The Risks of Dual Agency

Cheryl Davidson, Specialty Claims Management

Rinat B. Klier Erlich

Real estate transactions have always had the dual agency anomaly, in comparison with other fields of professional services. In the recent case of Horiike v. Coldwell Banker (2016) the California Supreme Court has taken the risk of dual agency over the top.

It is nearly impossible to imagine how a facilitator who owes a fiduciary duty of utmost care to a principal, can owe the same duty to the other side. When attorneys negotiate divorces, estates or represent more than one party, they are often faced with the same dilemma. While attorneys sometimes get into trouble over conflicts of interest, the hope is that they are educated enough to identify the potential conflict, obtain waivers or withdraw.

Real estate agents have developed workable methods of dealing with dual agency as well. For example, California Civil Code section 2079.16 provides disclosures to buyers and sellers and it explains:

“In representing both Seller and Buyer, the agent may not, without the express permission of the respective party, disclose to the other party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered.”

This Statute created a form where the buyers and sellers become informed of the potential dual representation and also give their consent.

Real estate agents are acutely aware that when they represent both sides they need to proceed with extreme caution, and agents often purposely decline representing buyers when they are listing a property for sale. Brokers, on the other hand, could become dual brokers if one of their associate licensees represents a buyer and another associate licensee represents a seller.

Horiike was based on that exact scenario. The buyer was represented by a Coldwell Banker associate licensee and the seller was represented by another Coldwell Banker associate licensee from a different office. The agents did not work together. The facts underlying the claim were that a flyer created by the listing agent had described the property’s square footage at approx. 15,000, wherein the property was closer to 10,000 square foot. The listing agent became aware of the discrepancy, but forgot to replace the flyers which were placed at the home. When the buyer discovered the discrepancy after the close of escrow he brought suit against Coldwell Banker for breach of fiduciary duty and included the listing agent in the suit. He did not name the agent who represented him in the transaction.

Before the case went to the jury Coldwell Banker was able to obtain a nonsuit and dismiss the breach of fiduciary duty cause of action. The rationale for this ruling was that the broker’s acts were derivative of its associate licensee, and the only associate licensee’s actions impacted were the acts of the listing agent. Since the listing agent did not represent Horrike, that listing agent did not owe Horikke a fiduciary duty. Therefore, Coldwell Banker could not have breached its fiduciary duty owed to Horiike through the acts of its listing agent. The Supreme Court disagreed.

The Court discussed that historically brokers were sub-agents of the sellers and they were cooperating with buyers to locate properties. It was not clear however, whether these sellers’ agents also owed a fiduciary duty to buyers and the courts would often look at the conduct of the agents to determine the relationship. In 1986 California became the first State to recognize dual agency in legislation. In enacting Civil Code section 2079.16 the California Legislature prescribed the method of agency disclosure. The Statute refers to the representations of the buyer and seller by an ‘agent.’ Under California Business & Professions Code sections 10130 and 10013, only licensed real estate ‘broker’ may act as ‘agent’ in real property transactions. Hence the reference in the Statute to dual agency must be a reference to ‘brokers’ and not to ‘agents.’ Therefore, Under Civil Code section 2079.13 the associate licensees perform duties as agents of the ‘agent’ (broker). The Code states:

“When an associate licensee owes a duty to any principal, or to any buyer or seller who is not a principal, in a real property transaction, that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.”

Before Horiike, brokers and lawyers interpreted this to mean that the broker was vicariously acting through–and its duty equivalent to– the associate licensee. The Supreme Court disagreed with that reading. It stated:

“Under the law, it is solely on the broker‘s behalf that an associate licensee is empowered to act in a real estate transaction . . .this means that an associate licensee does not have an independent agency relationship with the clients of his or her broker, but rather an agency relationship that is derived from the agency relationship between the broker and the client.”

In other words, when the Statute discusses dual ‘agency’ it talks about the brokers; not about associate licensees. Therefore, not only was Coldwell Banker Horiike’s fiduciary for all purposes, but the listing agent who represented the seller was also Horrike’s fiduciary. An associate licensee owes a duty to the buyer equivalent to that of the broker and Coldwell Banker clearly was a fiduciary to Horiike.

In practice, a listing real estate agent who represents a seller only, and who is ethically prevented from communicating with a buyer who is represented by another real estate agent from the same brokerage, will now be deemed the fiduciary of the buyer as well. Potentially, this can increase the risk of claims arising from acts of licensees, who may not understand that they are fiduciaries of the buyers. That said, we can also read Horiike more narrowly. In Horiike, the listing agent was aware of the square foot discrepancy and all he had to do was disclose it to the buyer, regardless of whether there was a fiduciary relationship.

Possibly, certain duties would not be expected to be performed by the listing agent who owes a fiduciary duty to the represented buyer such as, reviewing the transaction documents or recommending inspectors. As stated by the Horiike Court:

“While we do not gainsay defendants‘ concerns about the potential for conflicts of interest in the dual agency context, the narrow disclosure duty at issue in this case creates no such conflict. The fiduciary duty of disclosure that Horiike alleges [listing agent] breached is, in fact, strikingly similar to the non-fiduciary duty of disclosure that [listing agent] would have owed Horiike in any event.”

The Court noted that it was not deciding whether the fiduciary duty extended to the duty to learn information material to the buyer and follow up on red flags, as a fiduciary may be required to do for its principal, since under the specific set of facts in Horrike, the listing agent was already aware of the issues. Other scenarios however, remain unknown, and to the extent that the scope of this duty becomes impossible for agents to determine it will lie with the Legislature to amend the Statute.