The California Supreme Court made a ruling on Monday which had been long awaited in the real estate industry. It pertained to the subject of “dual agency,” when a broker “has both sides” of a real estate sales transaction (that is, concurrently representing buyer and seller), and specifically the fiduciary duties which may result therefrom when one sales agent working for the broker represents the buyer and another working for the same broker represents the seller.
The ruling was made in a case named Horiike v. Coldwell Banker Residential Brokerage Co., stemming from Plaintiff Hiroshi Horiike=s purchase of a luxury Malibu residence for $12,250,000. In the transaction, Coldwell Banker=s salesperson Chris Cortazzo represented the seller and another Coldwell Banker salesman (named Chizuko Namba) represented Horiike as buyer.
Under California law, a real estate broker must disclose whether it is acting as a dual agent and, if so, the broker must inform the parties that as a dual agent it owes fiduciary duties to both buyer and seller. If a sales agent or “associate licensee” acts for the broker, the salesman’s duty to each party to the transaction is, according to statute, “equivalent to the duty owed that party by the broker for whom the [salesperson] functions. ”
Horiike alleged in his suit that a flyer and other marketing materials (including the MLS listing) for the property which were given him during the transaction represented that the property offered “approximately 15,000 square feet of living areas. ” The seller, a family trust, had engaged Cortazzo to sell the property. He obtained public record information from the tax assessor’s office which states that the property=s living area was 9,434 square feet and also procured a copy of the residence=s building report which described the property as consisting of a single-family residence of 9,224 square feet, a guesthouse at 746 square feet, a garage of 1,080 square feet and a basement of unspecified area. However, in the MLS listing, Cortazzo stated that the property included “approximately 15,000 square feet of living areas. ”
Cortazzo gave Horiike an “advisory” stating that the buyer should verify square footage, recommending that he hire an appraiser or licensed surveyor and reciting that “Broker . . . [s]hall not be responsible for verifying square footage. ”
Two years after escrow closed, when Horiike was preparing to do construction, he reviewed the building permit and noticed the discrepancy in square footage between that document and the MLS listing and flyer he received from Cortazzo. Horiike then filed suit against Cortazzo and Coldwell Banker claiming, among other things, that both of those defendants had breached their fiduciary duties to Horiike “either deliberately misrepresenting the square footage . . . and failing to act with the utmost care, integrity and honesty as to Horiike and/or [making the representations negligently] . . . . ”
The lawsuit was tried to a jury. Cortazzo argued that, as the seller’s agent, he possessed no fiduciary duty to Horiike as the buyer. At the end of Horiike’s case, Cortazzo moved for nonsuit on the cause of action for breach of fiduciary duty and the trial judge granted the motion predicated on Cortazzo’s argument. The cause of action for breach of fiduciary duty was dismissed as to Cortazzo.
The trial court instructed the jury that, in order to find Coldwell Banker liable for breach of fiduciary duty, it had to find some individual sales agent responsible for breach of fiduciary duty too. Horiike had stipulated that he had not acted on the basis of conduct by Namba, his salesman. With the claim against Cortazzo dismissed and with there being no other agent involved, the jury was compelled to decide in favor of Coldwell Banker on the breach of fiduciary duty count.
Horiike appealed. The Second District Court of Appeal reversed and decided in Horiike=s favor. The Supreme Court, in unanimously affirming what the appellate tribunal had determined, indicated that “when an associate licensee represents a brokerage in a real property transaction, his or her duties are the same as the brokerage. ” In what it recognized as a matter of first impression, the high court stated:
“It is undisputed that Coldwell Banker owed a fiduciary duty to Horiike, including a duty to learn and disclose all information materially affecting the value or desirability of the residence . . . . That duty extended to information known only to Cortazzo, since a broker is presumed to be aware of the facts known to its salespersons.”
The result is that the case is now reinstated against both Cortazzo and Coldwell Banker.
Why is this decision significant? Because it may impact the now widespread pursuit of dual agency by firms wanting 100% of the commission. Indeed, in light of the fact that the California real estate brokerage industry today has a number of very large brokerage firms, the result is often that, as in Horiike, agents from the same brokerage company represent both sides of the transaction. Most agents have up to now really believed that the conflict of interest this creates is merely a concern for the brokerage house, not for either sales agent. The Horiike decision seems to say that, if the broker is the same for both sides, sales agents cannot insulate themselves by saying that their fiduciary duties are limited exclusively to the party they represented, even though the statute provides that each party is entitled to the “undivided loyalty of an exclusive salesperson, . . . . ”
Will the Horiike decision discourage dual agency? We at the firm doubt it. However, the decision will likely result in more disclaimers and documentation designed to protect the brokerage community as fast as the California Association of Realtors can write and circulate that paperwork. How far will this go from here? We’ll see. And Joe Cobert’s firm will keep you informed.