DeLeon Insight – November 2016
Although the practice of “dual representation”—representing the buyer and seller in a real estate transaction—is completely legal and widely accepted in California, it seems impossible for one real estate agent to zealously represent the disparate interests of the buyer and the seller, even when the situation is properly disclosed. Simply too much conflict of interest exists.
Nevertheless, many agents are tempted by the thought of getting twice the commission from the same transaction, and many clients accept this practice, not realizing how much more other agents’ clients might have been willing to pay. A good attorney would cringe at the notion of representing both the plaintiff and the defendant on the same case, yet many real estate agents represent both sides of a transaction without batting an eye.
To our knowledge, DeLeon Realty is the only major brokerage in Silicon Valley that imposes an absolute prohibition on the same individual agent advising both the buyer and the seller on the same transaction (or accepting any additional compensation if a particular buyer gets the house). Conversely, most other brokerages permit the listing agent to receive additional compensation if one of the listing agent’s buyers gets the property, which can cast a doubt on the listing agent’s objectivity. In fact, some brokerages attempt to rectify this untenable situation by instructing the listing agent to abandon the sellers if they procure their own buyer.
In those situations, an office manager, who is often unfamiliar with the property and competing properties, steps in to advise the sellers. Needless to say, this is not a viable solution because the listing agent already has pertinent confidential information regarding the sellers’ position (e.g., the lowest price the sellers are willing to accept). Further, by the offer stage, the listing agent would have had contact with other agents with interested buyers and may have subtly dissuaded these agents from submitting offers in order to enhance the listing agent’s buyers’ chance of success.
Recently, the California Court of Appeal weighed in on the matter of dual representation in Horiike v. Coldwell Banker Residential Brokerage Company, 169 Cal. Rptr. 3d 891, 893 (Cal. App. 2d Dist. 2014) (“Horiike”) with an added twist. In Horiike, the Appellate Court applied legal principles associated with dual representation to a real estate transaction where the seller and buyer were represented by different individuals working for the same real estate brokerage. The Appellate Court’s decision in Horiike is now pending before the California Supreme Court. If upheld, the decision could significantly impact future real estate transactions across the state.
The Relevant Facts and Findings of Horiike
In 2006, a seller of residential real estate in California retained an independent contractor agent who was associated with Coldwell Banker as the listing agent for the seller’s residence. Public record information identified the residence as having over 9,000 square feet of living space, and the building permit issued for construction of the residence stated the residence consisted of nearly 11,000 square feet. However, the seller’s agent prepared a sales brochure for the property which stated the property offered “approximately 15,000 square feet of living areas.”
An offer to purchase the home was submitted in March of 2007, and the prospective purchasers asked for verification of the living area square footage. The seller’s agent provided the prospective purchasers with a letter from the residence’s architect stating that the home contained 15,000 square feet of living space, but also advised the prospective purchasers to hire a qualified specialist to verify the square footage of the home. When the prospective purchasers requested an extension in order to verify the home’s square footage, the seller declined their request, and the transaction was cancelled.
In November 2007, another Coldwell Banker agent representing a different prospective purchaser named Hiroshi Horiike arranged for Horiike to view the residence. The seller’s agent gave Horiike a copy of the brochure stating the property had 15,000 square feet of living space, but did not advise Horiike to have the square footage estimate verified by an expert. Horiike purchased the residence and subsequently filed a lawsuit against the seller’s agent and Coldwell Banker alleging the residence had only 11,964 square feet of living space. The lawsuit alleged several causes of action, including a claim for breach of fiduciary duty by both defendants.
The trial court decided in favor of both defendants and Horiike appealed. The Appellate Court reversed the trial court’s decision and made the following key findings:
Because the seller’s and buyer’s agents were both affiliated with Coldwell Banker, Coldwell Banker was acting as a dual agent of the buyer and the seller;
As a dual agent, Coldwell Banker owed a fiduciary duty of utmost care, integrity, honesty, and loyalty to both the buyer and the seller; and
Because the seller’s agent was affiliated with Coldwell Banker with respect to the transaction with the buyer, he owed the same fiduciary duty to the buyer that Coldwell Banker owed. In other words, the listing agent had to act in the best interest of the buyer despite his closer ties to his client, the seller.
In its decision, the Appellate Court also signaled its belief that the seller’s agent had breached his fiduciary duty to Horiike when he failed to disclose that there were contradictory living area measurements for the residence.
The Anticipated Supreme Court Decision and Its Impact
Generally speaking, the Supreme Court has three options: (1) overturn the Appellate Court’s decision, (2) adopt a “middle ground” position by modifying the decision, or (3) uphold the Appellate Court’s Decision.
Upholding the Appellate Court’s decision could have a profound and wide-ranging impact on the way real estate is practiced in California, especially at large brokerages such as Coldwell Banker and Alain Pinel. Generally, at most brokerages, agents switch back and forth between working with buyers and sellers, occasionally on the same transaction, so it is unrealistic to expect that these agents will commit to only working with buyers or sellers.
Alternatively, the Supreme Court could overturn the Horiike decision on the grounds that simple affiliation with the same brokerage is not sufficient to trigger a fiduciary duty to the buyer and decide in favor of both defendants. However, this would be inconsistent with the overarching principals of California agency law.
A middle ground decision is also possible. The Supreme Court could find that the Coldwell Banker agent representing the seller is liable to Horiike, based on the disclosure standard generally applicable to sellers’ agents, and reject the Appellate Court’s finding that the dual agency standard applied to defendants. This decision would afford the buyer some relief, but would not expand the applicability of the dual agency fiduciary standard.
Upholding the Horiike decision would significantly impact standard practices throughout the industry. If this decision stands, representation of a buyer and a seller by two agents from the same brokerage could entail a risk of enhanced liability. To avoid added liability, a brokerage could consider bifurcation to create a “listing-only” entity and a “buyer-representation-only” entity. Traditional brokerages would need to substantially reorganize to operate in this manner.
Notably, DeLeon Realty operates a bifurcated practice and has done so for years. DeLeon’s listing practice and buyer representation practice are operated separately and independently from one another; there are no individual agents straddled between buyers and sellers. Should the Horiike decision become the legal benchmark, we may see DeLeon’s operational model implemented across the industry, which we believe would be a good thing for consumers. However, it would be costly for many real estate agents, especially those who hope to get commission from both sides of the transaction, or brokerages that condone this practice.