Broker Agreements - New Case Law

8/8/2012 - Lindsay Petrone

​The recent California Court of Appeal decision William L. Lyon & Associates, Inc. v. Superior Court ((2102) 204 Cal.App.4^th 1294) may have a large impact on the application of liability limitation provisions in broker agreements.   In Lyon, the buyers sued their residential broker (Lyon) almost three years after the closing for breach of contract, breach of fiduciary duty, negligence and fraud.  The buyer-broker agreement had a limitation provision requiring any related claim be brought within two years after representation.  The broker, who represented both seller and buyer in the transaction, argued that the claims were time-barred both by statute and the contract.  The Court of Appeal held that the statute of limitations for all of the claims had not expired despite the expiration of the agreement’s time limit of liability.

The buyers’ claims arose because the broker allegedly failed to disclose that the sellers had intentionally covered up defects in the house.  Lyon argued that the claims were not timely raised pursuant to Civil Code Sections 2079 and 2079.4.  Those statutes provide that a seller’s broker can be held liable to the buyer for up to two years after the closing for failing to disclose facts related to a reasonably diligent inspection of residential property.  Since the claims were filed almost three years after the closing, Lyon argued that the claims were not timely.  The Court of Appeal decided that this statutory provision did not apply because these issues arose out of the broker’s obligation to buyer as its own broker, not as the seller’s broker.

The breach of contract claim was based on the allegation that Lyon failed to conduct an adequate inspection prior to the sale.  The statute of limitations for a contract claim is normally four years, but parties may contract around this, provided the timeframe is deemed reasonable as a matter of law.  Although there was a reasonable two year timeframe in the agreement, the buyers argued that they did not discover this latent defect until later due to the other parties’ fraud so the two year term of liability should not be triggered until such discovery was made.  Generally, a cause of action arises when the wrongful act is committed, not when it is discovered by the plaintiff.  However, in certain cases the courts will apply the “discovery rule”, in which the statute of limitations does not start running until the breach is discovered.  In this case, the Court of Appeal held that because the buyers were unable to see or appreciate the breach when it occurred (as it was a latent defect), the two year time period was tolled until the discovery of the breach was made.  The court also mentioned that the application of the “discovery rule” was appropriate here as the relationship between the parties was that of a special trust.

Finally, Lyon argued that the remaining “tort” claims like breach of fiduciary duty and negligence were not timely filed due to the two-year contractual limitation.  As the buyers’ broker, Lyon owed a fiduciary duty to the buyers requiring the highest good faith and undivided service and loyalty.  The court highlighted that even if the buyer-broker agreement had not been signed, Lyon would still owe such a common law duty to the buyers.  As a result, the Court of Appeal held that the contractual limitations time period in the buyer-broker agreement did not apply to the breach of fiduciary duty claims, like fraud, negligence and negligent misrepresentation.  As those remaining claims have longer statute of limitation periods (for example, breach of fiduciary duty not amounting to fraud is four years) the statute of limitations had also not elapsed on those claims.

Lyon illustrates that although parties may contract around statute of limitation periods for certain claims, the courts will consider the type of breach in determining whether the “discovery rule” should be applied to possibly extend the timeframe.  Further, buyers, sellers and brokers should be aware that claims based on fiduciary duties are not usually governed by contractual limitations set forth in a contract.  Therefore, all parties should be cognizant of statute of limitation timeframes for those particular causes of action.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben & Junius, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work. Copyright 2012 Reuben & Junius, LLP. All rights reserved.