It is well known that under California law a real estate broker may act as a “dual agent” for both the seller and the buyer in a property transaction, provided both parties consent to the arrangement after full disclosure. In such representation, a dual agent owes fiduciary duties to both buyer and seller.  Pursuant to a recent case, Horiike v. Coldwell Banker, these fiduciary obligations have now been expanded to also apply to “associate licensees” acting on behalf of a brokerage firm (or the salespeople of the given brokerage firm, as they are more commonly known).  In a unanimous decision, the court ruled that when an agent representing a seller is working for the same firm as the agent representing the buyer, they are considered an “associate licensee” and must properly investigate and disclose all important information related to the property subject to the transaction.

In Horiike, the seller and buyer of a luxury Malibu mansion were represented by separate real estate agents.  However, both of these agents were acting under the license of a single brokerage firm, Coldwell Banker.  The seller’s agent had reason to know that residence’s square footage was significantly different than what was represented in the sales material.  The buyer purchased the property and began making renovations.  Upon reviewing a building permit previously obtained by the prior owner, the buyer discovered that the property had thousands of square feet less living space than what was disclosed in the marketing materials.  Coldwell Banker claimed that because the seller’s agent exclusively represented the seller, there was no fiduciary duty to disclose information relating to the square footage to the buyer.  The California Supreme Court thought otherwise.

By representing both the buyer and seller, Coldwell Banker owed a fiduciary duty to both parties, including a duty to learn and disclose all information materially affecting the value or desirability of the residence, and such duty extended to its salespeople. The court held that fiduciary duties flow from the broker to the agent and that the broker is presumed to be aware of the facts known to its agent.  Accordingly, Coldwell Banker (1) was presumed to know of the square footage discrepancy, and (2) had a duty to disclose that information to the buyer.

This raises interesting questions about the scope of a real estate agent’s fiduciary duties when both the buyer’s and seller’s agents are acting under a common broker. If a seller knows that its real estate agent is acting under a common broker with the buyer’s agent, the seller may be reluctant to share important information with its agent, due to the fact that the broker may have a duty to disclose that information to the buyer.  This is especially problematic for large brokerage firms.  Additionally, home builders often utilize in-house sales-agents who represent both the builder and the buyer.  It is important for brokers and home builders to be aware of these duties and the potential pitfalls involved in acting as a dual agent.

It ought to be pointed out that the case was decided based on facts that also triggered the non-fiduciary duty of a seller to disclose all material matters known about the property. Here, the square footage of the residence was required to be disclosed to the buyer under this existing rule, whether or not the broker fiduciary duties were implicated.  The impact of this case on future issues involving dual agency will depend on how narrowly or broadly the Horiike decision is interpreted.  From a broad interpretation, this case could have significant implications, including, as an example, the fact that such disclosure obligations could impede purchase and sale negotiations and/or dual agency representation.

To the extent there is any uncertainty about the scope of a dual agent’s fiduciary duties, the Horiike court stated that the Legislature could certainly enact legislation to uncouple the agent’s duties from those of the broker he/she represents.  However, until that happens there is no basis for distinguishing between a broker’s duty to learn of and disclose all facts materially affecting the value or desirability of the property and its agent’s duty to do the same.

If you have any questions about the duties of a dual agent, please contact the authors.