The California Supreme Court upheld the Buyer’s appeal in its recent case against Dual Agents working for a residential real estate brokerage firm during the purchase of a $12.25 million home in Malibu. Dave and Debbie Dual Agents tried surfing a big wave to double-dip on a sizable fee. But they wiped out.
Ripples from the Horiike vs. Coldwell Banker Residential Brokerage Company decision will likely reach to US brokerage firms offering Dual Agency in residential and commercial property transactions. It focuses an uncomfortable national spotlight on the practice of Dual Agency and whether a single brokerage firm can truly represent the best interests of competing parties in the same transaction.
The Court grabbed the microphone, declaring under Dual Agency, that a brokerage company has equal fiduciary obligations to both parties to learn and to disclose material facts that may affect the value of a property.
Originally the case was based on a dispute regarding the square footage of a large Malibu home bought by the plaintiff, Hiroshi Horiike. Coldwell Banker, the company that marketed the property for the Seller, also represented the Buyer. Horiike did sign documents agreeing that Coldwell Banker would act in the capacity of a Dual Agent and would represent both the Buyer and the Seller. The slow-to-surface size discrepancy was 15,000 SF, as advertised, versus 11,050 SF shown in the public records.
Ultimately, the court ruled that Coldwell Banker did not provide the same degree of care to the Buyer as compared to the Seller and, furthermore, that Coldwell Banker, in its capacity as a Dual Agent, owed both the Buyer and Seller the same degree of care and representation.
GOING BEYOND CALIFORNIA
Many states, including California, allow Dual Agency as a common practice at both residential and commercial brokerage firms. This means that the parties to the transaction can be represented by an agent (or agents) working for the same brokerage company.
It’s critical to know that a Dual Agent(s) gets to double-dip on the commissions in a transaction because he or she is supposedly working on behalf of two (2) parties, i.e. both the Landlord and Tenant or both the Seller and Buyer. As a result, in a completed transaction, a Dual Agent can make twice as much money.
If this sounds a little fishy, well, that’s because it is. When Dual Agents are on the scene, we’re sad to say that neither principal in the transaction actually has an advocate. This is precisely why we practice only Single Agency Representation, which is The Gold Standard of Representation for Consumers. Unfortunately, most Consumers don’t fully understand this; otherwise, they wouldn’t hire a big name, traditional brokerage firm, where conflicts of interest are a normal (but inconvenient) fact of life.
Many of the world’s largest commercial real estate companies practice and even encourage Dual Agency. CBRE, JLL, Colliers, Newmark and Cushman & Wakefield all represent institutional property owners and Sellers as their primary clients. However, these same firms also seek to represent corporate Tenants and Buyers as Dual Agents in lease and sale transactions. The California Supreme Court’s 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 brokerage house level.”
How could this ruling about Dual Agency impact future real estate representation?
• First, the Court has clearly outlined that a Dual Agent owes both opposing parties the same high degree of care. (From a purely practical point of view, is this even possible?)
• Second, the Court also stated that providing Dual Agency is inherently a conflict of interest. How can a single firm provide equal representation to two competing parties?
Dual agency is now illegal in Colorado, although some other states, like California, still allow it. However, Colorado and certain states have come up with new categories of legal relationships, such as Transaction Brokers, Facilitators and Intermediaries. These are all “pure middleman” relationships with Consumers, meaning that the Brokers/Salespeople working under them are not allowed to show any favoritism to either party, i.e. to the Landlord or Tenant, or to the Seller or Buyer.
Frankly, we wonder how this is even do-able, since, from our more than 50 years of combined experience, it is impossible not to favor one party over the other at some point of a transaction. We maintain that Transaction Brokers, Facilitators and Intermediaries, for all practical purposes, are simply Dual Agents operating under other names.
William Gary thinks California will eventually do what Colorado did, which is to push all of the legal brokerage relationships from the house/company level down to the individual Broker level. Then, to deal with conflicts of interest at the individual Broker level, California will again follow Colorado and come up with a new category of relationship, called Designated Agency (or something similar).
WHAT CALIFORNIA COURT DIDN’T MENTION
Surprisingly, the California Supreme Court did not address a key point in Horiike vs. Coldwell Banker Residential. Why wasn’t the Buyer’s CB broker held accountable for the square footage error, too?
Working as the Seller’s broker, Mr. Chris Cortazzo, was the main CB broker targeted by the Buyer, Horiike, for the large square footage error in the Seller’s favor.
However, we maintain that the Buyer’s CB broker, Ms. Chizuko Namba, had equal culpability with respect to the square footage discrepancy. She had equal access to the Public Records, where the error was eventually first discovered by the Buyer.
Why didn’t the Buyer hold his CB broker’s feet to the fire on the square footage error?
Likewise, why didn’t the California Supreme Court call out the Buyer’s broker?
It appears that both the Buyer and the California Supreme Court had lower expectations of Namba as the Buyer’s broker than they had for Cortazzo as the Seller’s broker. That’s odd, since the basis of the decision was the Court’s finding that Coldwell Banker’s Dual Agents had equal fiduciary responsibilities to both the Seller and Buyer.
With Designated Agents, the Employing Broker simply assigns the originating Broker with the conflict of interest to one side of the transaction and designates a new (but still in-house) Broker to the opposing side. It’s not Dual Agency. But it still is not 100% arms-length advocacy for the two principals in the transaction. (The brokerage firm still gets to double-dip and collect commissions on both sides of the transaction.) Consequently, even under Designated Agency, Tenants and Buyers, in particular, still get short-changed because they don’t get true advocates like they do with Single Agency Representation – The Gold Standard.
In our blog article titled How to identify the best Commercial Tenant Agent, we explain in depth why Single Agency Representation is The Gold Standard of
Representation for Tenants and Buyers.
In an industry where representing a client’s best interests is the primary key to success, things just became even muddier for real estate firms that try to represent both parties as Dual Agents in the same transaction. Whether it’s a sale or a lease transaction, firms that practice Dual Agency are going to be compelled to disclose more information than they have in the past. Otherwise, based on the California Court’s ruling, they risk being liable to one principal or the other (or maybe both!).
Neither ITRA Global Minneapolis/St. Paul nor ITRA MacLaurin Williams in Denver/Boulder even offers Dual Agency (or one of its questionable cousins). Consequently, our clients receive conflict-free representation from true advocates they can trust.
* Note: Portions reprinted with permission of Wayne Teig and ITRA Global, based on Canonical Reference to ITRA Global’s press release, dated November 22, 2016, California Supreme Court Case Challenges Ethics of Dual Agency.