Hard as it is to believe, there have been occasions when a seller did not divulge all material facts about a property to the listing broker. "Oh, did I forget to tell you about the sink hole?" "Why would a buyer want to know that the toilets backed up last year? It's all fixed now." Etc. Etc.
So, what happens if the undisclosed problem later becomes the subject of a law suit, and the listing broker gets dragged into the suit? Even if the broker is subsequently vindicated, he will still have legal costs. And he's likely not to have a contract -- especially with the buyer -- that would require the other party to pay his attorney fees.
Should the seller have to cover the listing broker's costs? You bet. And he will if the listing agreement includes an indemnification provision such as the one in the standard listing contract produced by the California Association of REALTORS®(CAR). A recent court case confirms this. (Bardack v. Rudy Tomjanovich et al., Second Appellate District, August 29, 2014)
Rudy and Sophie Tomjanovich (yes, basketball fans, that Rudy Tomjanovich) purchased a Los Angeles area home in 2004 for $4.25 million. According to the court record, "At the time they bought the home, they were given reports and disclosures indicating that the home had active water leaks. In December 2004, the Tomjanoviches experienced a water leak in the entry foyer. In April 2006, another leak occurred in the foyer skylight."
In 2007 they listed the home for sale with Coldwell Banker. A buyer was procured and the sale closed. At no time did the Tomjanoviches "…disclose to [the buyer] or Coldwell Banker the reports they had received at the time they bought the home, or that the property had water leaks while they owned it."
Subsequently, the buyer experienced several leaks. He sued the Tomjanoviches for breach of contract, intentional misrepresentation, concealment, and rescission among other things. Not only did the Tomjanoviches deny any wrongdoing, but also they filed a cross-complaint against their listing broker, Coldwell Banker. They alleged that "Coldwell Banker was negligent and breached its fiduciary duties to the Tomjanoviches…"
The jury found that the Tomjanoviches were liable to the buyer on a number of counts. They awarded the buyer compensatory damages of over $2.8 million and punitive damages of $250,000. The jury also determined "that Coldwell Banker… had not acted negligently nor breached any fiduciary duty to the Tomjanoviches."
Coldwell Banker then filed a motion for recovery of attorney's fees and costs. Their motion was based on an indemnity clause in the listing agreement. According to California Civil Code § 2772, "Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person." The indemnity agreement in the CAR listing contract, which appears in bold print, says this:
"Seller further agrees to indemnify, defend and hold Broker harmless from all claims, disputes, litigation, judgments attorney fees and costs arising from any incorrect information supplied by Seller, or from any material facts that Seller knows but fails to disclose."
The trial court found in favor of Coldwell Banker and entered a judgment on its behalf for attorney fees of –get this! -- $348,372.
The Tomjanoviches appealed, arguing that the indemnity provision only applied to third-party claims (remember, it was Tomjanovich, not the buyer, who sued Coldwell Banker). But the appellate court disagreed. It upheld the trial court's finding.
The Tomjanovich decision is not published for use in decisions by other courts; but it does show that the indemnification provision in the CAR listing agreement has teeth. Listing brokers who do not currently use an indemnity provision in their agreements might want to consider employing one.
Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.