Might Dual Agency Case Drive Sellers to Smaller Brokers?

By Dave Fratello | November 22nd, 2016

It's not often that the minutiae of real estate law wind up on the front page of your morning paper.

But there they are now, after an important California Supreme Court ruling on Monday. You may browse the details of the story and wonder: What does it mean to us, here, in Manhattan Beach?

Before we jump into the weeds of that case, let's jump to a couple of conclusions:

1) Lots of transactions are going to become more complicated, with stilted, extra CYA disclosure documents and other sober, formal-sounding statements larded on top of all those that we already see in a typical home sale.

2) Some sellers may believe that their best interests are served by working with smaller brokerages, where the potential risks coming out of the new Supreme Court ruling would appear to be more minimal.*

Let's explain that asterisk: * Dave works for a small, local real estate brokerage. That means we've got a novel perspective on an industry dominated by big operators. But this analysis could also be colored by some general self-interest. Reader, you decide.

How do we get to those conclusions? Stick with us here.

Dual Agency and 'Best Interests'

The Supreme Court case, Horiike v. Coldwell Banker, pertains to "dual agency," when one real estate broker represents both buyer and seller in a home sale.

The phenomenon of dual agency is already extremely common when it comes to individual agents. The agent promoting a listing may attract buyers, too, who will hire the listing agent for any of several reasons. Maybe the buyer hasn't done their homework yet and settled on a buyer's agent to represent them – suddenly, they need an agent. Whoops! Or they stumbled into the open house and met the listing agent and hit it off personally, then decided to buy the house. Or the buyer may view hiring the listing agent as a strategic move to gain advantage in negotiations.

Whatever the reasons and motivations, that's the kind of dual agency we're all familiar with: One agent for buyer and seller. But the Supreme Court case takes it to a new level, as we'll try to describe here.

For the individual agent representing two parties (seller and buyer) with potentially conflicting interests, it's already a delicate dance. The duties legally owed by the listing agent to the buyer are enhanced. Ordinarily, the listing agent must be honest and fair with any buyer and his or her agent. When representing the buyer, also, the listing agent has a fiduciary duty or obligation, the highest form of agency. The agent must act in the "best interest" of the buyer, which is interesting, because he or she already has that same obligation to serve the "best interest" of the seller. What could go wrong?

The Supreme Court has just found that "dual agency" rules kick in not only when it's one individual agent representing both buyer and seller – but any time that it is the same real estate brokerage representing both parties. This means what was already common will become many times more common – and more complicated.

Consider an Example

Let's say that Fred's Beach Real Estate has 250 agents spread out around the South Bay. You're a buyer. You've been working with an agent from Fred's brokerage – let's call her Martha – in your home search. You find that awesome Redondo condo you've been looking for. It's got a Fred's sign out front. The listing agent is a pleasant, white-haired gentleman named George.

Martha writes your offer on George's listing. It's accepted!

This is where the Supreme Court ruling takes effect. Because both agents work for Fred's Beach Real Estate, as a buyer, you're now entitled to the same legal protections as if you had hired George directly and kicked Martha to the curb. Fred is the dual agent. (We're assuming that there's still a real guy named Fred who's the broker of record.)

That's the big change from the ruling. Because agents work for brokers, not independently, the broker is the one who technically represents the parties. Those people you actually meet and talk to are sub-agents. So if both of the agents wave the same flag, from the same brokerage, then both buyer and seller have hired the same person – their broker – to represent them. It's a much broader definition of dual agency. The bigger the brokerage, the more agents, the higher the chances are that a dual-agency situation will break out.

Now be the seller of that Redondo condo for a moment. Look what's just happened. Your listing agent, George, is sold out.

George still represents your best interests, but now must also represent the buyer's best interests, too.

Information has to flow freely. Whatever George knows, he had damn well better tell Martha and the buyers. (There are a few, important exceptions: George can't tell Martha what your "real" bottom line is, for instance.) But George is now on alert. He doesn't want a lawsuit for non-disclosure down the road. He'll start talking.

More importantly, Fred's on alert now. If he and his brokerage are to survive in this new world, he can't have a stream of non-disclosure and botched-agency lawsuits. He might call a meeting for information-sharing among the agents. Fred has a duty to know what they both know about the home and the buyers, and the agents have a duty to share everything they know with both parties. 

If you can't imagine why this would be a problem, great!

How Might Sellers Protect Themselves?

In a typical home sale, there may not be any information that a seller wouldn't want to share with a buyer. But sometimes there is. And if the seller has the bad luck of having a buyer come in who's represented by the same overarching broker as the seller's agent, prepare for the walls to come down. It's now the law. 

To reduce the hypothetical risks of winding up in a dual-agency situation, sellers might increasingly choose to work with smaller firms that don't have 250 agents like Fred's Beach Real Estate.

There are indies in the South Bay, to be sure (like Confidential Realty!), but two of the larger local firms we all grew up with here have folded in under a giant international brand. Many agents fled to another major nationwide company. Consolidation under huge names has been the rule recently. There are advantages to the big brokerage houses, but now one new disadvantage, courtesy of the Supreme Court.

Could hiring an agent from a large firm now work against a seller's best interest?

The big firms will adjust. They always do. Whereas the California Association of Realtors screeched about the dangers of a ruling that brokers should be treated as dual agents, now CAR is sounding a welcoming tone after the ruling, calling it limited. You see? They'll adjust.

A Rare Pro-Consumer Outcome in Real Estate

We shouldn't lose sight of something critical here: Monday's Supreme Court ruling was a pro-consumer ruling.

In the real estate industry, forces often conspire against buyers. Sellers call the tune, and brokerages cater to them. Though every transaction has a buyer, too, the interests of buyers are often (annoyingly) treated as secondary. (This insight was one of the prime motivations for the creation of Manhattan Beach Confidential, as you may know.)

The Supreme Court was drawn to this issue by a disagreement over disclosure of facts in a transaction in Malibu. One broker had two agents involved: one listing agent and a separate buyer's agent.

The listing agent allegedly knew some things that he should have told the buyer through the buyer's agent, but didn't. Specifically, the listing agent allegedly knew that the square footage of the property he was advertising was much less than what he was promoting. He felt that by suggesting that the buyer investigate the square footage for himself, he was providing enough information and guidance. He allegedly satisfied himself that the duty to learn more about the square footage was transferred to the buyer.

But if that listing agent had been looking out for the "best interest" of the buyer, he would have said more – or so goes the theory of the case. Acting as a fiduciary for the buyer, the listing agent could not have kept silent on what he knew about the square footage. The buyer would have gotten more information, more directly.

It's worth noting that one buyer had already backed out of a deal for the Malibu home, and that the first buyer's reason for dropping out may have had to do with a square footage discrepancy. Whatever the listing agent did or didn't say about the square footage to the party that did buy the house, it would appear to have been motivated by protecting the "best interest" of the seller, to the detriment of the buyer.

But that was the old way of doing things! 

Give a little clap for the state Supreme Court, at least if you like to see ossified, anti-consumer practices smashed.

Clap clap clap.

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