Dual Agency – a Fiduciary Duty Trap

UPDATE:  On November 21, 2016, the California Supreme Court affirmed the ruling of the Court of Appeal, holding that when an associate licensee owes a duty to any party in a real party transaction, “that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.”  (Citing Civil Code Section 2079.13(b). Horiike v. Coldwell Banker Residential Brokerage Co., S218734.

Does a real estate agent representing the Seller owe a fiduciary duty to a Buyer who is represented by another real estate agent?  The answer is “Yes,” if both agents are employed by the same broker. The Second Appellate District has reaffirmed that real estate agents who act as dual agents – representing both the Seller and the Buyer in a transaction – owe a fiduciary duty to BOTH parties. In a recent case, the Appellate Court emphasized that all salespersons working for a single broker acting in a dual agent capacity owe the same fiduciary duty to all parties in the transaction.

The case, Horiike v. Coldwell Banker Residential Brokerage Co.,(filed 4/9/2014), the salesperson working with the Seller failed to disclose or misstated the actual square footage of the living space to the Buyer, who was represented by a different salesperson. But both salespersons worked for the same broker – Coldwell Banker. The Court of Appeal overturned the trial court’s finding that the salesperson representing the Seller did not owe a fiduciary duty to the Buyer.

Even though each of these individual salespersons are considered by the Broker to be “independent contractors” for tax purposes, they are both employees for purposes of their representation of the parties. As a result, the Broker becomes a dual agent representing both parties.  The Court noted that the push by the real estate industry to treat licensed salespersons as “independent contractors” for tax purposes has “enhanced the misunderstanding of salespersons that they can deal independently in the transaction.”

It has long been recognized that a Broker’s fiduciary duty to his or her client requires “the highest good faith and undivided service and loyalty.” “The broker as a fiduciary has a duty to learn the material facts that may affect the principal’s decision. The agent’s duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information.” Assilzadeh v. Calif. Federal Bank (2000) 82 Cal.App.4th  399, at 414-415.

In Horiike v. Coldwell Banker, the Court went on to declare that a fiduciary’s failure to share material information with the principal is constructive fraud, and noted that even a careless misstatement may constitute constructive fraud even though there was no fraudulent intent. Once again, the emphasis is on full disclosure by the fiduciary of all material facts which are known – or should be known.

Here, the listing agent and the selling agent both worked for Coldwell Banker, and therefore were to be deemed employees of the broker. The Court emphasized that the licensed salesperson had a fiduciary duty equivalent to the duty of the broker, and in a dual agency situation, the salesperson acting under the broker has the same fiduciary duty to both the Buyer and the Seller as the broker.

ARE REAL ESTATE AGENTS REQUIRED TO CHECK PERMITS OR ZONING?

Are real estate agents required to confirm the zoning classification of a property? Are they required to check City permits? Are they required to review title reports and surveys for easements? The real answer may surprise you!

Most real estate agents are familiar with the language under Civil Code §2079, which declares that it is the duty of the agent to conduct a reasonably competent and diligent visual inspection of reasonably and normally accessible areas. The CAR AVID form states that California law does not require the agent to inspect:

Areas that are not reasonably and normally accessible

Areas off site of the property

Public records or permits

Common areas of planned developments, condominiums, … etc.

The AVID form lists several limitations on what the agent is required to do, including the following statement:

” By statute, Agent is not obligated to pull permits or inspect public records. Agent will not guarantee views or zoning, identify proposed construction or development or changes or proximity to transportation, schools, or law enforcement.”

These limitations were enacted in the mid-1980s in response to the Court’s decision in Easton v. Strassburger 152 Cal.App.3d 90 (1984), which held that the agent must disclose any known material facts that affect the value or desirability of the property. Since factors such as “value” or “desirability” were inherently vague, the Legislature responded by creating a disclosure form – the Transfer Disclosure Statement, or “TDS” – pursuant to Civil Code §1102, along with the Agent’s Visual Identification Disclosure, or “AVID.” The intended effect of these forms was to shift responsibility for full  disclosure to the actual Seller or Owner of the property, and limit the liability of the agent to the prospective buyer.

However, agents often fail to understand that the duty owed to their own clients is substantially more extensive – it is a fiduciary duty to disclose all material information that the broker knows or could reasonably obtain regarding the property or relating to the transaction. This fiduciary duty is set forth in Civil Code §2079.16, which is reproduced in full on the first page of the CAR AD Form, “Disclosure Regarding Real Estate Agency Relationship.” It is the duty of “utmost care, integrity, honesty and loyalty in dealings” with their client.

In Field v. Century 21 Klowden-Forness Realty, 63 Cal.App.4th 18 (1998), the Court declared:

“Thus, depending on the circumstances, a broker’s fiduciary duty may be much broader than the duty to visually inspect and may include a duty to inspect public records or permits concerning title or use of the property.”  (Emphasis added).

In other words, the agent’s duty to their own client is substantially greater than the duty owed to a prospective buyer. Further, in a recent decision, the Court ruled that when the prospective buyer and the seller were represented by the same broker in a dual-agency relationship, the dual-agency broker owed a fiduciary duty to both the buyer and the seller.  Horiike v. Coldwell Banker (2014). In that case, the buyer and seller were each represented by a different salesperson who were working for the same broker – Coldwell Banker – and the Court made it clear that as a consequence, the broker’s fiduciary duty extended to each of the agents. Moreover, the Court pointed out that in these circumstances, the salespersons were considered employees of the same broker, even if they were considered to be “independent contractors” of the broker for tax purposes.

Noting that there was a misunderstanding in the real estate industry, the Court went on to declare that the failure of a fiduciary to share material information with the principal – in this case the failure of the seller’s agent to disclose material information to the buyer – amounted to constructive fraud, which means that no intent needed to be established.

Whenever I ask a group of real estate agents whether they are required to check permits, most will respond “No.” After the decision in Horiike v. Coldwell Banker, I anticipate a lot of brokers will be providing some new training!