Lee A. Dresie

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Importance of Disclosure in Dual Agency Underlined

May, 2014Article
AIRWaves

Some believe that, when different agents for the same broker represent the buyer and seller in the same transaction, the individual agents only owe a fiduciary duty to their respective clients. A recent appellate court decision should dispel this belief.

In Horiike v. Coldwell Banker Residential Brokerage Co., owners of a residential property in Malibu engaged the associate licensee of a broker (the “seller’s agent”) to sell their property. The building permit listed the property as having 11,050 total square feet; public records provided to the agent listed the property as having 9,434 square feet of living area. The seller’s agent listed the property as having “approximately 15,000 square feet of living areas” and prepared fliers stating the same.

A couple made an offer to purchase the property. They asked the seller’s agent to verify the amount of livable square feet. The seller’s agent provided a letter from an architect stating the house was 15,000 square feet. However, the seller’s agent also told them that he did not guarantee the number and that they should hire a qualified specialist to verify its accuracy. The deal fell apart.

The seller’s agent relisted the property, this time stating the square footage as “0/O.T.” or “zero square feet and other comments.” A buyer’s agent—who worked for the same broker as the seller’s agent—arranged to have her client view the property. The seller’s agent gave the client a copy of the flier stating the property had 15,000 square feet of living areas.

Escrow opened. The seller’s agent provided the buyer’s agent a copy of the building permit, which the agent gave to her client. This time, however, the seller’s agent did not advise the buyer to hire a specialist to verify the property’s square feet.

The parties signed a confirmation of the real estate agency relationships. The document explained that the broker, which employed both agents, was the agent of both the buyer and seller.

The parties also signed a disclosure form. The form explained, among other things, that the seller’s agent owed both the buyer and seller a duty to exercise reasonable skill and care and to disclose all known facts material to the value or desirability of the property. The form added that a “dual” agent owes a fiduciary duty to both parties.

Escrow closed. When the buyer prepared to do work on the property, she reviewed the building permit, which listed the livable square feet as 11,050. She asked the seller’s agent to verify that the property had 15,000 square feet of living area.

It is unclear how the seller’s agent responded, but whatever he said did not mollify the buyer. (Not surprising since the property did not have 15,000 square feet of living area.) The buyer then sued both the seller’s agent and the broker, alleging breach of fiduciary duty, intentional misrepresentation, and concealment. 

At trial, the buyer’s expert testified the property’s living area was about 12,000 square feet. The expert for the seller’s agent testified the property was about 14,000 square feet.

At the close of evidence, the trial court found that the seller’s agent did not owe a fiduciary duty to the buyer. The buyer’s remaining claims went to the jury.

The jury ruled against the buyer, finding the seller’s agent did not intentionally misrepresent or conceal material facts. The buyer appealed. The appellate court reversed, finding that the seller’s agent owed a fiduciary duty to the buyer.

The Court of Appeal found that these “dual” agents owed a fiduciary duty to both buyer and seller, even though each nominally only represented one or the other. Further, the duties owed by agents were imputed to their broker.

The seller’s agent argued that, even if the trial court erred by striking the fiduciary duty claim, this error was harmless because the jury found that the seller’s agent did not intentionally conceal or misrepresent material facts. The court rejected this argument: Even if the seller’s agent did not intentionally misrepresent or conceal material facts, as a fiduciary, he had an affirmative duty to disclose all material facts. As the court explained:

“The broker as a fiduciary has a duty to learn the material facts that may affect the principal’s decision. He is hired for his professional knowledge and skill; he is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal’s decision, and he has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision. The agent’s duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information.”

The court found that the seller’s agent breached this duty by failing to communicate to the buyer “all of the material information he knew about the square footage.” The court faulted the seller’s agent for “not even provid[ing] the . . . advice given to other potential purchasers to hire a specialist to verify the square footage.”

The decision highlights the dangers when agents for the same broker represent both buyer and seller. In such a transaction, each agent owes both buyer and seller a fiduciary duty — a duty to act with the highest good faith and undivided service and loyalty — no matter which party the individual agent represents. This duty means that, in addition to not misrepresenting key facts, such as a property’s square footage, an agent must disclose them. This is true even when those facts are uncertain.

Further, the agents’ fiduciary duty is imputed to their broker. If either agent breaches this duty, the broker also is liable.

Given these pitfalls, a broker and its agents must proceed with caution when representing both buyer and seller. Failing to do so can result in a problem worse than not selling the property: lengthy, expensive, and ultimately unsuccessful litigation.