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Risks of Dual Agency in real estate transactions

Mar 11th, 2015 | By | Category: Real Estate Litigation

Brown v. FSR Brokerage, Inc. – dual agency overview.

Broker breach of fiduciary duty lawyers

Introduction

When a buyer or seller gets involved in a residential or commercial real estate transaction, often times they want licensed real estate agents to assist them.  Every now and then a seller’s agent will have a listing and the buyer will be unrepresented.  In some cases, the parties may agree to allow one agent to represent both the buyer and the seller, and to negotiate a deal that is fair to all parties.  The agent is licking her/her chops because this means they have a chance to get the “double whammer” “double popper,” the “two-run homerun“, “the double dipper” or the more boring “dual agency commission.”  However, a real estate brokerage should TREAD VERY CAREFULLY AND UNDERSTAND THEIR FIDUCIARY OBLIGATIONS, which under the dual agency scenario, means the broker owes fiduciary duties to both parties.

What is a dual agency?

A dual agency exists where “an agent acting, either directly or through an associate licensee, as agent for the both the seller and buyer in a real property transaction.” Cal. Civ. Code § 2079.13(e). An associate licensee is one who is licensed as a real estate broker. Cal. Civ. Code § 2079.13(b).  A typical dual agency situation involves an agent that represents both the buyer and seller of a parcel of land, in one transaction. See, e.g., Assilzadeh, 82 Cal. App. 4th at 405 (agent and agent’s employer represent the buyer and seller in a transaction to purchase a condominium); Bonaccorso v. Kaplan, 218 Cal. App. 2d 63, 68 (1962) (same agent represents the buyer and seller in one transaction); Huijers v. DeMarrais, 11 Cal. App. 4th 676, 686 (1992) (same agent represents the buyer and seller in the sale of a parcel of property).  A dual agency is permissible when the seller and buyer have knowledge and consent that the agent represents both the seller and the buyer. “The general rule is that an agent may represent both parties to a contract with their full knowledge and consent.  See Cisco v. Van Lew, 60 Cal. App. 2d 575, 585 (1943); Cal. Civ. Code § 2079.16; Assilzadeh, 82 Cal. App. 4th at 414.  In California, a broker who has signed a contract to act as a sales agent for the seller can also represent the buyer and act in the capacity of a dual agent in order to complete the sale and purchase of the property.”); See Bonaccorso, 218 Cal. App. 2d at 68 which held that since both sides were aware of the broker’s activities and that the broker represented the buyer and seller, the dual agency was permissible).

When must the dual agency disclosure be made?

It should be noted that the statute requires disclosure to the seller “as soon as practicable prior to presenting the seller with an offer to purchase” unless disclosure already had been made. (Civ.Code, § 2079.14, subd. (b), emphasis added.) The contemplated disclosure is to be in writing.  See Brown v. FSR Brokerage, Inc., 62 Cal. App. 4th 766, 777, 72 Cal. Rptr. 2d 828, 833 (1998)

Is there a fiduciary relationship with the agents?

An agent in a dual agency situation has a fiduciary duty to both parties in a real property transaction. Cal. Civ. Code § 2079.16. This fiduciary duty includes:
(1) the duty to act with the utmost care, integrity, honesty and loyalty with respect to both parties,
(2) the duty to diligently exercise reasonable skill and care in the performance of the agent’s duties,
(3) the duty of honesty, fair dealing and good faith;
and
(4) the duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the parties. Cal. Civ. Code § 2079.16.
Additionally, the duty to disclose material information, includes a duty to “disclose reasonably obtainable material information.” See Field v. Century 21 Klowden-Forness Realty, 63 Cal. App. 4th 18, 25 (1998) A dual agent is not obligated to disclose to either party any confidential information obtained from the other party that does not involve the fiduciary duties listed in California Civil Code section 2079.16. Cal. Civ. Code § 2079.16; see also Holmes v. Summer, 188 Cal. App. 4th 1510, 1525 (2010) (acknowledging that a broker is not required to disclose confidential information that does not involve the enumerated affirmative duties under Section1 2079.16). Moreover, the “duties of the agent in a real estate transaction do not relieve a Seller or Buyer from the responsibility to protect his or her own interests.” Cal. Civ. Code § 2079.16.

The duty NOT to disclose confidential information about willingness to pay sales price

California Civil Code section 2079.21 specifically provides that a dual agent “shall not disclose to the buyer that the seller is willing to sell the property at a price less than the listing price, without the express written consent of the seller. A dual agent shall not disclose to the seller that the buyer is willing to pay a price greater than the offering price, without the express written consent of the buyer.” See also Cal. Civ. Code § 2079.16 (dual agents may not, without the express permission of the respective party, disclose to the other party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered); Brown v. FSR Brokerage, Inc., 62 Cal. App. 4th 766, 777 (1998) (relying on Section 2079.16 and stating that a dual agent is forbidden from disclosing to the buyer that the seller will accept less than the listing price).
A breach of this duty can result in the loss of commissions:
“The duty of a real estate agent to faithfully represent the interests of his or her principal, and to make full disclosure of adverse interests, long antedated this statute. Breach of these duties may result in loss of the right to compensation. (See Baird v. Madsen (1943) 57 Cal.App.2d 465, 475, 134 P.2d 885; Sierra Pacific Industries v. Carter (1980) 104 Cal.App.3d 579, 582, 163 Cal.Rptr. 764.)  See Brown v. FSR Brokerage, Inc., 62 Cal. App. 4th 766, 777, 72 Cal. Rptr. 2d 828, 833 (1998).

