty to learn and disclose all information materially affecting the value or desirability of the property, including the discrepancy between the square footage of the residence’s living area as advertised and as reflected in publicly recorded documents,” the court said in its opinion. It is undisputed that Coldwell Banker owed such a duty to the buyer. We now conclude that the associate licensee, who functioned on Coldwell Banker’s behalf in the real property transaction, owed to the buyer an ‘equivalent’ duty of disclosure under Civil Code section 2079.13, subdivision (b).”
THE COURT’S DECISION: In its written decision the court made several observations on dual agency, and duties owed as a result of that dual agency. Regarding the additional duties of agents in a dual agency, the Court stated:
“The primary difference between the disclosure obligations of an exclusive representative of a seller and a dual agent representing 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.”
“That duty extended to information known only to [the listing agent for seller], since a broker is presumed to be aware of the facts known to its salespersons. (See Civ. Code, § 2332 [“As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.”].”
Because this case arose out of a square footage dispute, the court noted that the fiduciary duty owed by the listing agent in this case:
“…is, in fact, strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event. Even in the absence of a fiduciary duty to the buyer, listing agents are required to disclose to prospective purchasers all facts materially affecting the value or desirability of a property that a reasonable visual inspection would reveal. (Civ. Code, § 2079; see also id., § 1102.6.) And regardless of whether a listing agent also represents the buyer, it is required to disclose to the buyer all known facts materially affecting the value or desirability of a property that are not known to or reasonably discoverable by the buyer.”
OTHER DUAL AGENCY ISSUES: The Court did not go on to address other, more troubling, dual agency issues such as confidentiality to the client.
“In other cases, a plaintiff‘s allegations may raise more difficult questions about the scope of a real estate salesperson‘s fiduciary duties when functioning as a dual agent in a transaction. Defendants argue that if salespeople owe precisely the same duties as their employers, then buyers and sellers would not have the benefit of the ―undivided loyalty of an exclusive salesperson,‖ and, worse, ―[s]alespersons would have a duty to harm their original client by disclosing to the other side confidential information about the client‘s motivations or the salesperson‘s beliefs.‖ These are significant concerns, but they are also concerns inherent in dual agency, whether at the salesperson or the broker level. Although the Legislature was certainly aware of these concerns when it enacted the disclosure statute, it opted not to address them directly.”
Also, because of the narrow decision before it, the Court did not go on to discuss what steps agents must take to “learn” material facts which might affect value or desirability. But we know the answer to that question from the existing Broker Fiduciary Duty Jury Instruction used in California:
“The facts that a broker must learn, and the advice and counsel required of the broker, depend on the facts of each transaction, the knowledge and the experience of the client, the questions asked by the client, the nature of the property and the terms of sale. The broker must place himself or herself in the position of the client and consider the type of information required for the client to make a well-informed decision.” (CACI 4107.)
The Court states that the Legislature chose not to address these broader dual agency questions, and the Court was not going to do so either based on the facts of the case before it.
PRACTICE TIPS
1. The basic holding of this case does not change the essential practice that all agents involved in a dual agency transaction owe equal fiduciary duties to both buyer and seller.
2. In a conflict situation between buyer and seller, both agents in a dual agency must treat each party equally and may not take any steps in favor of one party, nor to the detriment of the other.
3. Listen carefully to your clients, put yourself in their shoes and consider what information the clients need to make a well-informed decision to buy or sell.
See Weekly Practice Tip: “Dual Agency Issues” for more information on dual agency.
4. Agents always have a duty to disclose all material facts known to them affecting value or desirability to the buyer, fiduciary or not. But, when serving as a fiduciary, agents also have the duty to “learn” the facts that are important to their client(s), including those facts that might reasonably be discovered by a client.
See Weekly Practice Tip: “Completing the AVID the Right Way.”
5. All agents, when disclosing information obtained from any third-party source (seller, government records, MLS autofill, documents, reports, neighbors, other agents, etc.) to a buyer, should always ATTRIBUTE the source, DISCLAIM that the agent has verified that information and URGE the buyer to conduct their own investigation.
See Weekly Practice Tip: “Attribute and Disclaim.”
6. Fully disclosing ALL square footage and lot/acreage numbers to the buyer is essential for both listing and selling agents.
7. All listing and selling agents are advised to ALWAYS use the “Square Footage and Acreage Advisory” attached to the Weekly Practice Tip “Square Footage and Acreage Advisory” on every transaction, even if there is only one number. (Or, use a local equivalent Advisory.)
See Weekly Practice Tip: “Square Footage and Acreage Advisory.”
DO NOT FORWARD TO SELLERS OR BUYERS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.