In a unanimous decision that may have significant repercussions in the commercial real estate industry, the California Supreme Court held this week that real estate agents associated with brokers acting as dual agents owe the same fiduciary duties to both buyers and sellers as their brokers.
In Horiike v. Coldwell Banker Residential Mortgage Company, et al., the seller engaged a salesperson in Coldwell Banker’s Malibu office as a listing agent to sell a residential property in Malibu. Horiike v. Coldwell Banker Residential Mortgage Company, et al., S218734 (November 21, 2016). Meanwhile, the buyer had been working with a salesperson in Coldwell Banker’s Beverly Hills office for several years. The listing agent gave the buyer and his agent marketing documents indicating the property offered approximately 15,000 square feet of living area while also advising them that the seller was making no warranties about the square footage and that the buyer should verify the square footage himself. Prior to completing the purchase, the buyer completed the dual agency disclosure forms required under California Civil Code sections 2079.14, 2079.16, and 2079.17. The forms indicated that Coldwell Banker was acting as both the listing agent and the selling agent and, thus, was a dual agent of both the seller and the buyer.
Subsequently, the buyer discovered that, contrary to the listing agent’s representations, the living area of the property was significantly less than 15,000 square feet. The buyer sued the listing agent and Coldwell Banker for, among other things, breach of fiduciary duty. After a jury trial, the listing agent moved for nonsuit on the grounds that he had only represented the seller in the transaction and, therefore, did not owe a fiduciary duty to the buyer. The trial court granted the motion and the Court of Appeal for the Second District reversed. The California Supreme Court affirmed the Court of Appeal’s ruling.
It is a matter of statute that dual agents representing both the seller and the buyer in a transaction owe “[a] fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with” both the seller and the buyer with limited exceptions. Civ. Code § 2079.16. The issue before the Supreme Court in Horiike was whether a listing agent associated with a broker who is acting as a dual agent owes a buyer a fiduciary duty.
Importantly, in 2014, the Legislature expanded the definition of “real property” in Civil Code section 2079.13(k) to include commercial real property. 2014 Cal SB 1171. Accordingly, as of January 1, 2015, the disclosure requirements and duties set forth in Civil Code sections 2079.14 through 2079.24 apply to commercial as well as residential real estate brokers. Id.; Civ. Code § 2079.13(k).
In Horiike, the Supreme Court’s analysis centered on competing interpretations of California Civil Code section 2079.13(b), which states, in pertinent part:
“The agent in the real property transaction bears responsibility for his or her associate licensees who perform as agents of the agent. 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.”
Interpreting that section, the Court held that, because the listing agent was an “associate licensee” of the dual agent, Coldwell Banker, the listing agent owed the same duty to the buyer that Coldwell Banker owed to the buyer. As a dual agent, Coldwell Banker owed the buyer the fiduciary duties described in the disclosure form set forth in Civil Code section 2079.16, which include the “duty to learn and disclose facts material to the property’s price or desirability, including those facts that might not reasonably be discovered by the buyer.” Accordingly, the listing agent also owed those duties to the buyer and could be sued for breach of those duties.
Horiike represents a remarkable expansion of the fiduciary duties owed by agents associated with dual agents. While the Court downplayed the potential impact of its decision, characterizing the fiduciary duty of disclosure imposed by Horiike as “strikingly similar” to the non-fiduciary duties already owed, there is no question that Horiike expands buyers’ rights and opens the door to increased litigation against real estate brokers acting as dual agents and their associate licensees.
From a business standpoint, Horiike could create major shifts in the commercial real estate industry by disincentivizing dual agency and potentially distancing sellers’ interests from those of their brokers. Such shifts could create headaches for large commercial brokerages and, thereby, uncertainty in the business community as a whole.
At the end of its opinion, the Court suggested that the Legislature could address the uncertainty created by Horiike by “adopting legislation to uncouple associate licensees’ duties from those of the brokers they represent.” Given the stakes, it is entirely possible that the Legislature will address Horiike legislatively in the near future.
- Brian Lauter
Brian Lauter is a Shareholder at Eanet, PC. Eanet, PC is a boutique law firm focusing on business litigation, real estate litigation, labor and employment litigation, and corporate transactions.