Donald Trump’s global web of business relationships has triggered discussion about potential conflicts of interest in the White House. For much more ordinary houses, the courts have put real estate agents on notice about conflicts of interest in a common practice in the buying and selling of homes.
The house that was the subject of a recent ruling by the California Supreme Court was perhaps ordinary only by Malibu standards: a mansion advertised as having 15,000 square feet of floor space, purchased by Hong Kong business mogul Hiroshi Horiike for $12.25 million.
The seller was represented by Chris Cortazzo, an agent in Coldwell Banker’s Malibu office who is known for A-list clients that include Barry Diller, Ellen DeGeneres, Jerry Weintraub, Pamela Anderson, Patrick Dempsey, Cindy Crawford, and Kid Rock.
Mr. Horiike was represented by another Coldwell Banker agent, Chizuko Namba, in their firm’s Beverly Hills office. Thus buyer and seller were represented by different salespeople of the same brokerage, a concept known as “dual agency.”
This became an issue when Mr. Horiike learned that the home he thought had 15,000 square feet was described in building permits as having 9,224 square feet, plus a guest house of less than 750 square feet – in total, about 5,000 fewer square feet than he thought he had purchased.
Mr. Horiike sued Coldwell Banker, arguing that the brokerage and its two agents had breached their fiduciary duty to him by failing to disclose the significant difference between the size of the home as described in marketing materials and as stated in the building permits.
He lost at trial; the lower court concluded that Coldwell Banker’s Malibu agent who represented the seller had no fiduciary duty to the buyer.
Mr. Horiike appealed, and the Court of Appeal reversed the trial court, finding in his favor. Coldwell Banker then appealed to the Supreme Court, which recently ruled in favor of Mr. Horiike and against the brokerage.
The Justices noted that California law allows a real estate broker to act as a “dual agent” for both seller and buyer – provided both parties consent to the arrangement after full disclosure. The broker acting as a dual agent must also inform both sides that it owes fiduciary duties to both buyer and seller.
In addition, the law says a salesperson operating under a real estate broker’s license owes a “duty equivalent to the duty owed to that party by the broker” for whom the agent is working.
Thus, while Coldwell Banker’s Malibu agent might have believed his sole duty was to the seller while the Beverly Hills agent might have focused on the needs of the buyer, the brokerage itself had fiduciary obligations to both the buyer and seller, the Supreme Court ruled.
The justices noted that the disclosure form both parties must sign when agreeing to dual agency states that the real estate agent and its associates owe a “fiduciary duty of utmost care, integrity, honesty and loyalty in the dealing with either the Seller or the Buyer.”
The only exception is price. The seller’s agent is not required to disclose that the seller will accept a lower price, and the buyer’s agent can keep mum about whether the buyer might be willing to pay a higher price.
The Supreme Court ruling held that Cortazzo, as an associate licensee of Coldwell Banker, owed Horiike a duty to inform him about “all facts materially affecting the residence’s value or desirability,” such as the actual size of the home, even if those facts could have been discovered by the buyer or his sales agent through “diligent attention and observation.”
The justices acknowledge that their ruling may raise concerns among real estate agents “about the potential for conflicts of interest in the dual agency relationship.”
Coldwell Banker had argued that if salespeople have the same fiduciary duty as the agency itself, buyers and sellers would not have the benefit of the “undivided loyalty of an exclusive salesperson.”
In addition, the brokerage said, salespeople “would have a duty to harm their original client by disclosing to the other side confidential information about the client’s motivations or the salesperson’s beliefs.”
Even if that is true, the justices ruled, these concerns are “inherent in dual agency, whether at the salesperson or the broker level.” The state legislature can address those concerns if it feels they are too burdensome, they noted.
Because dual agency is so common in California, the decision has already caused a stir in the real estate community. It is now clear that any broker or salesperson contemplating a transaction in which they will be representing both buyer and seller should proceed with caution.