A broker’s fiduciary duties owed to real estate clients in California and Arizona

Our real estate law firm practices law in California and Arizona.  We have handled real estate case from San Francisco down to San Diego, Los Angeles, and everything in between.  In real estate transactions, (especially complex commercial real estate deals), things can get interesting, and where one party represent two clients, the “fiduciary duty” red flag should pop up in the mind of the prudent real estate agent.

Let’s do a quick refresher course in fiduciary duty law.  In Huijers v. DeMarrais, 11 Cal. App. 4th 676, 681-84, 14 Cal. Rptr. 2d 232, 236-37 (1992) the Court discussed:

“For residential real estate sales, a real estate agent is required by statute to make certain disclosures about the agent’s duties to the parties and about which party or parties to the transaction the agent is representing. (§ 2373 et seq.)  Section 2374, subdivision (a), provides that “[t]he listing agent, if any, shall provide the disclosure form to the seller prior to entering into the listing agreement.” The disclosure is required to be made in the form set forth in section 2375. The form lists the duties of the seller’s agent, the buyer’s agent and advises that a real estate agent may represent both seller and buyer in a transaction. It also contains the warning that “[t]he above duties of the agent in a real estate transaction do not relieve a Seller or Buyer from the responsibility to protect their own interests.”  The form set forth in section 2375 gives buyers and sellers of real estate general information about a real estate agent’s duties, and points out the fiduciary responsibility of the agent. Information about whether an agent represents both buyer and seller may not always be known prior to the seller signing the listing agreement. Section 2375.5 therefore requires the listing agent to disclose “as soon as practicable” whether the agent is representing the seller only or both the seller and buyer.”

This lays out the general rule brokers in California and Arizona should follow. IF YOU ARE GOING TO SERVE AS A DUAL AGENCY, DISCLOSE ALL MATERIAL FACTS OF THE REPRESENTATION TO BOTH PARTIES AT THE FIRST AND EARLIEST POSSIBLE OPPORTUNITY.  We can help you draft full disclosure statements.  The same should be done whether you are involved in a residential or commercial real estate transaction (ex. office, industrial, mixed use, retail, etc.).

What are the risks of failing to advise real estate clients of conflicts of interest (ex. dual agency representation)

One great California case that discusses the duty to disclose dual agency is Brown v. FSR Brokerage, Inc., 62 Cal. App. 4th 766, 777, 72 Cal. Rptr. 2d 828, 833-34 (1998)

The duty of a real estate agent to faithfully represent the interests of his or her principal, and to make full disclosure of adverse interests, long antedated this statute. Breach of these duties may result in loss of the right to compensation. (See Bairdv. Madsen (1943) 57 Cal.App.2d 465, 475, 134 P.2d 885; See Sierra Pacific Industries v. Carter (1980) 104 Cal.App.3d 579, 582, 163 Cal.Rptr. 764.).

When does the dual agency need to be disclosed?

It should be noted that the statute requires disclosure to the seller “as soon as practicable prior to presenting the seller with an offer to purchase” unless disclosure already had been made. (California Civil Code §2079.14, subd. (b), emphasis added.) The contemplated disclosure is to be in writing.

Certain things cannot be disclosed

Even in a consented dual agency situation, the statute specifically forbids the agent from disclosing to the buyer, without express permission from the seller, that the seller will accept less than the listing price. (California Civil Code §2079.21) Based on Forbess’ testimony, that is substantially what Kibrick did.
In other words, you want to work the deal, but you do not want to be disclosing what the lowest price a seller will accept is, or what the most a buyer is willing to pay.  This is one of the reasons dual agency law is so tricky, and why some brokerages simply ban the practice.

DUAL AGENCY TIP:  You also have to realize that if a given real estate brokerage has TWO SALESPERSONS and one represents the buyer and one represents the seller on a particular piece of property, the dual agency situation also exists.  Some brokerages, especially those with a large number of agents, can forget this principle and may not even have any mechanism in place for the broker to understand their agents are engaged in a dual transaction, and to make sure (as part of the broker’s duty to supervise real estate activity) that the proper steps are being taken to disclose the agency in writing at the first possible instance.  This could come back to bite all real estate agents involved, and the potential of a breach of fiduciary duty lawsuit, financial elder abuse lawsuit, or other legal or disciplinary action arises, along with potential for lost commission, and the buyer or seller rescinding the transaction.

Contact a Real Estate litigation law firm

We handles breach of fiduciary duty, real estate license discipline, accusations, BRE investigations, financial elder abuse and other real estate arbitration and litigation matters in California and Arizona.  Contact us at (877) 276-5084 to speak with one of our real estate attorneys.  We have flexible legal fees and tenacious representation.  You can also fill out the contact form below to have a representative contact you.
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