How a California Residential Real Estate Case Could Impact National Commercial Real Estate
The case of Horiike (Hiroshi) v. Coldwell Banker Residential Brokerage Company is scheduled for oral arguments in front of the California Supreme Court on September 7.
The issue is “when the buyer and the seller in a residential real estate transaction are each independently represented by a different salesperson from the same brokerage firm, does Civil Code section 2079.13, subdivision (b), make each salesperson the fiduciary to both the buyer and the seller with the duty to provide undivided loyalty, confidentiality and counseling to both?” This is a direct quote from the California Supreme Court’s website.
A simplified summary of Section 2079.13 essentially states that an associate broker or real estate sales person works under the supervision of a broker. Therefore, they are working in the capacity of an associate licensee. As a result, the broker is responsible for his associate licensees.
In other words, an associate licensee owes a duty to a buyer or seller. In addition, “that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.” The last part is in quotes because that language is at the heart of the issue. This is a result of a somewhat common scenario in real estate.
Hiroshi Horiike used a Coldwell Banker agent to purchase a home. A Coldwell Banker agent from another office listed the purchased home. Unfortunately, the actual square footage was significantly smaller than the listed square footage.
As a result, Horiike sued. The buyer claimed that Coldwell Banker violated their fiduciary duty. The agent failed advise Horiike to hire a third party to verify the square footage.
An initial jury verdict ruled in favor of Coldwell Banker. This verdict was overturned by the California Court of Appeal.
So why have national commercial real estate firms like CBRE, Cushman and Wakefield, and Jones Lang LaSalle joined the parties filing briefs. Why are they asking the California Supreme Court to review the Horiike appellate decision?
Because of the legal rationale issued by the Court of Appeal. The court reasoned that, “When a broker is the dual agent of both the buyer and the seller in a real property transaction… the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller as the broker.”
Following the letter of the law, it makes sense. A salesperson representing a buyer has a duty to his client. In addition, so does the broker for whom the salesperson is an agent.
Imagine that the salesperson representing the seller in a transaction is working under the same broker. The broker would also have a duty to the seller. That “duty is equivalent” to the duty owed by the broker. Therefore, both salespersons are working under a broker that has a duty to both parties.
The majority of U.S. states allow brokerages and their agents to limit their liability and fiduciary duty. Brokers easily avoid agency law and fiduciary duties to both parties. They simply use non-agency roles such as “intermediaries” or “transaction brokers.”
Commercial Real Estate
Hughes Marino President and CEO, Jason Hughes, feels that upholding the Court of Appeal’s decision could restore a level of transparency to real estate transactions. Therefore, the decision will affect the commercial real estate world as well.
“Agency is a murky condition in the real estate brokerage world,” Hughes said. “Our contention has been that tenants leasing corporate office space need more transparency, as far too often, landlords hold all the cards.”
Greines, Martin, Stein & Richland, the law firm representing Coldwell Banker, stated that “the opinion will be deeply disruptive”. This is “because compliance with fiduciary duties to one client will frequently entail a breach of fiduciary duties to the other.”
While a final ruling has not been made, firms that only represent commercial tenants often argue this point anyway. The lack of transparency is a reason why firms that represent landlords and tenants provide less effective representation for their tenant clients.
Hughes argues that dual agency has “constantly hurt companies with poor lease terms and economics”. Companies often do not even know “that ‘their agent’ is supervised by the managing broker of the office”. In addition, that managing broker gets all or a significant percentage of their income from the landlords”. And these are the very same landlords “that their agent is supposed to be strongly advocating against”.
“The truth is there is simply no way to represent two masters equally, especially when one of them has significant financial leverage with your company,” Hughes said. “Everyone wins with more transparency, except maybe some landlords and full-service legacy brokerage companies.”