Dual Agency Brokerage Under Attack in California

Mary Smith, a salesperson at ABC Brokerage Company, is the listing agent for space in a building owned by Big Owner. In the marketing flyer for the space, Mary states that the space is 20,500 sf even though she knows it is not that large.  XYZ Company, a tenant, hires Bob Jones, also an agent at ABC Brokerage Company, to represent it in its search for space.  After a lease is signed for the subject premises, it turns out that, unbeknownst to Bob Jones and the XYZ Company, the space is only 16,000sf.  Does XYZ Company have a claim against its brokerage firm, ABC Brokerage Company, based on the actions of its agent, Mary Smith?  It might depend on what state you are in.

A recent California Supreme Court case held that, in a dual agency situation (i.e., where the same brokerage firm represents both the seller and buyer or landlord and tenant in the same transaction), the agents of the brokerage firm owe fiduciary responsibilities to both of the firm’s clients in the transaction and not just to the client they are specifically representing.  The case, Horiike v. Coldwell Banker, involved the purchase and sale of a mansion in Malibu.  However, the holding has important precedential value for commercial real estate transactions in California as well.

In Horiike, the home seller’s agent, Chris Cortazzo of Coldwell Banker, failed to warn the buyer that the square footage of a home identified in a sales brochure was incorrect.  The buyer purchased the home based on the erroneous information.  At the trial, the buyer sued both Mr. Cortazzo and Coldwell Banker.  The trail court threw out the suit against Mr. Cortazzo because it determined that Mr. Cortazzo was exclusively representing the seller and, therefore, had no fiduciary duty to the buyer to warn him of the inaccuracy in the sales flyer.  The court then instructed the jury that, to find Coldwell Banker liable to the buyer, it would have to determine that the agent at Coldwell Banker representing the interests of the buyer in the transaction acted wrongly.  Because the buyer’s agent, Chizuka Namba, also of Coldwell Banker, was not aware that the square footage reference in the brochure was incorrect (and the buyer did not even name Ms. Namba in the suit), the jury found in favor of the defendant.  The buyer appealed the case.

The California Court of Appeals reversed the lower court’s findings and held that Mr. Cortazzo, as a salesperson working under Coldwell Banker’s license, owed a duty to the buyer “equivalent” to the duty owed to him by Coldwell Banker.  The obligations and fiduciary responsibilities of the individual sales agents of the Coldwell Banker were found to be derivative of the obligations and responsibilities of the firm they worked for and under whose license and direction they operated.  Thus, because the buyer was a client of Coldwell Banker, all of its agents had the same fiduciary responsibility to that client regardless of who they were representing in that transaction.  This responsibility included the requirement that Mr. Cortazzo “disclose known facts materially affecting the value or desirability of the property to both parties.”  This duty to warn was expressly contained in the “Disclosure and Consent to Representation of More Than One Buyer or Seller” which the parties signed as required under California law because Coldwell Banker was representing both the buyer and seller in the transaction.

Coldwell Banker felt it was entitled to retain the two significant commissions it made on this transaction even though (1) the buyer had relied to his detriment on the firm’s misleading marketing brochure and (2) the firm’s employee (Mr. Cortazzo) knew the square footage was overstated. It argued, in effect, that the home buyer did not truly hire Coldwell Banker; he only hired the broker at Coldwell Banker who was working with him.  Thus, it was Coldwell Banker’s position that the only person at the company who was obligated to protect the buyer was Ms. Namba, the agent working for him, even though its other agent, Mr. Cortazzo, knew the sales brochure he had prepared was inaccurate.  The holding in the Horiike case is largely dependent on the statutorily required disclosure form that all of the  parties were required to sign under California law because Coldwell Banker was acting as a dual agent in the transaction.

Needless to say, this case is causing considerable distress in the brokerage community for firms who typically act as dual agents in the market.  If in fact a landlord broker has a fiduciary duty to warn a tenant about problems with a given property or the creditworthiness of the landlord, it could be difficult for him to aggressively market the building and advance the landlord’s interests.  Likewise, would a tenant broker whose firm also represents the landlord be required to inform the landlord that the tenant is having financial difficulties?

The Horiike case is specific to California.  What would the outcome of the case be in Pennsylvania?

Pennsylvania contemplates two types of dual agency situations. The first, involving a “dual agent” is where the very same agent represents both the landlord and tenant (or buyer and seller) in the transaction. The second, involving a “designated agent”, is where, though the same brokerage firm represents both parties to a transaction, the firm designates different agents within the firm to represent the interests of each party.

Section 35.314 of the Pennsylvania Code (Duties of Dual Agent) addresses the first scenario.  In this instance, the dual agent in Pennsylvania may take “no action that is adverse or detrimental to either party’s interests in the transaction.”  Because any negotiation is a zero sum game where a dollar earned by one party is a dollar taken from the other party, a dual agent would be hard pressed to do anything in a transaction other than introduce the parties and then let them hash out their own deal. Clearly he could not advocate for the financial interests of one client without necessarily being adverse to the interests of the other client.

Section 35.315 of the Pennsylvania Code (Duties of a Designated Agent) deals with the second scenario where the brokerage firm designates one agent to represent one party (i.e., the seller or landlord) and another of its agents to represent the other party (i.e., buyer or tenant).  Subsection 35.315(e)(1) states that each designated agent owes: “Loyalty to the principal with whom the designated agent is acting by working in that principal’s best interests.”  Thus, if the Horiike case were tried in Pennsylvania, it is likely that Coldwell Banker would have prevailed because Mr. Cortazzo would be statutorily required to act solely in the best interests of the seller.  He would have no fiduciary duty to the buyer and arguably, by informing the buyer of the incorrect square footage, would be breaching his fiduciary obligation to act in the seller’s best interests.  Thus, unlike in California, where all the brokers in your firm have duties to protect your interests, in Pennsylvania, only the agent working for you has your back.

Conclusion

In Philadelphia where two or three firms dominate the landlord listings, dual agency scenarios have become more and more common leading to more frequent opportunities for conflicting loyalties within a firm.  In these instances, the tenant needs to understand that it isn’t hiring a brokerage firm; it is only really hiring the agent working on its deal.  In fact, there may be situations where some of the agents at the tenant’s brokerage firm could be obligated to act against the tenant’s interests.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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