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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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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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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.

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New Good Neighbor Fence Act of 2013

Adjacent neighbors frequently get in disputes about the responsibility to maintain fences between their properties. Sometimes the neighbors ask the Association to get involved. Although some CC&Rs specify the responsibility for maintaining these fences, Civil Code section 841 applies to the responsibility of adjacent owners to maintain fences that are on the property line. This code section has been completely re-written effective January 1, 2014. The new code section makes it easier to determine who is responsible for the costs of maintenance and provides a remedy if one neighbor feels that he/she is not responsible for half the costs. Here is the text of the new law:

(a) Adjoining landowners shall share equally in the responsibility for maintaining the boundaries and monuments between them.

(b)(1) Adjoining landowners are presumed to share an equal benefit from any fence dividing their properties and, unless otherwise agreed to by the parties in a written agreement, shall be presumed to be equally responsible for the reasonable costs of construction, maintenance, or necessary replacement of the fence.

(2) Where a landowner intends to incur costs for a fence described in paragraph (1), the landowner shall give 30 days’ prior written notice to each affected adjoining landowner. The notice shall include notification of the presumption of equal responsibility for the reasonable costs of construction, maintenance, or necessary replacement of the fence. The notice shall include a description of the nature of the problem facing the shared fence, the proposed solution for addressing the problem, the estimated construction or maintenance costs involved to address the problem, the proposed cost sharing approach, and the proposed timeline for getting the problem addressed.

(3) The presumption in paragraph (1) may be overcome by a preponderance of the evidence demonstrating that imposing equal responsibility for the reasonable costs of construction, maintenance, or necessary replacement of the fence would be unjust. In determining whether equal responsibility for the reasonable costs would be unjust, the court shall consider all of the following:

(A) Whether the financial burden to one landowner is substantially disproportionate to the benefit conferred upon that landowner by the fence in question.

(B) Whether the cost of the fence would exceed the difference in the value of the real property before and after its installation.

(C) Whether the financial burden to one landowner would impose an undue financial hardship given that party’s financial circumstances as demonstrated by reasonable proof.

(D) The reasonableness of a particular construction or maintenance project, including all of the following:

(i) The extent to which the costs of the project appear to be unnecessary or excessive.

(ii) The extent to which the costs of the project appear to be the result of the landowner’s personal aesthetic, architectural, or other preferences.

(E) Any other equitable factors appropriate under the circumstances.

(4) Where a party rebuts the presumption in paragraph (1) by a preponderance of the evidence, the court shall, in its discretion, consistent with the party’s circumstances, order either a contribution of less than an equal share for the costs of construction, maintenance, or necessary replacement of the fence, or order no contribution.

(c) For the purposes of this section, the following terms have the following meanings:

(1) “Landowner” means a private person or entity that lawfully holds any possessory interest in real property, and does not include a city, county, city and county, district, public corporation, or other political subdivision, public body, or public agency.

(2) “Adjoining” means contiguous to or in contact with.

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The Cost for Providing HOA Docs to Buyers Must Now be Disclosed in Advance

Governor Jerry Brown signed AB 771 today, a bill that prevents home buyers in a common interest development (CID), such as a condominium or townhome, from being charged excess document fees.

Homeowner associations (HOAs) are required to provide specific documents to prospective purchasers of homes in a CID — a form of real estate ownership in which each homeowner has an exclusive interest in a unit and a shared
interest in the common area property. In addition to the standard residential property disclosures, purchasers of a unit within a CID must receive basic information about the structure, operation and management of the HOA that operates the CID.

Current law requires that this information come from the HOA and prohibits it from charging fees in excess of what is “reasonable,” not to exceed the actual cost of processing and producing these documents. HOAs generally have provided the documents for approximately $75 to $250. Increasingly, HOAs have been delegating document preparations to third party vendors or contractors who, under a 2007 court decision, are exempt from this fee limitation. This delegation of responsibility by HOAs sometimes resulted in home purchasers being forced to pay additional fees, as much as $1,000, for other documents which were “bundled” with the required documents.

Assembly Bill 771 (Betsy Butler, D-Torrance) addresses this situation by specifying that only fees for the required documents may be charged when such documents are provided, effectively prohibiting any “bundling” of fees for other documents with these fees. The bill also creates a new form detailing which documents are required, and requires the provider to disclose the fees that will be charged for the documents before they are provided. The seller of a CID must complete this form and transmit it to the prospective purchaser along with the required documents. This will eliminate any uncertainty for the prospective purchaser as to exactly which documents are being provided and the precise fees being charged for those documents.