A recent California Appellate Court ruling is liable to have major long-term consequences for the real estate practice of dual agency in the Golden State. In this case (Hiroshi Horiike v. Coldwell Banker, Second Appellate District, April 9, 2014), the dual agency was not a matter of a single person - real estate agent - representing both buyer and seller. Rather, it was a case of different agents from different offices (of the same firm) representing the two parties.
Chris Cortazzo, a salesperson for Coldwell Banker Residential Brokerage (CB) listed a property in Malibu in September of 2006. In the listing, and on a flier, he stated that the home "offers approximately 15,000 square feet of living areas." The MLS service that provided public record information stated that the living area was 9,434 square feet. The building permit indicates a single-family home of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified area. The listing agent had or subsequently obtained a letter from the architect "stating the size of the house under a current Malibu building department ordinance was approximately 15,000 square feet."
An offer was made the following March. In response to the buyers' request for verification of the square footage, they were given the architect's letter. The listing agent also advised that they have a qualified specialist verify the square footage. He also gave that advice on the Transfer Disclosure Statement.
Unable to obtain building plans or to receive an escrow extension for further investigation, the buyers cancelled.
In July, the listing field for square footage was changed to "'0/O.T.' by which he meant zero square feet and other comments."
A couple of months later, the plaintiff, Hiroshi Horiike, was working with Chizuko Namba, a salesperson in another CB office. She arranged for him to see the Malibu property. Horiike received a copy of the flyer saying that the home "offers approximately 15,000 square feet of living areas." He made an offer and escrow opened in November. Namba was provided with a copy of the building permit which she sent to Horiike along with other documents.
Both parties signed a confirmation of the real estate agency relationships as required by Civil Code section 2079.17. They also signed a mandated agency disclosure form which describes various agency relationships and the duties of agents. Among other things, that form says that "A real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Seller and the Buyer in a transaction..." It also says that an agent in a dual agency situation has a fiduciary duty to both the seller and the buyer.
The transaction closed. During the course of the transaction, Horiike did not receive advice to hire a specialist to verify square footage, as had the buyers in the previous transaction.
In 2009, Horiike reviewed the building permit in preparation for work on the property. He could not verify the approximately 15,000 square feet of living area. He sued CB and the listing agent. He did not sue his agent, Namba, whom he said he liked.
The trial court granted one motion of nonsuit on the grounds that the listing agent had no fiduciary duty to the buyer. Then the jury found that the listing agent had not made a false representation of a material fact, hence there was no misrepresentation. It also found that he did not intentionally fail to disclose an important or material fact to the buyer.
Horiike appealed. The Appellate Court said that:
"The motion for nonsuit should have been denied and the action...for breach of fiduciary duty submitted to the jury." Clearly, CB was a dual agent, and "When an associate licensee owes a duty to any principal...that duty is equivalent to the duty owed to that party by the broker..." Thus, "The jury's findings that Cortazzo did not provide false information to Horiike, or provided false information that he reasonably believed to be true, and did not intentionally conceal information,does not satisfy his duty to Horiike as a fiduciary." [my emphasis] As a fiduciary, the listing agent should have gone the "extra mile" to provide the buyer with information about matters that concerned him.
The Appellate Court said that, because CB had fiduciary duties to the buyer, so, then, did its agents, both of its agents. In short, the Court said that it is a mistake - and a common myth - that when there are two agents of the same company in a dual agency situation, each of them only has fiduciary duties to his/her personal client. They are both the fiduciaries of both. The case was remanded for a new trial.
There is a great deal of concern about this ruling in the California real estate community. It runs counter to the way - rightly or wrongly - that agents and brokers have thought things were. It certainly raises practical questions. (In the case at hand, for example, the listing agent did not even speak the same language as the buyer.)
The California Association of REALTORS (CAR) will support CB in a petition for review by the California Supreme Court. But this may be one of those situations where you should be careful what you ask for. It is certainly possible that dual agency, as it is now commonly practiced in California, will become untenable.
Other states have dealt with this type of situation by creating a category called designated agents. Those agents are, respectively, fiduciaries of only one party. To be able to do this in California would require legislative action. That would be a topic for another day.
Bob Hunt is a director of the California Association of Realtors. He is the author of Real Estate the Ethical Way.