BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Fiduciary Duty After Horiike v. Coldwell Banker
BOTTOM LINE: The California Supreme Court has stated that fiduciaries have a duty to learn and disclose all information materially affecting value or desirability. There are several existing documents which assist agents in meeting their fiduciary duty to their client. These include the “Seller Advisory re Completing the TDS,” andthe CAR “Buyer Material Issues” and “Buyer Inspection Election.”
1. THE HORIIKE DECISION:
In a prior Tip, we reported on the California Supreme Court decision in Horiike v. Coldwell Banker. The issue in that case was whether the listing agent in a dual agency 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 stated, “It is undisputed that Coldwell Banker owed such a duty to the buyer.”
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.”
2. WHAT DOES IT MEAN THAT A FIDUCIARY MUST “LEARN” AND DISCLOSE FACTS?
The Horiike decision did not go on to discuss what steps agents must take to “learn” material facts which might affect value or desirability. But we have some guidance on that question from the existing Jury Instruction used in California on the duty of disclosure by a real estate broker:
“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)
However, the specifics of how, and to what extent, this is done is not really explained anywhere. So, until a future court gives more specific information there is no ability to give absolute clear bright lines for compliance. But, in light of this uncertainty, there are some steps that listing and selling agents can do to fulfill this duty and protect themselves.
3. WHAT DOES THIS MEAN FOR LISTING AGENTS?
Listing agents already learn about their listed properties, and about the sellers, from a variety of sources. Agents typically meet with sellers and discuss their objectives, their motivation for selling and their desired timing for the sale. It is best to document these conversations in the transaction file. Thus, the agent has established the ability to put him/herself in the sellers’ position so as to give proper advice and counsel.
A Comparative Market Analysis is prepared showing the range of possible prices, depending on sellers’ timing and motivation. If sellers desire a quick sale, the listing agent will perhaps recommend a lower listing price to attract immediate offers.
The listing agent also counsels the sellers regarding their disclosure duties. A good way to do that is to provide the sellers with the “Seller Advisory re Completing the TDS” and to review that document with the sellers so they fully understand their disclosure obligations
See Weekly Practice Tip: “Seller Advisory re Completing the TDS”
Finally, work with the sellers to fully complete all necessary disclosures. Review for completeness prior to passing them to buyer. Provide ALLdocuments in seller’s possession which contains information materially affecting value or desirability including all old disclosures and reports.
See Weekly Practice Tips: “Seller Disclosure Obligations,” “Completing the TDS the Right Way” and “Disclosing Old Reports and Disclosures”
4. WHAT DOES THIS MEAN FOR BUYER AGENTS?
The issue of the buyer’s agent’s duty “to learn” is somewhat more difficult. This is because, in addition to understanding the buyer’s objectives, motivation and timing for their purchase, there is the property itself. Each property is different as is the surrounding area, with dozens if not hundreds of factors.
Regarding learning about what it is the buyer is looking for, CAR has an excellent form for that purpose: “Buyer Material Issues” (form BMI on zipForms). This form is very useful because it asks the buyer to identify those material issues that are important to the buyer. It is also useful because it has specific language regarding the “Scope of Broker Duty” which identifies what an agent will do – and what agents do not do. This is useful to clarify your role in representing the buyer. Ask the buyer to complete and sign it.
When your receive disclosures and documents from seller, review them for completeness. Review inspection reports as well. Do not just pass them along. Discuss them with your buyers and point out to your buyer those items which are significant red flags, and those which affect the Material Issues which the buyer has identified.
Another very useful form is the CAR “Buyer Inspection Election” (form BIE on zipForms). Here, the buyer completes a questionnaire as to which inspections the buyer desires to have and those which the buyer is choosing not to have. This can be completed upon contract ratification or after the initial home inspection. In either case, if a buyer changes their mind, choosing NOT to have a particular inspection, be sure to note that change in this form, or in an email confirmation.
Tailor your advice to your client based on who they are (first time buyer or sophisticated investor?) and the type of property (small condo or large apartment building?), since those are factors affecting your fiduciary duty obligations.
PRACTICE TIPS:
1. Follow the steps above whether you are a listing agent or a selling agent.
2. Listen carefully to your clients, putting yourself in their shoes and consider what information the clients need to make a well-informed decision to buy or sell.
3. Be alert for red flags and those issues which your client has said are important and pay attention to them.
4. Buyer agents: use the “Buyer Material Issues” form with each of your buyers. When a property is identified for writing an offer, go through the BMI with buyer, discussing those factors which buyer has identified as a material issue, as well as those which are missing. Likely no one property will match all criteria, so discuss with buyers the trade-offs based on the choices in the market. As a result, you and the buyer are learning what is truly important as opposed to those which are merely desirable or “would be nice to have.”
5. Buyer agents: Also utilize the “Buyer Inspection Election” form as a record of those inspections which your buyer has chosen to have and not to have. Confirm in writing if buyer subsequently chooses not to have an inspection identified in the BIE, so as to avoid a claim later that the agent simply missed it.
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.