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When Broker Double Ends Transaction, Fiduciary Duties are Owed to Both Buyer & Seller

In a new published decision, the appellate court has clarified the duties of a Broker to the Buyer and Seller when the Broker double ends the transaction. (Dual Agency) In Horiike vs. Coldwell Banker, the Broker represented both the buyer and seller through two different salespersons. The listing agent put the property in MLS and advertised it as having approximately 15,000 square feet of living area. The building permit lists the total square footage as 11,050 square feet, plus a guest house with 746 square feet, and a garage with 1,080 square feet. The listing agent prepared a flier for the property also claiming it offered approximately 15,000 square feet of living area.

In March, 2007 a couple made an offer on the property and asked the listing agent for verification of the living area square footage. The listing agent provided a letter from an architect stating that the house was approximately 15,000 square feet but he recommended that the buyer verify the square footage. After the buyers requested an extension of time to verify the square footage, the seller refused to grant an extension so the buyers canceled.

The listing agent then changed the square footage in MLS to “0/O.T.” which meant zero and other comments.

In November, 2007 another buyer made an offer on the property and the listing agent again provided the flyer claiming the property had 15,000 square feet of living area. After escrow opened, the listing agent provided the buyer with a copy of the building permit. The buyers were represented in the transaction by another agent from Coldwell Banker. The Agency Disclosure (AD Form) disclosed that Coldwell Banker was acting as the agent for both the buyer and the seller.

A couple of years after close of escrow, the buyer asked the listing agent to verify the square footage. The buyer had an expert at trial testify that the square footage of the living areas of the home totaled 11,964 square feet. Coldwell Banker’s expert testified the square footage was 14,186.

n November, 2010 (approximately three years after close of escrow) the buyer sued the listing agent and Coldwell Banker for intentional and negligent misreprentation and breach of fiduciary duty, among other causes of action. After the buyer put his case on trial to a jury, the judge granted a motion for non-suit on the breach of fiduciary duty cause of action. The judge did not believe that the listing agent or Coldwell Banker had any fiduciary duties to the buyer. The judge instructed the jury that neither the listing agent or Coldwell Banker owed any fiduciary duties to the buyer. The jury therefore found in favor of the listing agent and Coldwell Banker and judgment was entered in their favor. The buyer appealed.

On the appeal, the buyer argued that the listing agent and Coldwell Banker owed fiduciary duties to the Buyer beacuse Coldwell Banker was acting a dual agency capacity. Although the buyer was represented in the transaction by a different salesperson than the listing agent, both agents worked for Coldwell Banker, therefore Coldwell Banker was representing the buyer also. Fiduciary duties are owed by a broker to their clients, which include the duties of the highest good faith and undivided service and loyalty. A dual agent has fiduciary duties to both the buyer and the seller. The agency disclosure form (AD) states that a dual agent has a fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with either the buyer or seller.

Since a broker who acts in dual agency owes fiduciary duties to both the buyer and seller, it follows that each agent employed by the broker also owes the same fiduciary duties to both buyer and seller. Therefore, although the listing agent did not represent the buyer in the transaction, by law, the listing agent owed fiduciary duties to the buyer. Therefore the appellate court determined that the judge had given the jury the wrong instructions and the judgment had to be reversed.

The broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty. The broker acting in a fiduciary capacity has a duty to learn the material facts that may affect the principal’s decision. He is hired for his professional knowledge and skill, and is expected to perform the necessary research and investigation in order to know the important matter that will affect the principal’s decision. Since the listing agent knew that the square footage had been measured differently than as advertised on his flyer, the listing agent had a duty to advise the buyer that the square footage had been measured differently than as represented on his flyer and to warn the buyer to verify the square footage with an expert. Since the judgment had to be reversed, the case will now go to trial again with a new jury who will be instructed property.

The lesson to be learned from this case is that a Broker acting as a dual agent has fiduciary duties to both the buyer and seller, and fiduciary duties are much higher than the duties of a listing agent to a buyer when the broker does not represent the buyer. In that case, the listing broker acts as an agent only for the seller and only has fiduciary duties to the seller. The listing broker (if not acting in dual agency) has an obligation to both buyer and seller to exercise reasonable skill and care, as well as a duty of fair dealing and good faith, and a duty to disclose all facts known to the agent materially affecting the value or desireability of the property. Fiduciary duties are much higher and include the duty to learn material facts that may affect the principal’s decision, and perform research and investigation to find material facts.

