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.