California Supreme Court Addresses Pitfalls Of Dual Agency Relationships In Real Estate Transactions

It is not uncommon for parties on opposite sides of a real estate transaction to consent to representation by a single real estate broker for purposes of reducing commissions or expediting a transaction.  California law allows for such a “dual agency” relationship if the buyer and seller consent to such a relationship after required disclosures.  In such a scenario, purchasers and sellers may nonetheless be represented by separate “associate licensee” agents working under the license of the same broker or brokerage firm.

The recent California Supreme Court decision in Horiike v. Coldwell Banker Residential Brokerage Co. addresses the duty owed by a real estate agent (or associate licensee) working under the license of a broker to a party on the other side of the transaction that employs a separate associate licensee agent employed by the same broker.

In Horiike, the purchaser of a residential property filed a lawsuit against the seller’s agent for breach of fiduciary duty based on a failure to disclose known inconsistencies in records of the total square footage of the living space.  The trial court ruled that the seller’s agent did not owe a fiduciary duty to the purchaser on the grounds that the seller’s agent exclusively represented the seller.  Based on this finding, the trial court ruled that the broker could not be liable for the agent’s conduct.  The Court of Appeal reversed this ruling, finding that the seller’s agent owed a fiduciary duty to the purchaser based on the broker’s dual agency for both the purchaser and seller.

The California Supreme Court upheld the appellate ruling.   In so holding, the Court reasoned that because the brokerage firm agreed to act as a dual agent for both the purchaser and the seller, the associate agent representing the seller assumed duties “equivalent” to those owed by the brokerage firm to the purchaser pursuant to California Civil Code Section 2079.13(b).  The Court noted that the fiduciary duty owed by the broker’s associate licensee who represented the seller included a “duty to learn and disclose facts material to the property’s price or desirability, including those facts that might reasonably be discovered by the buyer.”

In light of Horiike, agents and brokers for parties to a real estate transaction must be cognizant of the implications dual agency relationships have on the scope of duties owed to parties to the transaction. Real estate agents and brokers under whose license those agents operate face substantial exposure if fiduciary duties arising from dual agency relationships are not scrupulously observed.

For questions regarding the Horiike decisions, including the scope of fiduciary duty and potential liability and exposure arising from dual agency relationships in California real estate transactions, please contact Paul James of our San Diego office.