When a California real estate agent lists a property for sale with his broker, it is not unusual for another agent from the same brokerage to assist the buyer. When the same broker represents both parties in the transaction, that broker is a “dual agent,” and owes fiduciary duties to both parties. A fiduciary is required to give diligent and faithful service act toward the principal in the highest good faith and undivided service and loyalty, and must disclose to the principal all information that may affect the principals’ affairs or decisions. This is much greater than an arm’s length business transaction. But what sometimes confuses the agent/salesperson is that when his broker is a dual agent, he is too, and has the same fiduciary duties. Salespersons wondering what that fiduciary duty implies should consult with a real estate attorney because, in a recent decision the salesperson was surprised to learn that he was a dual agent, and that meant that he did not have to deliberately mislead a buyer to be found liable for fraud.
In Horiike v. Coldwell Banker Residential Brokerage Company, a salesperson listed a house in Malibu for sale. There was a first buyer who asked the salesperson, Cortazzo, what the square footage was. His listing stated that it had 15,000 square feet of living area. The first buyer asked for verification of the square footage. He advised them to hire a specialist to accurately determine the size. He also included this in the real estate transfer disclosure statement, and changed the MLS listing to read “0” square feet, and other comments.
The first buyer backed out and along came the plaintiff Horiike, (see him here) who was represented by another salesperson from the same brokerage. Cortazzo gave him the old flyer that stated the property was 15,000 square feet.. Escrow was opened, and they all signed the agency confirmation statement, indicating that Coldwell Banker was agent for both buyer and seller. Unfortunately for him, Cortazzo did not advise the buyers to hire an expert to measure the square footage of the living area. The sale closed, the buyer wanted to have work done on the house, found that it was only 11,964 square feet, and sued everybody.
At trial the jury found that Cortazzo had reasonable grounds for believing the property had 15,000 square feet, thus he was not liable for negligent misrepresentation. The trial court also dismissed the breach of fiduciary duty claim against Cortazzo, claiming that he was not a fiduciary.
The court of appeals first set out the legal terminology and relationships of the parties. Under the California statutory scheme an “agent” is a licensed real estate broker “under whose license a listing is executed or an offer to purchase is obtained.” (Civil § 2079.13, subd. (a).) An “associate licensee” is a licensed real estate broker or salesperson “who is either licensed under a broker or has entered into a written contract with a broker to act as the broker’s agent in connection with acts requiring a real estate license and to function under the broker’s supervision in the capacity of an associate licensee.” (subd. (b).) ” ‘Dual agent’ means an agent acting, either directly or through an associate licensee, as agent for both the seller and the buyer in a real property transaction.” (. subd.(d).)
The court noted that salespersons commonly believe that there is no dual representation if one salesperson represents buyer, another represents the seller, even though they both have the same broker. Thus Cortazzo was a fiduciary, and had a greater obligation. “A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests. A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent.”
Possible liability for constructive fraud raises the bar – Cortazzo’s reasonable and good faith belief that the property was 15,000 sq ft is not a defense to constructive fraud. The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, a careless misstatement may constitute constructive fraud even though there is no fraudulent intent.
Remember Cortazzo’s advice to the first buyer – hire a specialist to confirm the size; and how he changed the MLS listing to zero sq ft. We know about this because the plaintiff found out, and will use this evidence to show that Cortazzo had some doubt as to the actual measurement. This decision made his defense much more difficult.