In Horiike v. Coldwell Banker, the California Supreme Court affirms Court of Appeals verdict that Real Estate Brokers have significant conflict of interest when representing both Landlords and Tenants; encourages State Legislature to revise law to protect consumers.
In what could be the beginning of a stunning change in the real estate industry, the California Supreme Court upheld the Appellate Court ruling against a dual agent real estate company while also encouraging the State Legislature to protect consumers by directly addressing the “significant concerns inherent in dual agency,” which should be prohibited due to its fundamental conflict of interest.
The Supreme Court stated that “[i]n approving the practice of consented-to dual agency, however, the [State] Legislature undoubtedly understood that the dual agent’s loyalty must extend to both parties, and that it cannot bear any fiduciary duty to one party that requires it to breach its duty to the other party.” The law specifies certain limitations on the duties owed by a dual agent:“[a] dual agent may not disclose to the buyer [or lessee] that the seller [or landlord] is willing to sell [or lease] the property at a price less than the listing price, without the express written consent of the seller [landlord], nor may the dual agent disclose to the seller [landlord] that the buyer [lessee] is willing to pay a price greater than the offering price, without the express written consent of the buyer [lessee].” (Civ. Code, § 2079.21.) In commercial real estate transactions, the situation is much worse for the consumer, or tenant, than in residential transactions in that the “seller” or “landlord” is a professional. They often know far more than the brokers they employ; this in turn creates a dual agency unfairness issue – as the dual agent is unable to inform the tenant about anything confidential the landlord knows since the dual agent owes a fiduciary duty of confidentiality to the landlord – perpetuating the landlord’s superior negotiating position by ensuring it is better informed than everyone else in the transaction. Dual agents in the commercial real estate industry include: CBRE, JLL, Cushman & Wakefield, Colliers, etc.
Coldwell Banker, a defendant in this landmark ruling, argued that although it had disclosed that it was operating as a dual agent, its licensed salesperson was acting independent of his broker. The Court disagreed – stating that the salesperson is “licensed only to act” “under the broker’s [direct] supervision.” What most consumers don’t know, however, is that 90% of real estate agents are licensed “salespersons” – not licensed “brokers” – even though most identify themselves as “brokers.” Thus, 90% of real estate agents owe the other party the same fiduciary duties their brokers owe.
The Supreme Court further states that: “[a]s a practical matter, it is unclear how a corporate brokerage like Coldwell Banker would fulfill its fiduciary disclosure duties as a dual agent….”
The Court goes on to state that “a plaintiff‘s allegations may raise more difficult questions about the scope of a real estate salesperson‘s fiduciary duties when functioning as a dual agent in a transaction. Defendants [i.e., Coldwell Banker] argue that if salespeople owe precisely the same duties as their employers, then buyers and sellers would not have the benefit of the ‘undivided loyalty of an exclusive salesperson,’ and, worse, ‘[s]alespersons 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. These are significant concerns, but they are also concerns inherent in dual agency, whether at the salesperson or the broker level. Although the Legislature was certainly aware of these concerns when it enacted the disclosure statute, it opted not to address them directly.”
“In approving the practice of consented-to dual agency, however, the Legislature undoubtedly understood that the dual agent‘s loyalty must extend to both parties, and that it cannot bear any fiduciary duty to one party that requires it to breach its duty to the other party. (See Civ. Code, § 2079.16 [―[i]n a dual agency situation, the agent owes ―[a] fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either the Seller or the Buyer].)” The practice and practicality of doing this, however, is nearly impossible.
Jason Hughes, President & CEO of Hughes Marino, Inc., a California commercial real estate brokerage that exclusively represents tenants, never landlords, in their lease and purchase negotiations, authored SB 1171, a law adopted January 1, 2015, that required dual agency disclosure in commercial real estate transactions. Up until then, there was a carve-out for disclosure in non-residential transactions. A 30-year veteran of the real estate industry, Mr. Hughes contends that the real estate industry should be treated as the legal industry with regards to conflicts of interest. While “dual agency” could be allowed with proper conflict waivers and disclosures, it should be heavily avoided to protect the less advantaged non-professional real estate participants, commercial tenants leasing and buying real estate.
For more information about the case, click here.
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Proper citation for this case: Horiike v. Coldwell Banker Residential Brokerage Company et, al. (November 21, 2016, S218734) ___ Cal.4th___.
About Hughes Marino
Hughes Marino is an industry-leading commercial real estate company that exclusively represents business owners and corporate real estate decision makers. The company only represents tenants and buyers – never landlords – which eliminates potential conflicts of interest that other real estate firms have. In addition to tenant and buyer representation, the firm also offers in-house construction management, lease auditing, and lease administration services to its clients. Hughes Marino has offices in San Diego, Orange County, Los Angeles, San Francisco and Silicon Valley.