Agency Highlights: 4Q 2016

A.         Cases

Earlier this year, we examined the following two cases. Each case exemplifies an agency issue seen in many 2016 cases. The Maguire case was one of the larger damage awards involving an agency issue in 2016. In that case, the broker was found vicariously liable for the acts of the licensee. In Wagner, the Montana Supreme Court addressed the duty owed by a dual agent in a real estate transaction. Maguire v. Burns, No. D067835, 2016 WL 2936835 (Cal. Ct. App. May 17, 2016). Buyers purchased a vacant movie theater with plans to convert the property into a dinner theater. After purchasing the property, the buyers learned the project was not possible, and they sued the brokerage firm and licensee. The buyers claimed that the licensee did not adequately investigate use of the property, misadvised them regarding property development, and failed to disclose an alternative option agreement from the sellers. The court held that the licensee breached his duty to the buyers. The court found the brokerage firm was also liable, but only for a portion of the damages. The appeals court reversed the judgment and found the broker liable for all damages plus interest because the licensee was acting within the scope of his employment. The broker was liable for $180,619.22. Wagner v. MSE Technology Applications, Inc., 384 Mont. 436 (Aug. 30, 2016). A potential purchaser of land sued the seller, purchaser, and a licensee, claiming they interfered with his attempted purchase. The prospective purchaser and seller entered a purchase agreement, with the licensee acting as a dual agent. A few months later, several meetings were held between the seller, an adjacent property owner, the licensee, and a new purchaser. The plaintiff did not attend these meetings, and indicated that she was not interested in purchasing the adjacent parcel, which contained the only existing road providing access to the property. When the plaintiff did not close on the property by the closing date specified in the agreement with the seller, the seller then closed the deal with the new purchaser. The licensee assisted with the new transaction and claimed that the plaintiff indicated she was no longer interested in the original property. The trial court granted judgment for all defendants on the intentional interference claim. The trial court also granted summary judgment in favor of the licensee on a professional negligence claim. On appeal, the appellate court reversed the court’s decision with respect to the licensee. The appellate court concluded that the potential purchaser presented some evidence showing that the licensee may not have acted in the would-be purchaser’s best interest as dual agent. The court reversed summary judgment and dismissal of claims in favor of the licensee.

AGENCY CASES FROM EARLIER EDITIONS

The cases from this past quarter address several key agency issues. A California Supreme Court decision determined that a licensee associated with a brokerage firm serving as a dual agent owes a duty equivalent to that owed by the broker to clients. We also review an opinion from a case we discussed in an earlier edition of the Legal Pulse regarding the effect of text messages. In this new decision, the court concluded that the broker did not have authority to enter into a transaction on behalf of the client.

An associated licensee owes the customer a duty equivalent to the duty owed by the broker.

1.         Horiike v. Coldwell Banker Residential Brokerage Company, No. S218734, 2016 WL 6833005 (Cal. Nov. 21, 2016)

The purchaser and seller agreed that the broker, through its associated licensees, would act as dual agent in the transaction for a luxury home. After the transaction was completed, the purchaser discovered a large discrepancy between the square footage listed on the building permit and that stated in the marketing materials for the property. The buyer sued the listing licensee and broker for breach of fiduciary duty. The trial court concluded that the licensee who listed and marketed the property and acted on behalf of the seller had no duty to the buyer, and then instructed the jury that the broker could only be liable if a different associated licensee of the broker breached the fiduciary duty. The jury found that the broker did not breach a fiduciary duty owed to the buyer. The Court of Appeals reversed that decision.

Real estate broker did not have authority to bind the seller to a real estate transaction.

In this decision, the California Supreme Court considered the duty owed by a listing broker to the buyer when the broker is acting as a dual agent.  The broker’s duty to the buyer was not in dispute.  The Supreme Court determined that the associate licensee who listed the property owed a duty to the buyer equivalent to that owed by the broker. According to the court, an associate licensee represents a brokerage in a real estate transaction and does not have an independent agency relationship with the client. An associated licensee has no power to act except as a representative of the broker and undertakes the same duties as owed by the broker. The California Supreme Court affirmed the judgment of the Court of Appeals.

2.         St. John’s Holdings, LLC v. Two Electronics, LLC, No. 16MISC000090, 2016 WL 6191911 (Mass. Land Ct. Oct. 24, 2016)

Update!

The potential purchaser of a commercial property claims that it had an agreement with the seller to purchase the property, and brought this action to enforce the agreement to purchase. In an earlier decision (discussed in the Third Quarter 2016 Legal Pulse), the court concluded that a text message from the seller’s broker was sufficient to constitute a written counteroffer in the transaction. In this decision, the court considered whether the broker had the authority to bind the seller to the counteroffer.

