On November 21, 2016, the California Supreme Court issued a ruling in Horiike v. Coldwell Banker Residential Brokerage Company that is likely to have far reaching implications for California real estate brokers in terms of dual agency. As we have written about in the past many states, including Nevada and California, allow real estate brokers and sales persons to represent both a buyer and seller in a real estate transaction provided that proper disclosures are made to the parties.
While dual agency statutes generally impose fiduciary duties of care, integrity, honesty and loyalty in dealings with both parties, we have often raised the effectiveness of these duties to overcome the inherent conflict of interest presented by dual agency. In fact, when enacting the current dual agency statutes in California, the California Legislature noted that the proposed statute could not cure “the fundamental problem in dual agency relationships – potential and sometimes unavoidable conflicts of interest” but rather was “simply [a] ‘disclosure’ bill intended to inform the buyers and sellers in a real estate transaction of the possible agency relationships and duties owned by a realtor…” (Sen. Rules Com., Bill No. 3349 (1985-1986 Reg. Sess.)).
Often as one way to mitigate some dual agency conflicts, different agents working under the same broker will each represent one party in the transaction rather than having one agent represent both parties. This is the type of relationship that was at issue in the Horrike case.
Horiike, filed suit after discovering a significant discrepancy between the actual square footage of his new condominium and the square footage that was represented by the marketing materials. The Court, in deciding the very narrow question of whether the listing agent, working under the same broker as Horiike’s agent, owed Horiike a duty to learn and disclose all information that could materially affect the value or desirability of the property, concluded that he did.
The Court interpreted the statute to mean that an agent’s duties are equivalent to the duty of the broker for whom s/he functions. i.e. a real estate agent does not have an independent agency relationship with the client of the broker, rather the agency relationship with the client is derived from the agency relationship between the broker and the client. As a result, the relationship between broker and agent cannot be uncoupled.
Therefore, when the broker agrees to act as dual agent for both buyer and seller, both broker and the agents assume all of the duties of dual agency, including those statutory fiduciary duties to investigate and disclose material information.
It will be interesting to see if the California Legislature takes another look at dual agency in light of this case. We will be sure to inform you if they do.