A Double-Crossing Double Agent?
Harry I. Price, Esq.
A recent case will have a negative impact upon the role of real estate brokers as fiduciaries. The action broadens the ability of clients to sue, by abrogating what was thought to be a hard and fast rule: clients are responsible for establishing the price and terms of the sales agreement. The seller was able to make an end-run around this principle by alleging that the agent performed two bad deeds: hiding the fact that he was a dual agent; and breaching his duties by wrongfully communicating the seller’s “bottom line” price to the buyer without authority.
In Brown v. FSR Brokerage, Inc. (1998), 72 Cal.Rptr.2d 828, the claimant was the seller of real property. He asserted that, unbeknownst to him, his own listing broker was acting as a dual agent, without proper disclosure let alone consent from both principals. The broker prevailed in a motion for summary judgment, which was reversed on appeal, because the fact of “proper disclosure” was hotly contested.
The seller’s allegations concerned a claim that the broker was working hardest on behalf of the buyer, in an effort to beat the seller’s asking price down. When it is a buyer who is the claimant, allegations of nondisclosure of material information typically incorporate the claim that the price paid was too high due to structural defects, neighborhood conditions, or other matters affecting the value, use or desirability of property. See Reed v. King (1983), 145 CA3d 261, 193 CR 130. On the other hand, as in this action, when the seller is the claimant, the allegations are that the seller sold for too low of a price. InBrown, the seller contended just that. The appellate court ruled in the seller’s favor, holding that he had stated a cause of action and presented sufficient triable issues of fact sufficient to withstand a motion for summary judgment and be submitted to trial. However, the factual scenario does not appear to be sympathetic to the seller for that future trial.
Brown acquired the property in January, 1994, and then three months later listed it for sale. In common parlance, that is “flipping” the property for immediate profit. Traditionally, those in the business of flipping properties are buying for investment, which means that they are deemed to be sophisticated. Most real estate consumer protection laws are designed with the ideal unsophisticated consumer in mind: the homeowner who is buying or selling his personal residence, making the largest purchase or sale of his life, and who is inexperienced and unskilled in real estate practices and procedures. Brown, on the other hand, worked with real estate brokers over a twenty-month period, successively reducing the asking or list price in his efforts to sell the property.
The list price started in April, 1994, at almost four million dollars, $3,950,000. We are not told what his purchase price was (presumably less), the amount of his financing when acquiring the property (presumably there was an appraisal) or his reasons for sale (presumably profit, though he may have experienced a family or work-related setback requiring an unanticipated sale). We are told that the list price spiraled down to the point where in December, 1995 the asking price was $2,695,000, and that was later reduced to $2,495,000 (a 38% reduction from the original list price, which was presumably over-inflated).
The balance of the facts surround the duties of a broker acting on behalf of both sides, which is commonly known as dual agency, where the dual agency is not disclosed. Dual agency in real estate transactions is where the same brokerage office represents both buyer and seller. There can be two different real estate agents operating separately on behalf of each party, but if both real estate agents work for the same brokerage office, then it is a one-broker transaction and deemed to be a dual agency. Real estate brokers covet what is known as “double-ending the deal,” or the dual agency transaction, because of what is involved: the portion of commissions paid on both sides of the transaction. In contrast, when an attorney tries to represent both sides of a transaction, that is commonly known as a “conflict of interest.” Real estate brokers have successfully obtained statutory authority to preserve their way of life, meaning to routinely enter into such conflict of interest situations by securing a detailed written agency disclosure form to be signed by their principals, the buyer and the seller, in an effort to have a knowing and intelligent waiver of this conflict of interest. The statutory framework, found in Civil Code §§2079, et seq., provides that said form is to be presented to the seller “as soon as practicable prior to presenting the seller with an offer to purchase.” (Civil Code §2079.14, subd. (b), emphasis added). The agency disclosure form allows a broker to represent both sides, and owe fiduciary duties of disclosure to both sides, while carving out one exception. Fiduciary duties include disclosure of all material information affecting the value, use or desirability of the real property. The most material information of all, of course, is the price: a seller would like to know whether or not the buyer will pay more for the property; and conversely, a buyer would like to know whether or not the seller will take less for the property. A true fiduciary, upon learning of any information relating to the subject of price modification, would have an immediate duty to convey said information to their principal. Because real estate brokers want clients to repose trust and reliance in their services and advocacy, and not go down the block to a competing broker with whom the commission will have to be shared, brokers were able to achieve the best of both worlds with the written exception to fiduciary disclosure of material information included in the statutory form incorporated in Civil Code §2079.14, which states (in the portion allowing an agent to represent both Seller and Buyer) in pertinent part as follows:
“In representing both Seller and Buyer, the agent may not, without
the express permission of the respective party, disclose to the other
party that the Seller will accept a price less than the listing price or that the
Buyer will pay a price greater than the price offered.”
With that context in mind, Brown claimed that he was never informed that the purchaser who offered $2,350,000 was, in fact, represented by his own broker. He claims that he thought that he, the seller, was the sole client of the broker, and that the buyer was represented by an attorney. Furthermore, although he signed a dual agency disclosure form in escrow, as part of the voluminous papers he was asked to sign in one sitting, that form came after the purchase offers and he didn’t know what the form was about. Finally, Brown contends that the “bottom line” selling price of $2,400,000 that he told to his broker in confidence ended up being information wrongfully communicated to the Buyer, resulting in financial damages suffered and incurred by the Seller.
Less than three months after the close of escrow, Brown flipped his sale into a lawsuit. The damages sought appear to be the $95,000 difference between the last list price of $2,495,000 and the sales price of $2,400,000, or 3.8% of the list price. The lawsuit could have been avoided had the dual agency disclosure form been employed as intended, at the outset of negotiations. However, it is questionable that there were damages sustained by the Seller. There were no other offers to purchase the property at any higher price over the many prior months that the property had been on the market. The market itself is the greatest indication of market value. A greater service might have been performed by the appellate court had they held that a 3.8% differential is too close of a call to justify legal action. Real property is, after all, unique, and the value attributed to it can vary not only from home to home, but the same home’s value can vary from season to season. Given that homes are not the type of mass market commodity that carries with it a certain value, that the sales price is negotiable, and that the terms of purchase can also affect the sales price, why clog the courts with a differential of less than four per cent? If the seller did not wish to sell at a lower price, the decision was his and his alone. Brown could have let his property continue to languish on the open market. The fiduciary only gives opinions and advice, but the decision rests with the client. However, the courts are loathe to set a threshold amount of damages and thereby cut off rights of individuals who are free to fight over principles, even if the amount in controversy is modest...especially if, as Brown alleged, there were misdeeds by a fiduciary.