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Selling Broker has Higher Duties to Buyer than Listing Broker

In a new published decision entitled Saffie vs. Schmeling (March 7, 2014) the appellate court exonerated a
listing broker from any liability when the buyer purchased an undeveloped commercial parcel which was discovered to be unbuildable after close of escrow. The property was located in an earthquake study zone. The listing broker represented in the MLS “This parcel …has had a Fault Investigation completed and has been declared buildable by the investigating licensed geologist. Report available for serious buyers.” The date of the report was May 20, 1982, but the listing was put into MLS in June, 2006. The report was 24 years old. The buyer was represented in the transaction by a different broker. The buyer received a copy of the report but did not read it prior to close of escrow. After purchasing the property, the buyer discovered that the planning department would not allow development of the property using the old report and since earthquake engineering standards had changed radically after the 1994 Northridge earthquake, the intended development of the property could not be accomplished.

The buyer sued his own broker, the listing broker, and the seller. The trial court found the buyer’s broker liable for $232,147.50 for breach of fiduciary duty and negligence. However, the court found the listing broker was not liable, since no misrepresentation was made in the MLS. The actual report was provided to the buyer before close of escrow and it was prominently dated in 1982 and the buyer could have ordered a new geological investigation. Civil Code section 1008 states that the listing broker is responsible for “the truth of all representations and statements made by the agent … of which that agent had knowledge or reasonably should have had knowledge to anyone injured by their falseness or inaccuracy.”

Since the listing broker merely represented that the property had been declared buildable by a geologist and a copy of the report was provided to the buyer prior to close of escrow, there was no misrepresentation, since the report was true when it was written. It was up to the buyer to order a new geologic investigation since it was obvious that the report was 24 years old.

The buyer’s agent and broker were held liable because agents and brokers owe their own clients fiduciary duties, which is a higher standard than what a listing broker owes to third parties who are not their clients. The buyer’s broker therefore had a duty to determine whether the geologic report that was 24 years old was something the buyer should rely on for his particular purposes. The listing broker has a duty of honesty, fairness, and full disclosure toward all parties. However, a listing broker does not have a duty to investigate public records, or permits pertaining to title or use of the property. The buyer’s broker, however is expected to perform the necessary research and investigation in order to know the important matters that will affect the buyer’s decision.

There are several lessons to be learned from this case. A listing broker will be liable for any misrepresentations made in MLS that cause the buyer damage, however, he is not required to investigate public records or permits pertaining to title or use of the property. A buyer’s broker, however, may be liable for breach of fiduciary duty to their client for failing to advise the client to get an updated geologic report when the only report provided is 24 years old. The fiduciary duty a broker has to his client is higher than the duty of a listing broker to buyers in a transaction when the buyer is represented by another broker.

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Seller and Escrow Company Are Liable for Delay in Close of Escrow

Many buyers, sellers and their real estate agents are unaware that a slight delay in closing escrow can cause significant liability for breach of contract damages. The standard CAR® purchase contract contains a Time is of the Esssence Clause. This means that a failure to close escrow on the exact day scheduled can constitute a breach of contract entitling the non-breaching party to damages for the delay.

In Ash vs. North American Title Company, a recent published decision (February, 2014), the buyer was purchasing the property as part of a 1031 exchange. The buyer deposited all funds necessary to close by the date provided in the contract, but the seller and the escrow company failed to close escrow on that day which was a Friday. The buyers funds had been deposited in a bank account held by LandAmerica Exchange Services, acting as the intermediary for the exchange. On the Monday after escrow was to close, the intermediary filed bankruptcy, and it took more than six months for the bankruptcy court to release the funds back to the buyer. The bankruptcy of the intermediary froze the deposits, including the buyer’s funds which had been deposited into the intermediary’s bank account.

The buyer sued the seller and the escrow company handling the sale for failing to close escrow on the Friday that was called for in the contract. As damages, the buyer claimed expenses of $140,000 incurred in the bankruptcy proceeding and tax liability of $465,000 due to the failure of the section 1031 exchange. Additionally, the buyer claimed $166,000 in income from the property if the sale had been timely completed, payments to the lender of $42,000, $189,000 paid for a new loan above what he would have paid for the original loan that was terminated by the original lender, and $28,000 of interest on a loan to meet expenses. These direct damages totaled $1,033,000.

After a trial the jury returned its verdict finding that the seller breached its contract by delaying the timely close of escrow, and was liable to the buyer for $300,000, and that the escrow company breached its contract to provide proper and timely escrow and title services and was liable for $250,000 in contract damages. The jury also found that the escrow company was liable for negligence in the amount of $500,000 and for $250,000 for breach of fiduciary duty. The jury imposed punitive damages on the escrow company in the amount of $750,000!

