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UPDATE: New California Disclosures Required For Commercial Agents and Brokerages

 

For many years, California has required residential real estate agents, who represent both the buyer and seller in a single transaction, to obtain their clients’ written consent to that “dual agency” relationship.  The Legislature imposed this requirement to (1) educate buyers and sellers about the potential conflicts of interest that often arise as a result of dual agency relationships and (2) compel agents to memorialize in writing the clients’ informed decision to proceed anyway with the transaction.

Under new statutes going into effect on January 1, 2015, these same rules will now apply to commercial real estate agents and brokerages.  The rules will apply not only to the sale of commercial property, but also to leasing.  Additionally, the Legislature has imposed two further requirements:  First, the new statutes will significantly limit what commercial agents in dual agency relationships can tell their clients about the negotiations.  Second, even where no dual agency exists, a commercial agent will be required to obtain from his client a signed disclosure form identifying the party represented and the specific fiduciary duties the agent owes.   

The new law, California Civil Code Sections 2079.13-2079.16, requires all listing and selling agent to obtain from their clients a real estate agency relationship disclosure document.  The document must satisfy the content requirements of Civil Code Section 2079.16, and identify which party the agent represents -- the buyer, the seller or both (i.e., a “dual agent”) -- and what fiduciary duties the agent owes to his client(s).  Such disclosures also will be required in leasing transactions, whether the agent represents the landlord, tenant, subtenant or any combination of them. 

The new law imposes the following additional duties:

Listing Agents:

1.         A listing agent must obtain a signed disclosure document from each of his clients prior to entering into any listing agreement. 

2.         If a listing agent represents only a single party to the transaction, he is required to obtain a signed disclosure document from that party.

3.         If a listing agent does not deal on a “face-to-face basis” with his client, he can merely mail the disclosure document to that client and is not required to obtain a signed copy of it from the client.

Selling Agents:

1.         A selling agent must obtain a signed disclosure document from both the seller and buyer, even when no dual agency exists.    

2.         A selling agent must obtain a signed disclosure document from (a) the seller “as soon as practicable prior to presenting the seller with an offer to purchase” and (b) the buyer “as soon as practicable prior to execution of the buyer’s offer to purchase.”

3.         If selling agent does not deal on a “face-to-face basis” with his client, he can merely mail the disclosure document to that client and is not required to obtain a signed copy of it from the client. 

Further, the new statutes will prohibit dual agents in commercial transactions from (1) disclosing to the buyer that the seller is willing to accept a lower price than the listing price without the express written consent of the seller and (2) disclosing to the seller that the buyer is willing to pay a price greater than the offering price without the express written consent of the buyer.  The dual agent must also maintain any other confidential information he receives from his client(s).   

Commercial real estate brokerages likely will be most affected by the new statutes.  In years past, large brokerages with agents on both sides of a transaction dealt with dual agency conflict issues by creating “ethical walls” that prevented its agents from sharing material information with each other.  Under the new laws, this might not be a sufficient solution by itself.  Even if different agents represent the parties, each will be classified as a dual agent if employed by the same brokerage.  Fiduciary duties will be imposed on both agents and the brokerage.  The agents will be required to obtain each client’s informed written consent to the dual agency relationship.  They also will be expressly forbidden from discussing a number of material facts about the transaction with each other.

A recent California Supreme Court case, Horiike v. Coldwell Banker Residential Brokerage Company, 2014 CA S. Ct. Briefs LEXIS 467, May 20, 2014, while arising out of the residential context, could be a harbinger of things to come for commercial brokerages.  The plaintiff in Horiike, a home buyer, sued the listing agent and his brokerage for breach of fiduciary duty after learning that the home contained less habitable square footage than represented in marketing materials.  The plaintiff was represented in the transaction by another agent of the same brokerage.  The Court remanded the case back for a trial on the issue of whether the agent had breached his fiduciary duty to the plaintiff, even though that agent never had any contact with the plaintiff.  The Court held that, “[w]hen a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller as the broker.”

The new laws impose on real estate agents and brokerages specific disclosure requirements with which they must comply.  Brokerages also now will be exposed to greater scrutiny – and perhaps liability – as a result of future dual agency relationships.

This posting is intended to summarize recent developments in the law for informational purposes only. It is not intended, and does not constitute, legal advice. We make no warranties of its completeness or accuracy. Because questions regarding the application and interpretation of these and other laws require qualified legal analysis, we ask that you direct any such questions to us following an appropriate, formal retention.

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