Horiike v. Coldwell Banker Residential Brokerage Co., California Supreme Court, No. S218734, Nov. 21, 2016
Last week, the California Supreme Court announced a decision that could modify the way big brokerage real estate firms handle business. In a case of first impression, the Court held that a brokerage company who represents both the buyer and the seller in a real estate transaction owes a fiduciary duty to both parties, even if different agents represent the parties. It is well settled law that an agent who represents both the buyer and the seller owes a fiduciary duty to both parties. In Horiike v. Coldwell Banker, however, the Court extended the fiduciary duty to brokerage companies.
The case began in 2007 when Hong Kong millionaire Hiroshi Horiike purchased a Malibu mansion for $12.25 million. Chris Cortazzo, one of the most successful agents at Coldwell Banker, represented the seller. Horiike was represented by a different Coldwell Banker agent. Both parties agreed to dual representation. Horiike claims Cortazzo told him the house was 15,000 square feet. However, after he moved in, Horiike realized that the house was only 10,000 square feet. Horiike sued Cortazzo and Coldwell Banker, alleging that both Cortazzo and Coldwell Banker breached their fiduciary duties when they sold him the house because they falsely represented the size of the house to him. Cortazzo argued that he could not be held liable because his sole duty was to his client, the seller.
The California Supreme Court sided with Horiike and expanded the 1986 state law that authorizes and regulates dual agents in real estate transactions. The Court held that Coldwell Banker owed a fiduciary duty to Horiike, which included a duty to learn and disclose all material information that would influence the transaction. The Court extended the duty to the information that Cortazzo knew because Coldwell Banker was presumed to be aware of all facts known to its salespersons. The Court declined to decide whether or not either party actually breached their fiduciary duty.
This decision could affect the future of big brokerage real estate transactions. Now a real estate transaction in which a big brokerage company represents both sides is ripe with possibility for conflict. Agents in a dual-agent transaction can no longer only consider their client's interest when selling a house; they must also consider the interests of both the buyer and seller. As a result, big brokerage companies will need to be more cautious before they enter into a dual agent relationship for a particular transaction. Only time will tell, but this could lead to a limitation in sales involving big brokerage firms and/or restructuring of big brokerage houses into smaller firms.