California Supreme Court rules dual agent owed both clients highest degree of care
The California Supreme Court has upheld the appeal in the case Horiike vs. Coldwell Banker Residential Brokerage Company that began on September 7th. The Court’s decision will likely cause some ripples for real estate companies that practice dual agency in either a residential or commercial capacity. The case has received national attention regarding the practice of dual agency and whether a single brokerage company can actually represent the interests of two competing parties in a fiduciary capacity. The Court’s decision outlined that the brokerage company did have a duty to both learn and disclose any material facts that may have an impact on the value of the property.
The original case was based on a dispute regarding the square footage of a property purchased by the plaintiff, Hiroshi Horiike. Horiike was represented by the same company marketing the property for sale, Coldwell Banker. Horiike signed documents with Coldwell Banker outlining that Coldwell Banker was acting in a dual agent capacity and representing both the buyer and seller. The court determined that Coldwell Banker did not provide the same degree of care to the buyer as compared to the seller of the property, but owed both the buyer and seller the same degree of care and representation.
Dual agency has been a common practice in both residential and commercial brokerage firms where the parties to a real estate transaction are represented by an agent (or agents) from the same brokerage company. “This court ruling proves the point that exclusive tenant representation firms have been making for years, that lines can easily blur when an agency represents both sides of a transaction,” said William Strong, an ITRA Global corporate real estate advisor from San Diego. “It’s very clear to us that you can only advocate for one party in a lease or purchase, and so ITRA Global advisors choose to only work for corporate space users to ensure our client’s interests are our top priority.”
Many of the world’s largest real estate companies both practice and encourage dual agency. CBRE, JLL, Colliers and DTZ/Cushman & Wakefield all represent institutional property owners and sellers as their primary clients. However, these same firms also represent corporate tenants and buyers in lease and sale transactions as dual agents. In the Supreme Court ruling today, the court opinion noted the following with respect to the practice of dual agency:
“Defendants argue that if salespeople owe precisely the same duties as their employers, then buyers and sellers would not have the benefit of the undivided loyalty of an exclusive salesperson, and worse, salespersons would have a duty to harm their original client by disclosing to the other side confidential information about the client’s motivations or the salesperson’s beliefs. These are significant concerns, but they are also concerns inherent in dual agency, whether at the salesperson or the broker level.”
How could the court ruling and opinion about dual agency impact real estate representation looking forward?
- First, the Court has clearly outlined that a “dual agent” owes both parties the same high degree of care. (Is this really even possible?)
- Second, the Court has also stated that providing dual agency is inherently a conflict of interest – how can one firm provide representation to two competing parties?
“This ruling will be problematic for real estate firms that practice and promote dual agency, because agents and brokers will now need to err on the side of over disclosing
information about a property being marketed for sale or for lease, including information that might be harmful to their seller or landlord client”, said Wayne Teig of ITRA Global / Minneapolis – St. Paul. Teig continued, “The same over disclosure
principle could also come into play for real estate brokers who are representing a corporate tenant or buyer. Based on the Court’s decision, a broker representing a tenant interested in leasing space at an office building that is also represented by his or her brokerage company also has some duty of care to the landlord under dual agency. So, is that tenant broker now compelled to disclose more information about their tenant client to the landlord than they would have in the past to protect their company’s interests? If so, that’s clearly a potential risk tenants need to be aware of with respect to how a dual agency situation could work against their interests in a lease situation.”
In an industry where representing your client’s interests above all else is a primary key to success, things just became a lot less clear for real estate companies that routinely represent both parties in a real estate transaction under dual agency. Whether it is a sale transaction or a lease transaction, firms that practice dual agency are going to be compelled to disclose more information than they have in the past or risk being liable to one client or the other (or maybe both!) after the fact based on the Court’s ruling.
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