The Significance of Horiike vs. Coldwell Banker on Dual Agency

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justiceYesterday the California Supreme Court ruled on dual agency.  Dual agency is when a broker represents both the buyer and the seller in the same transaction.

In Horiike vs. Coldwell Banker, the dispute arose from a discrepancy in the listed square footage and the actual square footage.  The seller had represented that the home in Malibu was 15,000 square feet when permits showed it less than 10,000.  Apparently, the garage and basement were included in the seller’s calculation of the total living area, which as a rule is a no-no.  The listing agent, was apparently aware of the possible discrepancy.  The court ruled that because Coldwell Banker was the broker for both agents, the seller’s agent should have disclosed this possibility to the buyer.  The court reiterated that it’s an agent’s duty to “Disclose any material fact to the buyer that affects the value or desirability of the property that are not known to or within the diligent observation of the parties”.  Hello?  This is a requirement not only in dual agency but in every transaction, even when each party has their own representation.  It’s literally in the first document signed by the seller when a listing is taken and again when a buyer makes an offer.  The document, Disclosure Regarding Real Estate Agency Relationship uses the exact wording the court used.  In fact, one would have to assume the court inserted the language directly from the California Association of Realtors document.

In the case before the court, the Association of Realtors argued that because the buyer had their own agent, the listing agent had a “unique” responsibility to the seller having been the listing agent first.  realtor_imageWhy would they do this you ask?   The Association’s supposition was that even though Coldwell Banker had a dual agency, since the listing agent was not representing the buyer, the listing agent should have loyalty and a fiduciary obligation to the seller first.

What makes the Horiike case unique is not this idea that all material facts need be disclosed in dual agency because that is always the case and the agent really should have disclosed the need to verify square footage regardless of agency since he was aware of a possible discrepancy.  What’s significant is that the decision serves as a reminder that while there may be two different licensees (agents) in a dual agency transaction, the fact they are under the same brokerage as was the case in Horiike, means the listing agent must behave the same as if they were representing the buyer themselves.

Let me explain the distinction.  When I represent a buyer and a seller in a transaction, I always make extra sure anything I know or suspect about the property is brought to the attention of the buyer.  And if a seller tells me something in confidence, if I feel my buyer needs to know this fact because it may affect the way they feel about then property, I tell the seller we need to tell the buyer. But some disclosures aren’t always clear.  For example, earlier this year I had a dual agency and I noticed that the windows in the living room had a weird orange powder or film in between the panes of glass.  The seller said, it had been that way when they bought the home from the previous owner.  I suspected this was a symptom of a problem with the window seal.  So, I made a point of telling my buyer that the windows may have a problem that wasn’t necessarily just cosmetic.  You would think that of course Tim would want to protect the buyer since he was representing both buyer and seller and you’d be right, I watch out for my clients.  But what if I wasn’t representing the buyer and they had their own broker?  Would I have gone to the lengths of disclosure of suspicions if I were not also representing the buyer?  The C.A.R. contract is quite clear, it’s the buyer’s responsibility to investigate.  The seller has a duty to disclose and an agent to observe.  What would I tell the buyer, I saw something that could be something and maybe you want to investigate?  At what point, does that breach my fiduciary responsibility to the seller to represent their best interests?  I mean I’m no window expert and it’s my duty to protect the seller not cause fear in the buyer on speculation on something I have no real knowledge of which could damage the seller I represent.

When I am representing both buyer and seller however, my role shifts to that of facilitator and I tell my sellers this because they may or may not be willing to allow me to shift into that new role.  They may want me to only represent them (contact Tim here if  you want more information about my services).  In the past, if a seller wants this, I get my manager or another agent from my team to assist in representing the buyer.  It keeps things neutral.  This however is the crux of the Horiike ruling:  That even if I get another agent from my office or even another office of my broker, my role changes.  I am a dual agent.

In Horiike, the court ruled that the agency relationship specifically for the listing agent changes when the same brokerage is on both sides of the transaction, even though buyer has their own agent representing them.  The distinction is that the listing agent’s responsibility shifts to that of dual agent when in any transaction with another agent from the same brokerage.  The listing agent must act as if they are representing both the buyer and the seller even though there’s a buyer’s agent.  It’s as if the buyer’s agent doesn’t exist.  It’s a subtle difference but it is a difference with implications potentially huge for the real estate business.

In a world where there are brokerages comprised of hundreds or even thousands of agents, this creates a real conundrum for sellers.  For example, a seller listing a property may decide it’s not such a good idea to list with a large brokerage.  A large brokerage with lots of agents under a broker could mean there’s a greater likelihood that their agent could be forced into a dual agent role, even though there are two agents in the transaction.  While this is still a possibility in a small boutique brokerage, clearly the larger the brokerage, the greatprocuring_causeer chance a seller loses their agent’s independence.   Moreover, the seller would have to decline an offer if they are not willing to allow dual agency.  And what does that mean for a buyer?  If my agent is with a large brokerage and I want to see a property listed by the same brokerage and it turns out the seller is unwilling to entertain an offer from that brokerage because they don’t want a dual agency, that buyer can’t exactly go to another broker to write the offer over.  This is because the agent originating an offer for a buyer, is the only one entitled to the commission.  This is called “Procuring Cause.” If I’m a buyer, who’s going to write my offer if they won’t be entitled to a commission?  So, the Horiike ruling is not without consequence and could lead to a move towards smaller independent offices and away from the huge Coldwell Banker, Keller Williams and Century21s of the world.  I guess that’s another good reason for an agent to be with a boutique brokerage, like I am (Learn more about Tim here).

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