A person that represents a party in a real estate transaction in California is required to have a real estate license. The representative may obtain either a broker’s license and work on his or her own, or a salesperson’s license, in which case the representative must work under the supervision of a broker with a broker’s license. The broker may be either an individual with a broker’s license, or more often, a brokerage firm that has a broker’s license. The requirements to obtain a salesperson license are much easier to satisfy than the requirements to obtain a broker’s license, and as a result, many representatives in California obtain just a salesperson’s license and work under the supervision of a broker or brokerage firm.
It is common practice in California for the same real estate broker or brokerage firm to represent both the buyer and the seller in a residential real estate transaction. The same is true – although to a lesser degree – in commercial transactions. This practice, known as “dual agency,” is especially common when parties engage the services of large real estate brokerage firms that have hundreds of real estate salespeople working under the firm’s license. Typically, one salesperson from the brokerage firm will exclusively represent the seller while another salesperson from the same firm will exclusively represent the buyer.
Exclusive Representation: Salesperson #1 from Company A represents the seller and Salesperson #2 from Company B represents the buyer.
When a broker or brokerage firm exclusively represents only one side of a transaction, the broker or brokerage firm owes a fiduciary duty of the utmost care, integrity, honesty and loyalty only to the party that it represents. But the broker or brokerage firm is still required to be “honest and fair” in dealing with the party that it does not represent.[1] The obligation to be honest and fair to the other party requires the broker or brokerage firm to disclose known facts that “materially affect the value or desirability of the property that are not known to, or within the diligent attention and observation of, the parties.”[2]
Dual Representation: Salesperson #1 from Company A represents the seller and Salesperson #2 from Company A represents the buyer.
When a broker or brokerage firm represents both sides of a transaction in a dual agency arrangement, the broker or brokerage firm owes a fiduciary duty to both parties in the transaction, and must disclose that they represent and owe fiduciary duties to both sides. The fiduciary duty owed to both parties in a dual agency scenario includes the broker’s or brokerage firm’s obligation to learn and disclose all information materially affecting the value or desirability of the property, including facts that might be reasonably discovered by the buyer or seller.[3] Despite the broker’s or brokerage firm’s fiduciary duty to both parties, the California Civil Code specifically prohibits the broker or brokerage firm from disclosing to the buyer that a seller is willing to sell the property at a price less than the listing price without the seller’s consent, and similarly prohibits the broker or brokerage firm from disclosing to the seller that a buyer is willing to pay a higher price than the buyer’s offering price without the buyer’s consent.[4]
In November 2016, the California Supreme Court ruled that in a dual agency arrangement, not only does the broker or brokerage firm owe a fiduciary duty to both sides, but so do the broker’s or brokerage firm’s salespeople, even when the salespeople represent one side of the transaction exclusively. Although this case concerned a residential real estate transaction, the statutory scheme that the California Supreme Court relied on applies to residential and commercial transactions alike.[5] Thus, the Court’s ruling is anticipated to have a substantial impact on the way dual agency arrangements are handled across the real estate industry in California, in both commercial and residential transactions.
THE FACTS
In Horiike v. Coldwell Banker Residential Brokerage Co., the owner of a luxury residence in Malibu, California, engaged a salesperson, Chris Cortazzo, working for the brokerage firm Coldwell Banker, to sell the property. When Cortazzo prepared to list the residence on the market, he obtained public records, which stated the property contained 9,434 square feet of living area, and a copy of the residence’s building permit, which described a residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified size. However, Cortazzo’s listing claimed the property contained approximately 15,000 square feet of living area. In early 2007, a couple offered to purchase the residence, and Cortazzo informed them that Coldwell Banker did not “guarantee or warrant” the square footage of the property, and advised the couple to “hire a qualified specialist to verify the square footage.” The couple requested documentation of the square footage, and Cortazzo provided a letter from the residence’s architect that stated the residence contained approximately 15,000 square feet. However, in a cover note, Cortazzo reiterated that the couple should “hire a qualified specialist to verify the square footage.” The sale eventually fell through after the seller refused to grant additional time for the couple to inspect the property.