The seller and the escrow company both appealed. The appellate court affirmed the finding of breach of contract on the part of the seller and the escrow company but held that the amount of the damages had to be retried because the bankruptcy of the intermediary was not reasonably foreseeable by the seller or the escrow company. So a new trial will have to be held on the issue of damages.

The result in this case, however, emphasizes the potential liability a buyer or seller and/or an escrow company might have for failing to close an escrow on time.

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AB 1360 Proposed Legislation To Allow Electronic Voting for Homeowner Associations

The California Legislative Action Committee (CLAC) has sponsored new legislation which would allow Homeowner Associations to offer electronic voting to Members. The existing CID election procedure is intended to provide secrecy to members and involves an extensive process, including the provision of double stuffed ballots. HOAs are required to secure an inspector of elections to open and tally all ballots received in an election. A problem reported by CIDs, regardless of size, is the challenge of getting enough members of the HOA to participate in an election to achieve a quorum. For an election to be valid, the governing documents of an HOA generally require that a quorum of the members vote.In some cases HOAs are not able to achieve a quorum in the first election and must conduct subsequent elections, which they report is a costly endeavor. Ultimately this cost, like all costs to operate the CID, is borne by the members through their assessments.

Purpose of this bill: This bill would allow members of an HOA to opt in to electronic voting as an alternative to voting by paper ballot. According to the author, this bill seeks to increase voter participation in HOA elections while contributing to reductions in the use of paper and providing cost-saving opportunities for HOAs in the administration of elections. Members would be given the option to vote electronically. If they decided not to, they would receive a paper ballot and would vote according to the existing procedure outlined in law.

Secrecy of ballots: One of the main goals of the existing election procedure for CIDs is to maintain secrecy. The double stuffed ballots and independent third party inspector of elections are intended to insure that members are confident that they can freely vote without reprisal. At the same time, some HOAs contend that the existing process is cumbersome and costly and that apathetic members do not vote in elections, both of which mean HOAs incur extra costs for multiple elections. The challenge to allowing electronic balloting is balancing the desire for secrecy with the goal of greater voter participation.

Role of inspector of elections: This bill still maintains a role for the inspector of elections to receive, count, and tabulate the voting results from the electronic balloting service provider. In the case of paper ballot voting the role of the inspector is clear. With electronic voting, it is not entirely clear what type of record the electronic voting service provider would provide of the votes or how the inspector of elections would count and certify them.

Arguments in support: The board of directors of Laguna Woods Village supports this bill. Laguna Woods Village is made up of 18,000 senior citizens residing in 12,736 homes in three housing non-profit mutual benefit corporations, two condominium associations, and one cooperative housing corporation. The board of directors of Laguna Woods Village writes, “This bill would provide an option for an association such as ours to offer an opt-in electronic voting option that would afford an opportunity for increased convenience thereby increasing voter participation as well as reducing the cost of conducting elections which cost approximately $15,000 annually.”

Arguments in opposition: The Center for California Homeowner Association Law (CCHAL) opposes this bill and raises concerns that the bill could jeopardize the secrecy of the ballots. CCHAL contends the bill does not address several key questions, including how secrecy of the ballots will be maintained, how electronic ballots can be audited, and what the chain of custody is for ballots in electronic balloting. CCHAL maintains that the rationale for the bill is that electronic balloting increases voter participation, but that no research from a neutral third party establishes that this outcome will be achieved.

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Contingency Removal

The CAR® Residential Purchase Contract (Form RPA-CA) allows the buyer 17 days to remove most contingencies. There are many contingencies in the contract, including a Financing Contingency, an Appraisal Contingency, an Inspection Contingency, Title Report Contingency, and Disclosure Contingencies. Contingencies must be removed in writing by using the CAR® Form CR. If the buyer fails to remove all contingencies within the applicable time period, the seller may give the Buyer a Notice to Perform (Form NBP) If the Buyer fails to remove the contingency by the expiration of the time period in the Notice to Perform, the seller may cancel.

Some Realtors believe that the buyer has the absolute right to cancel within the 17 day contingency removal period for any reason, and get their deposit back. However, this is not really true. There is an implied covenant of good faith and fair dealing in every purchase contract which requires the buyer to make a good faith attempt to remove all contingencies, and any refusal to remove a contingency must be in good faith. If the seller can show that the refusal to remove a contingency is not in good faith, the buyer might be in default if he fails to perform and risks loss of the Deposit.