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CRE Industry Weighs Impact of CA Supreme Court Decision In 'Dual Agency' Case

Days of Dual Agency May be Numbered as Court Upholds Ruling Listing Broker had a Fiduciary Responsibility to Disclose Information to Buyer
November 21, 2016
In a decision with potentially far-reaching impact on how commercial and residential real estate brokerages do business, the California Supreme Court on Monday upheld a lower court ruling that a listing broker had a fiduciary responsibility to both the buyer and the seller in a "dual agency" transaction involving the 2007 sale of a Los Angeles home.

The case, Horiike v. Coldwell Banker Residential Brokerage Co., involved a dispute over the purported square footage of a house. But the case, arising from Hong Kong businessman Hiroshi Horiike's $12.25 million purchase of a residential property in Malibu, turned on the larger issue of a real estate brokerage firm's fiduciary responsibility when its agents or brokers represent both sides in a transaction.

Horiike worked with Coldwell Banker agent Chizuko Namba to purchase the Malibu property listed by Chris Cortazzo, a Coldwell Banker agent in another office. After the sale closed, Horiike discovered that the size of the house was 11,000 square feet rather than the 15,000 square feet claimed in marketing materials. Horiike sued Cortazzo and Coldwell Banker, claiming that both had breached their fiduciary responsibility by failing to advise him to hire a third party to verify the actual square footage.

Coldwell Banker initially won the case in a jury trial in 2012, but Horiike was successful in an appeal after a state appellate court judge agreed that the Coldwell Banker sales agent and listing broker had an equal fiduciary responsibility to the buyer. The California Supreme Court granted Coldwell Banker's petition to review the case and heard oral arguments on Sept. 7.

In unanimous decision released Monday, Supreme Court Justice Leondra Kruger, writing for the court, affirmed the appeals court judgment, ruling "it is undisputed" that Coldwell Banker, in representing both sides in the transaction, "owed the buyer a duty to learn and disclose all information materially affecting the value or desirability of the property."

"As a practical matter, it is unclear how a corporate brokerage like Coldwell Banker would fulfill its fiduciary disclosure duties as a dual agent," according to the decision.

While real estate brokerages, attorneys and trade groups were still digesting the implications of the 21-page ruling, several observers contacted by CoStar said the decision potentially has far reaching implications for full-service brokerages in California and across the country.

Hughes Marino, a San Diego-based commercial tenant representation firm, was one of several real estate firms that filed supporting briefs in the case.

Jason Hughes, president and CEO of the California CRE brokerage, called the ruling, "the beginning of a systemic change of our industry."

Hughes, who also spearheaded related legislation in California that went into effect Jan. 1, 2015 requiring CRE brokers to formally disclose their working relationships to clients in any property transaction, said the decision represents "what could be the beginning of a stunning change in the real estate industry" as it confirms that brokers "have significant conflict of interest when representing both landlords and tenants in transactions."

Katie R. Jones, an attorney with Walnut Creek, CA-based Miller Starr Regalia whose real estate clients include CRE brokers as well as investors and tenants said commercial brokerages "are not likely to be happy" with the decision.

But, she added, "it remains to be seen how the large brokerage firms are going to handle it or what they're going to do. They may be able to continue doing business as usual and make their disclosures a little more apparent, but I'm not sure how the large brokerage firms are going to be able to do that still be able to adequately represent both sides of a transaction."

William Gary, principal with Lone Tree, CO-based tenant and buyer representative iTRA MacLaurin Williams, said California law regarding agency brokerage has been considerably behind Colorado and a number of other states. Gary said Colorado has addressed potential conflict of interest issues by establishing alternative categories of agency relationships that are defined as having no fiduciary duties to clients. These new categories go by several different names, including transaction brokers, facilitators and designated agents.

Gary predicted California will eventually adopt similar legislation, which shifts the legal agency relationship with the client from the brokerage to the individual broker.

"Doing that would seem to get the big CRE Houses out from under tons of conflicts of interest, and is where I believe that California is headed," Gary said.

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