In late 2007, a different buyer, Hiroshi Horiike, became interested in purchasing the Malibu residence. Horiike had previously engaged a different Coldwell Banker salesperson, Chizuko Namba, to locate residential property for Horiike to purchase. Namba arranged for Horiike to view the Malibu property in November 2007. During Horiike’s visit, Cortazzo provided him with a marketing flyer indicating the residence contained approximately 15,000 square feet of living area. Cortazzo did not advise Horiike to obtain a third party specialist to verify the size of the residence in the manner Cortazzo had advised the previous buyers, but did provide Horiike, through Namba, a copy of the property’s building permit and a form advisory that stated: “[O]nly an appraiser … can reliably confirm square footage… Representations … in a Multiple Listing Service, advertisements, and from property tax assessor records are often approximations, or based on inaccurate or incomplete records…. Brokers have not verified any such representations. Brokers do not have expertise in this area. If Buyer wants information about the exact square footage … Broker recommends that Buyer hire an appraiser or licensed surveyor….”[6]Horiike eventually purchased the property without further examining the square footage, but later sued Coldwell Banker and Cortazzo (but not Namba) for breach of fiduciary duty after discovering the discrepancy in the size of the living area.
TRIAL COURT FINDINGS
The trial court granted a nonsuit in favor of Cortazzo, finding that he exclusively represented the seller of the residence and did not owe a fiduciary duty to Horiike.[7]The trial court also found in favor of the brokerage firm (Coldwell Banker) because Horiike stipulated that he did not want to seek recovery for breach of fiduciary duty based on Namba’s conduct, which caused the trial court to instruct the jury that Coldwell Banker could only be liable for a breach of fiduciary duty if an agent other than Namba and Cortazzo had breached a fiduciary duty to Horiike.[8]
COURT OF APPEAL
The Court of Appeal reversed the trial court on the breach of fiduciary duty claim against both Coldwell Banker and Cortazzo, holding that based on its interpretation of the California statutes, Cortazzo owed Horiike the same fiduciary duties that Coldwell Banker owed to Horiike, which – because Coldwell Banker was acting as a dual agent – included the duty to learn and disclose all information materially affecting the value or desirability of the property, including facts that might be reasonably discovered by the buyer or seller.[9]
CALIFORNIA SUPREME COURT
Coldwell Banker and Cortazzo petitioned the California Supreme Court to review the decision of the Court of Appeal. They did not dispute that Coldwell Banker was acting as a dual agent and therefore owed a fiduciary duty to both the buyer and seller, but they argued that Cortazzo exclusively represented the seller and therefore did not owe a fiduciary duty to the buyer, who they asserted was represented exclusively by Namba.[10]However, the California Supreme Court unanimously affirmed the judgment of the Court of Appeal, finding that under the California Civil Code, Cortazzo owed fiduciary duties to Horiike “equivalent” to the fiduciary duties that Coldwell Banker owed to Horiike.[11] Horiike contended that Cortazzo breached this fiduciary duty by making representations about the square footage of the residence’s living area that Cortazzo did not know to be true, by failing to disclose the discrepancy between such representations and the information contained in public documents, and by neglecting to specifically advise Horiike to hire a third party specialist to verify the square footage of the residence in the manner Cortazzo had done for a previous potential buyer. The Court did not rule on whether Cortazzo’s actions and inactions amounted to a breach of his fiduciary duty to Horiike, but remanded the case for a new trial to determine that issue.
CONCLUSION
The Horiike ruling could have a major impact on large brokerage firms that frequently represent both parties to a real estate transaction because the firms’ salespeople will owe conflicting fiduciary duties to the parties involved in the transaction. Although the California Civil Code prohibits a dual agent from disclosing that a seller will accept less for a property or that a buyer will pay more for a property, the same Civil Code section specifically states that the limitations regarding price disclosures do not affect a dual agent’s responsibilities with respect to other confidential information. Thus, salespeople involved in dual agency arrangements could potentially face conflicts of interest in all other aspects of a transaction. The Court mentioned the potential for conflicts of interest in dual agency situations in its opinion, but noted that conflicts of interest are inherent in dual agency arrangements, which the California State Legislature has chosen to allow. The Court offered that the Legislature could enact legislation to “uncouple” the duties of salespeople from the duties of the brokerage firms they represent, but explained that, “as presently written, the statute 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 [salespeople’s] duty to do the same.”[12]
