Whether representing buyers or sellers, Realtors have a duty under Article 1 of the Code of Ethics to treat all parties honestly. That much is clear. What is not quite so clear is how wide the net of all parties is to be cast.
Does all parties refer only to signatories to a contract? Or might it also include their family members; and, if so, which ones? Are prospective or intended beneficiaries of a contract also parties to whom a real estate agent may owe a duty? And are such duties owed even if no contract has yet been formed?
These are not just the idle questions of a Code of Ethics geek. Similar questions arise in the law, and the answers to those questions may have significant financial consequences.
In California, the courts have not provided unambiguous clear direction in this regard. In the past decade the Fourth Appellate District Court of Appeal held that a listing broker did not have a duty of care with respect to a family member who was not a signatory to the contract (Coldwell Banker Residential v. Superior Court (Salazar), March 29, 2004).
Marcos Salazar, a minor, and his mother, Maria Casteneda, moved into a house which she had recently purchased. Not long thereafter, Marcos developed asthma, purportedly as a result of exposure to mold that was in the house. Through his father, guardian ad litem, Marcos sued the listing broker for its breach of duty "under Civil Code section 2079 et seq. to conduct a reasonably competent and diligent inspection of the property and to disclose known or reasonably ascertainable defects…"
The Court of Appeal, however, said that the duties under Civil Code §2079 are duties "to prospective buyers, and not to other persons who are not parties to the real estate transaction." "Because Marcos was not a prospective buyer or transferee, [the listing broker] did not owe him a duty of care."
On the other hand, in an earlier case (Krug v. Praszker, First District Court of Appeals, May 9, 1990) the court seems to have stretched the notion of parties to a transaction.
In that case, Krug, a real estate investor, held an unrecorded third trust deed securing a promissory note made to him by the property owner, Gilbert. When Gilbert needed to sell his property, he engaged broker Roman Praszker as listing agent. He told Praszker about the unrecorded deed, and asked him to "take care of everything."
Shortly thereafter, "Praszker informed Krug that a sale of [the property] to the Efil Corporation was pending and advised him that if he intended to protect his third deed of trust he should record it. Krug said he would think about it, and Praszker gave him the name of the title company handling the transaction."
The sale did not go through. Subsequently, another transaction opened. Praszker, who represented buyer and seller in the next transaction, did not inform Krug; and Krug's still-unrecorded third trust deed was wiped out.
In the lawsuits that inevitably followed, the trial court found against Praszker on grounds of negligence. The appellate court upheld the trial court in this case. The appellate court noted that, "California cases recognize a fundamental duty on the part of a realtor to deal honestly and fairly with all parties in the sale transaction." Moreover, the court went on to say, "The most important step in determining if a broker owes a duty of care to a third party is to examine 'whether a reasonable person would have foreseen an unreasonable risk of harm to the third person and whether in view of such risk the broker exercised ordinary care under the circumstances." This seems to impose duties of care far beyond that contemplated by the Salazar decision.
Real estate agents and brokers know that they have lots of duties. It is a problem, though, that they don't always know to whom those duties are owed.
Published: March 12, 2013
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