The Fall of Large Real Estate Brokerage Houses?

The California Supreme Court ruled on November 21, 2016 that a real estate brokerage company representing both the buyer and seller in the sale of a residence owes the same fiduciary responsibilities to each party. As such, the Horiike v. Coldwell Banker ruling has the potential to alter the requirements of a real estate brokerage company’s fiduciary responsibilities when its agents are representing both sides of a transaction.

The case considered California Civil Code Section 2079, which statute spells out the responsibility each agent has to the buyer and seller in a sales transaction.  The statue provides that the listing agent has a fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with only its clients, i.e. the seller; however, the listing agent has no fiduciary responsibility to the buyer and must be only “honest and fair” in its dealings with the buyer.

With respect to the buyer’s agent, the statute provides a similar fiduciary duty as it relates to their client, i.e., the buyer, but only the same “honest and fair” standard to meet in dealing with the seller. Accordingly, the listing agent has a fiduciary duty solely to his or her client, i.e., the selling party, and the buyer’s agent has a fiduciary duty solely to his or her client, i.e. the buying party.

So what has changed?  This ruling will certainly change the extent of the real estate brokerage company’s fiduciary responsibility when its agents represent both sides of a sales transaction.

The California Supreme Court ruled that it is undisputed that a brokerage company representing both seller and buyer in sale of a residence owed a fiduciary duty to the buyer, including a duty to learn and disclose all information materially affecting the value or desirability of the residence, and that such duty extended to information known only to the listing agent because a broker is presumed to be aware of the facts known to its salespersons.

Prior to this ruling, a listing broker having information bearing on the actual square footage of a residence, at odds with the square footage of the residence as disclosed in the MLS and marketing materials, had no duty to reveal such conflicting information to the buyer.

The Horike ruling now means that when the same real brokerage company represents both sides in a real estate transaction, both agents owe the higher fiduciary duty of utmost care, integrity, honesty, and loyalty to both the agent’s direct client as well as to the other party in the transaction.  No longer will agents be able to insulate themselves from providing the same level of care and loyalty by contending that they owe a fiduciary duty solely to their client.

Accordingly, where a listing broker has reason to believe that the square footage listed in the MLS and marketing materials may be exaggerated or overstated, this information must be provided to the buyer – even though the listing agent does not represent the buyer.

This ruling has the potential to significantly alter the manner in which large brokerage companies represent their clients when their agents handle both sides of a transaction. Large brokerage houses traditionally rely on dual agencies for a significant portion of their revenue, despite the apparent conflict of interest in such situations and the potential for abuse. As a result, listing agents will now be required to provide information to the buyer’s agent that they normally would have failed to reveal before this important decision.

For more detailed information about this decision and the impact it is likely to have on real estate sales transactions, please contact Narvid Scott. Consulting with our experienced attorneys at the outset of any real estate transaction can save significant time and legal expense by helping clients avoid the many pitfalls which unfortunately occur in our ever increasingly complex real estate world.