Real estate brokers, and the licensees who work under their supervision, owe fiduciary and other duties to their clients. Can those duties be fulfilled in the context of dual agency? The potential conflicts of interest that may arise when brokers undertake the representation of more than one party to a real estate transaction are again before California lawmakers, in the wake of the California Supreme Court’s November 2016 decision in Horiike v. Coldwell Banker Residential Brokerage Company (2016) 1 Cal.5th 1024.
Among the duties owed by a real estate licensee is a “fiduciary duty of utmost care, integrity, honesty, and loyalty” in dealings with her own client. A licensee’s duties to both parties in a transaction include (a) a duty to exercise reasonable care and skill, (b) a duty of good faith and fair dealing, and (c) a duty to disclose facts that are known to her and which materially affect the value or desirability of the property and which are not within the diligent attention and observation of one or both parties.
“Dual agency” arises when a single real estate brokerage represents both parties to a transaction. Often, two real estate salespersons represent the different parties, but they are both supervised by the same broker or corporate brokerage. Continued consolidation in the brokerage industry had made dual agency increasingly common.
In most cases of dual agency, each party interacts exclusively with her own salesperson, rather than with the supervising broker. Nonetheless, the Real Estate Law considers the client’s relationship to be with the broker. Principles of agency create concerns about how the broker – who acts through the licensed salespersons he supervises – can fulfill his fiduciary duties to both of the adverse parties to a real estate transaction, while maintaining the confidences of one party to the exclusion of the other.
In 1986, California enacted legislation that addressed, to some extent, the practice of dual agency. Rather than prohibiting dual agency or reconciling the conflicts of interest inherent to dual agency, however, California focused on disclosure: dual agency was permitted, if the broker obtained the informed consent of both clients. With one exception, the Real Estate Law left intact the duties – including fiduciary duties – that a broker owes to his clients. Notwithstanding their fiduciary duties, the broker and his associate licensees were required to maintain the confidence of the parties’ respective positions regarding price.
The dual agency legislation initially applied only to residential transactions, but in 2015 it was extended to commercial real estate brokers.
The Supreme Court’s decision in Horiike significantly changes the legal landscape. The Court there determined that when a real estate brokerage serves as a dual agent in a residential real estate transaction – albeit through salespersons who each have a relationship with only one of the parties – the brokerage’s fiduciary duties to both parties are imputed to the listing agent. The practical import of the decision is that the listing agent, who was historically viewed as having fiduciary duties only to the seller, is now held to have fiduciary duties to both the seller and the buyer. The Court held that the listing agent has a fiduciary duty to the buyer to learn about and disclose all facts that materially affect the value and desirability of the property. In some contexts, doing so could require the listing agent to work against the interests of its client, the seller.
The facts of Horiike limit its application to residential transactions. How the decision will impact on dual agency in the commercial real estate context is not yet clear. However, two pieces of legislation were proposed in response to Horiike, each of which bears consideration.
Assembly Bill No. 1059 would completely prohibit real estate brokers or their associated licensees from representing both the seller and buyer in any commercial real estate transaction, i.e., “any negotiation regarding an agreement or the consummation of an agreement to lease, purchase, or sell commercial real estate. . . .” Assembly Bill No. 1059 is pending before the Assembly Judicial Committee, and is set for further hearing on May 2, 2017.
Assembly Bill No. 1626 is expressly drafted to clarify the duties of real estate licensees in the wake of the Horiike decision. Rather than prohibiting dual agency, Assembly Bill No. 1626 would maintain the current focus on informed consent, and would require modification of the statutorily-required disclosures. The legislation would provide some protection to licensees in that the fiduciary duties of a dual agent would be considerably more limited than those imposed on a licensee who exclusively represents the buyer. The dual agent’s duty to “learn about and disclose all facts that materially affect the value and desirability of the property” will be limited to disclosure of facts that are actually known to her, or which could have been learned by “a reasonably competent visual inspection” of the property [emphasis added]. Assembly Bill No. 1626 is set for hearing on April 25, 2017 before the Assembly Judicial Committee.
Time will tell whether dual agency survives in California, or to what extent legislation will scale back or eliminate the fiduciary duties that real estate brokers who serve as dual agents owe the parties to commercial real estate transactions.
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 & Rose, 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.