Facts: A buyer’s agent locates a suitable property for their buyer. The seller’s agent is employed by the same broker as the buyer’s agent. The broker’s dual agency status is timely disclosed to the buyer. The listing and marketing materials provided by the seller’s agent to the buyer significantly misstate the square footage of the home and are inconsistent with public records. The seller’s agent does not bring the discrepancy to the buyer’s attention nor recommend any further investigation. After the sale closes, the buyer discovers the discrepancy in the square footage.

Claim: The buyer seeks money losses from the seller’s agent, claiming the seller’s agent breached their fiduciary duty owed to the buyer since the broker was a dual agent and thus the seller’s agent owed the buyer a fiduciary duty to investigate and disclose all infor­mation materially affecting the value and desirability of the property, such as the property’s square footage.

Counter claim: The seller’s agent claims they are not liable for the buyer’s money losses since the fiduciary relationship between the broker and buyer does not extend to the seller’s agent, who was acting as the exclusive agent of the seller.

Holding: A California Supreme Court holds the seller’s agent is liable for the buyer’s money losses since, as the employing broker was acting as a dual agent, the seller’s agent was also a dual agent who owed a fiduciary duty to the buyer.  [Horiike v. Coldwell Banker Residential Brokerage Company (November 21, 2016)_C4th_]

Agent of the agent and reciprocal duties

A sales agent who provides real estate services is limited to the status of an agent working on behalf of and dependent on their employing broker. An agent, also known as an associate licensee, rendering real estate services cannot independently contract in their own name or on behalf of anyone other than their employing broker. [Calif. Business and Professions Code §10160]

Only brokers may be employed by members of the public to act on their behalf. A broker’s sales agents are therefore accurately described as agents of the agent — i.e., agents of their employing broker. Sales agents render services on behalf of the broker’s clients, and do so exclusively as their broker’s representatives. [Calif. Civil Code §2079.13(b)]

Thus, a sales agent does not have an independent agency relationship with their broker’s clients — the agency relationship of the sales agent is derived from the agency relationship that exists between the broker and the client. Sales agents therefore owe all transaction participants identical duties as the broker on whose behalf the sales agent is acting.

In this case, when the broker elected to act as a dual agent for both the buyer and seller, the seller’s agent, as an associate licensee of the broker in the transaction, assumed equivalent dual agency duties as the broker — including the fiduciary obligation to act with the utmost care, integrity, honesty and loyalty in the dealings with the buyer.

Here, the seller’s agent misinterpreted the bilateral nature of agency relationships. By the seller’s agent’s reasoning, it was a one-way street: if the seller’s agent was a dual agent, then the seller’s broker was necessarily cast as a dual agent; however, if the seller’s broker was a dual agent, this would not automatically trigger dual agency obligations (with attendant fiduciary duties) on behalf of the seller’s agent. This incorrect reasoning misconstrues the power dichotomy between broker and agent — the employing broker is the nexus by which the agency relationships of all the broker’s agents are established. Agency relationships flow from the headwaters of the broker down to the tributaries of their agents — not uphill from the agent to the broker.

Editor’s note — Even in the absence of a fiduciary duty to the buyer, seller’s agents have a general nonfiduciary duty to disclose to prospective buyers all material facts affecting the value or desirability of a property. Thus, even if the seller’s agent did not owe a fiduciary duty to the buyer, they still would have breached their general duty to disclose the significant discrepancy in the property’s square footage.

Dual agency — a double edged sword

Stated simply, a dual agent is a broker who simultaneously represents opposing principals in a transaction, either by themselves or through the agents they employ.

A dual agent owes a fiduciary duty to both principals they represent since each are the broker’s clients. Thus, the dual agency alone creates a conflict of interest, which needs to be promptly disclosed to each client. [See RPI Form 117; CC §2079.17]

Related reading:

Dual agency explained

The dual agency situation inherently imposes limitations on the benefits obtainable by the principals. Though a dual agent is duty-bound to work diligently on behalf of both clients, they are prevented from actively achieving the full advantages of negotiations for either client. Like the opposing ends of a teeter totter, a natural inability exists to simultaneously negotiate the highest and best price for the seller, and the lowest and best price for the buyer.

Thus, clients of a dual agent generally do not receive the full range of benefits available from an exclusive agent. This environment, even when handled properly, exposes dual agents to breach-of-duty claims.

This client disadvantage holds true even if different agents employed by the same broker each work with different principals in the same transaction, as this case clearly illustrates.

It all comes back to disclosure

Though this case touches on multiple bedrocks of real estate practice — dual agency, fiduciary duty versus general duty, the transmission of legal responsibilities between brokers and their agents — the catalyst which set this case in motion was the seller’s agent’s failure to disclose the discrepancy in square footage to the buyer.

Editor’s note — The discrepancy in square footage is significant. Public records indicate the property measures 11,050 square feet with 9,434 square feet of living area. However, the listing and the seller’s agent’s marketing materials state the home provides “approximately 15,000 square feet of living areas.”

Related reading:

Combating lies in real estate transactions

Here, the seller’s agent unequivocally remained silent regarding the known discrepancy. Even had the seller’s agent not owed a fiduciary duty to the buyer, the seller’s agent would still have owed the prospective buyer, and also the buyer’s agent, a limited, non-client general duty to voluntarily provide critical factual information on the listed property.

What is limited about the duty is not the extent or detail to which the seller’s agent may go to provide information, but the minimal quantity of fundamental information and data about the listed property which the seller’s agent will hand to the prospective buyer or the buyer’s agent before the seller enters into a purchase agreement.

The information disclosed by the seller’s agent only needs to be sufficient to place the buyer on notice of facts which may have an adverse effect on the property’s value or interfere with the buyer’s intended use.

In this case, the seller’s agent said nothing to put the buyer or their agent on notice.

California’s public policy pursues transparency in property information between sellers and buyers. A seller’s agent’s disclosures inform prospective buyers about the fundamentals of the listed property and act to eliminate the asymmetry of information in sales transactions. Thus, the seller’s agent is severely limited in their ability to exploit the prospective buyer’s lack of knowledge about the condition of the property by use of these disclosures.

A seller’s agent fails to perform the general duty owed to the buyer to disclose knowledge of material facts — such as the actual total square footage of a property — when information that might affect the buyer’s decisions regarding an offer is withheld.

Editor’s note —The broker who employed the buyer’s and seller’s agent will also be pursued. However, the buyer stipulated they did not seek recovery for breach of fiduciary duty based on the buyer’s agent’s conduct.