What is Dual Agency?
A dual agency situation arises when the same broker represents both the buyer and seller in a commercial or residential real estate transaction. Many times two real estate agents represent each party while the same broker or corporate brokerage acts as an umbrella supervising both agents.
While this is a common practice in California, the laws governing dual agency are in a state of flux after a 2016 California Supreme Court decision.
Is it Possible to Represent Both Buyer and Seller’s Separate Interests Fairly?
Maybe. In the legal world, one attorney or law firm cannot represent both the plaintiff and defendant at the same time. Too many conflicts of interest arise including the possibility of breaching fiduciary duties and violating privileges. Buyers, sellers, and parties to real estate transactions may see similar issues occurring with dual agency.
Rather than prohibiting dual agency, however, California’s law permits it as long as both parties consent to the arrangement after full disclosure. The law requires brokers to disclose whether they are acting as dual agents and to inform the parties that a broker acting as a dual agent owes fiduciary duties to both buyer and seller.
The broker may act directly or through an “associate licensee” (or real estate agent) who works for and is supervised by the broker. Notably, the duty owed by the agent to any party in a real estate transaction is equivalent to the duty owed to that party by the broker.
Horiike v. Coldwell Banker Residential Brokerage Co.
In Horiike, homebuyer Horiike retained Coldwell Banker real estate agent Chizuko Namba to help him purchase a home in Malibu listed for sale by another Coldwell Banker agent, Chris Cortazzo, located in a different office.
The parties agreed that Coldwell Banker, acting through Namba and Cortazzo, would function as a dual agent in the transaction. After the sale, however, Horiike discovered a significant discrepancy in the house’s square footage as found in the building permit and the square footage in the house’s marketing materials provided by Cortazzo.
Horiike sued Cortazzo and Coldwell Banker for breach of fiduciary duty based on a failure to disclose known inconsistencies in the records of total square footage of the house. After a jury trial and appeal, the California Supreme Court granted Coldwell Banker and Cortazzo’s petition for review.
Cortazzo Should Have Investigated and Disclosed Inconsistencies in Square Footage
The issue before the Court was whether Cortazzo, acting as a listing agent representing Coldwell Banker in the sale of the house, owed a duty to Horiike, the buyer, “to learn and disclose” inconsistencies in the square footage as advertised and reflected in publicly recorded documents. The Court decided in favor of Horiike.
To begin with, it was “undisputed” Coldwell Banker owed fiduciary duties to “learn and disclose” square footage inconsistencies to Horiike. Moreover, as Cortazzo was only a representative of Coldwell Banker, he did not have an independent agency relationship with Horiike or the seller.
Instead, his relationship with Horiike was one “derived from the agency relationship between [Coldwell Banker and Horiike].” Because Coldwell Banker agreed to act as a dual agent for both the buyer Horiike and the seller, Cortazzo assumed duties “equivalent” to the duty owed by Coldwell Banker to Horiike under California Civil Code Section 2079.13(b).
In effect, a listing agent like Cortazzo, rather than having fiduciary duties only to his client the seller, now has fiduciary duties to both the buyer and seller.
Takeaways From Horiike
- An “associate licensee” has fiduciary duties to both the buyer and seller in a dual agency transaction (see above).
- Disclosure Obligations of Exclusive Representative v. Dual Agent
The primary difference between the disclosure obligations of an exclusive representative of a seller and a dual agent representing the seller and buyer is the dual agent’s duty to learn and disclose facts material to the property’s price or desirability, including those facts that might reasonably be discovered by the buyer.
- Transparency v. Duty of Confidentiality to Buyer and Seller
Following Horiike, the Court acknowledged the tension between maintaining transparency in real estate transactions versus maintaining a duty of confidentiality to each client; buyers and sellers will not have the benefit of the “undivided loyalty of an exclusive salesperson” and a salesperson “[may] have a duty to harm their original client by disclosing to the other side confidential information about the client’s motivations or the salesperson’s beliefs.”
These concerns, however, are inherent in dual agency, and the Court said if the Legislature wanted to address them, it opted not to when drafting the dual agency statutes.
- Risk of Lawsuit & Limiting Dual Agency Transactions
Agents may face an increased risk of being sued after Horiike. Also, large firms may try to avoid dual agency transactions which could reduce buyers and sellers’ access to certain areas of the market.
- California Assembly Bill Nos. 1059 and 1626
Assembly Bill No. 1059 and No. 1626 were proposed in response to Horiike, and both are “In Committee” before the Legislature. Bill No. 1059 prohibits commercial dual agency transactions. Bill No. 1626 clarifies the role of real estate licensees/agents and revises the mandatory dual agency disclosure forms in light of Horiike.
Where Do We Go From Here?
Whether the current assembly bills pass or assemblypersons draft different legislation post- Horiike remains to be seen. In the meantime, Horiike is the prevailing law and now more than ever, parties to dual agency transactions may have questions regarding dual agency law, the scope of their liability, and fiduciary duties owed to clients.
If you have concerns regarding your current practices and policies, please contact an attorney for help and to ensure your compliance with California’s existing real estate laws.