As you’re probably aware, a real estate broker may act as a dual agent for both the buyer and the seller under California law, as long as both parties consent to such representation after the broker has made full disclosure of the dual agency. In a recent decision with potentially far-reaching implications for brokers, the California Supreme Court has made it clear that this fiduciary obligation applies even when the representatives of the buyer and seller work for separate offices of the same company.
Dual agency situations often arise when buyers are faced with a hotly contested marketplace, such as in Silicon Valley. Buyers struggling in such an environment may conclude that they will gain an advantage of efficiency in the bidding and offer process if they deal directly with the listing agent. In some cases, an agent acting for both the seller and the buyer can help craft an offer for a buyer that would be more acceptable to the seller, thus avoiding a risky series of offers and counteroffers that could potentially doom a deal. Even with required disclosure when a single broker or agent represents both parties, however, some authorities have concluded that dual agency will limit a party’s options in the event problems arise. For example, in the event of litigation, only one insurance company will have exposure for damages.
Entering this thorny landscape, the California Supreme Court has issued a decision that could cause even greater complications for the California real estate industry, by creating potential conflicts of interest for large commercial real estate firms with multiple offices statewide. This portentous ruling emerges from a dispute over a residential purchase that closed in 2007. In that transaction, both the listing agency and the agency of the realtor representing the purchaser were owned by Coldwell Banker Residential. When the buyer, who paid $12.3 million for a Malibu home that was advertised as being 15,000 square feet, discovered two years later from public records that the home had only 9,434 square feet of living space, he sued his agent and Coldwell Banker for breach of fiduciary duty in failing to advise him to confirm the size of the property.
The trial court ruled in favor of the defendants, concluding that Coldwell Banker did not breach its fiduciary responsibility to the plaintiff. Both the Court of Appeal and the California Supreme Court disagreed, however. Writing for a unanimous Court, Justice Leondra Kruger concluded that it is “undisputed that Coldwell Banker,” in representing both sides of the transaction, owed the buyer “a duty to learn and disclose all information materially affecting the value or desirability of the property.”
As a result, dual agency relationships and the complications they bring can exist between real estate sales professionals located hundreds of miles apart, as long as their offices are owned by the same company. For brokers, this decision poses significant challenges for meeting their fiduciary obligations with regard to the safeguarding and disclosure of their clients’ information and for ensuring an even-handed purchase and sale process. This would be especially true for commercial brokerages, which regularly enter into dual agency arrangements with their clients.
Acknowledging the conflicts inherent in dual agency relationships, states such as Colorado have established alternative categories of agency relationships that are defined as having no fiduciary obligations to clients. For California brokers, such a change in policy and status would require legislation. Meanwhile, how can a California broker best avoid these problems? “The keys to handling [dual agency] transactions are honest and fair dealings to all parties, full disclosure, confidentiality as to the other [party’s] position from a negotiation standpoint, [and] being hands-on to every detail,” according to John Stanaland of HOM Sotheby’s International Realty.
Even so, it is not difficult to imagine a broker acting as a dual agent facing an insoluble dilemma where the disclosure of certain facts would satisfy one duty but violate another. Perhaps telegraphing a deeper concern about the practice of dual agency in California, Justice Kruger further commented that, “[a]s a practical matter, it is unclear how a corporate brokerage like Coldwell Banker would fulfill its fiduciary disclosure duties as a dual agent” given the disclosure obligations implicated by dual agency relationships.
The case is Horiike v. Coldwell Banker Residential Brokerage Company.