DUAL AGENCY = Duty to Learn And Disclose

Is a real estate agent required to check public records and permits?  Does a Listing Agent owe a fiduciary duty to the prospective purchaser?  Many real estate agents quickly respond in the negative to these questions, citing the standard CAR disclosure forms, e.g., AVID.  They point to the section on the AVID that states, in part, that “California law does not require the Agent to inspect the following:  … Public records or permits.”  This confusing and misleading form, and the general confusion over the issue generally, has been brought into sharp focus by the California Supreme Court in the long-awaited decision in the matter of Horiike v. Coldwell Banker Residential Brokerage Company, S218734, handed down November 21, 2016.

For those who have not been tracking this case, the plaintiff sought to purchase a luxury home in the Malibu area, and was represented by a real estate salesperson working for Coldwell Banker.  The salesperson arranged for Mr. Horiike to see the property.  A previous attempt to sell the property had fallen through, and the listing agent, who worked for another office under Coldwell Banker, provided some information, including a flyer showing the property to be approximately 15,000 sq. ft. of living space.  The listing agent knew that the square footage of the living area was represented to be as low as 9,224 sq. ft. on permit records, and approximately 9,434 sq. ft. on tax records, yet forwarded the flyer with the 15,000 sq. ft. representation.  A couple of years later, in or around 2009, the plaintiff started doing some work and discovered the discrepancy.  Following a trial, the jury returned a special verdict in favor of Coldwell Banker, and Mr. Horiike appealed.  The Court of Appeal reversed and remanded on the issue of the fiduciary duty owed as a result of the fact that both the Selling Agent and the Listing Agent worked for Coldwell Banker, establishing a Dual Agency situation.  Coldwell Banker petitioned the Supreme Court for review, and after two years plus of briefs and oral argument, the ruling today affirmed the Appellate decision.

The single, narrow issue before the Supreme Court was 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 living area as advertised and as reflected in publicly recorded documents.  The Court determined that it was undisputed that Coldwell Banker, as the broker owed this duty to the buyer, and concluded that the associate licensee, who functioned on behalf of Coldwell Banker in the transaction, owed to the buyer an “equivalent” duty of disclosure under Civil Code section 2079.13(b).

The several amicus briefs filed on behalf of the Respondent, including CAR, attempted to argue that Dual Agency was legal, and had been disclosed, but that imposing a fiduciary duty on the agent equivalent to that of the Broker would undermine the duty of “undivided loyalty” of agents to their principals.  The Court reviewed the actual and legislative history of the practice of dual agency, noting that it was more or less adopted only recently – 1986, and later by some accounts.  Up to that point, agents generally all represented the Seller.  California’s approach was to require disclosure as a basis for permitting it.  (2o79.14, .16, .17), and requiring consent, which was obtained by providing the buyer and seller with yet another CAR form.

The Court further noted that in this particular situation, the listing agent’s duty to disclose this material fact existed even in the absence of a fiduciary duty, inasmuch as the Listing Agent owed a duty to disclose all facts materially affecting the value or desirability of the property, as well as all known facts not known to or reasonably discoverable by the buyer, citing 2079.16 and Lingsch v. Savage (1963) 213 CA2d 729.

The Court went on to emphasize that Brokers are required to supervise the activities of their salespersons, and emphasized that an associate licensee has no power to act except as a representative of his or her broker. (CC section 2338).  Moreover, the Court pointed out that the broker is presumed to be aware of the facts known to its salespersons.  Here, Coldwell Banker was presumed to be aware of the square footage discrepancy, but failed to disclose this material fact from the buyer.

Looking further at the Legislative history of 2079.13, the Court noted, with some irony, that the legislation had been sponsored by CAR, and opposed by DRE until it was amended to impose the stricter, fiduciary duty standard.  (AB 3449 (1985-1986).  The language of the bill was amended to clarify that “the fiduciary duties of real estate broker agents to buyers and sellers also apply to real estate salespersons.”  In conclusion the Court declared that “as presently written, the statute (2079.13) provides no basis for distinguishing between a broker’s duty to learn of and disclose all facts materially affecting the value or desirability of the property and its associate licensee’s duty to do the same.”  (Opinion by J. Kruger; w/ full concurrence).

This uber-briefed and argued case has been watched closely by the real estate industry, and the implications are being sorted out.  Clearly, the current disclosure forms promulgated by CAR are no longer adequate, and the practice of double-ending a deal, while legal with consent and full disclosure, now carries heightened risk for all brokers, especially the larger brokerage houses with thousands of independent agents operating out of multiple offices under the single shingle.  One would imagine that brokers with multiple associate licensees are scrambling to figure out a way to protect themselves, while CAR has posted a brief summary on its website, basically urging all members to be sure to disclose all material facts.  We would anticipate a new set of supplemental disclosure forms shortly.  However, I think that CAR has yet to acknowledge the duty to “learn and disclose” imposed by today’s decision.  This will be a work in progress.

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!