Claims against real estate professionals were dismissed because the seller’s conduct in failing to honor the agreement caused the plaintiff’s damages.

The court concluded that the broker did not have authority to bind the seller. A real estate broker does not serve as a general agent, but instead is a special agent with restricted authority. To establish authority on behalf of a client, the party needs to present evidence of its authority. Here, the only evidence of the broker’s authority was a statement from the seller telling the buyer to “work through [the broker].” This statement was not sufficient to establish the broker’s authority on behalf of the seller. The court dismissed the purchaser’s complaint.

3.         Padilla v. Miller, No. B26684, 2016 WL 6236412 (Cal. Ct. App. Oct. 25, 2016)

Plaintiffs engaged the defendant real estate representatives to help them sell and buy rental properties for use in a Section 1031 exchange transaction in order to minimize the plaintiff’s tax liability. The plaintiffs entered into an agreement with the seller of a property. The licensee disclosed that he had previously represented the seller in buying that property, and he would act as dual agent in the transaction. Ultimately, the seller breached the purchase agreement by refusing to sell the property. After settling claims with the seller, the plaintiffs brought suit against the real estate representatives for negligence and breach of fiduciary duty. The plaintiffs allege that the real estate professionals breached their fiduciary duty by failing to open escrow, failing to deposit the purchasers’ deposit into escrow, failing to notify the seller that timing was critical because the transaction was part of a Section 1031 exchange transaction, failing to identify alternate properties, and failing to use correct forms.

The trial court dismissed the complaint, finding that the seller was responsible for the purchasers’ damages. Even if the real estate defendants failed to perform the duties identified by the purchaser, the seller was still contractually obligated under the parties’ agreement. If the seller had performed the agreement, the purchasers would not have suffered damages. The appellate court affirmed dismissal of the claims. However, in a reversal of the trial court, the appellate court granted the purchasers an opportunity to file an amended complaint.

B.         Statutes and Regulations

Arizona

The Arizona Department of Real Estate added a statement to its Substantive Policy Statement on Real Estate Licensee Advertising. The new statement requires the designated broker to “supervise all advertising for real estate, cemetery, or membership camping brokerage services.”[1]

California

Several new and recently-amended statutes affect agency issues for California licensees. A new statute clarifies that individuals working in the capacity of an outdoor advertising representative do not constitute real estate brokers for purposes of real estate licensing and regulation.[2] One amended statute, which will become effective next year, addresses licensee advertising. Under the amended statute, all solicitation materials and purchase agreements must include the responsible broker’s identity.[3] “Responsible broker’s identity” is amended to mean the name of the broker or both the name and associated license identification number.[4] Solicitation materials include print ads, advertising on electronic media, For Sale signs (which were formerly excluded), and directional signs.[5]

Colorado

Amended regulations in Colorado state that a broker must determine if he or she possesses the knowledge, experience, and training to provide requested brokerage services.[6] If the broker does not have the requisite knowledge or skills, the broker must decline to provide the services or obtain the needed knowledge or obtain assistance in order to perform the services. On a different topic, the regulations prohibiting a broker from inserting personal provisions into Real Estate Commission-approved forms were also amended. A broker may include language regarding payment of the broker’s commission “if this is a term of negotiation between the principal parties of the contract to buy and sell.”[7]

Georgia

Georgia amended two statutory sections relating to broker duties. A brokerage must review all offers to buy, sell, lease, or exchange real property “within the time of said offer.”[8] The former rule required this review to be conducted within 30 days of the offer. In another modification, brokers must timely provide a copy of the closing statement from a real estate transaction only if they are provided with a copy of the statement.[9]

Idaho

The Idaho Real Estate Commission issued a Guideline regarding Coming Soon Listings. The Guideline states that if a licensee promotes a property as “Coming Soon,” but is actually marketing the property to a select group of buyers, the licensee is engaging in misleading advertising.[10] Under those circumstances, the licensee is not acting with honesty and good faith and in the best interest of the client.[11]

Illinois

Several amended regulations in Illinois address licensee advertising issues. Licensee advertising must identify the licensee and the sponsoring broker.[12] A licensee who is a managing broker must indicate that status on advertising, except on For Sale signs.[13] Also, advertising for a real estate auction must contain the name and address of a licensed broker.[14] If a sponsoring broker is advertising a property that is subject to an exclusive listing agreement with another broker, the broker wishing to advertise the property must obtain permission from the sponsoring broker and must identify the sponsoring broker with the exclusive listing in the advertisement for that property.[15]

Kansas

A new regulation in Kansas defines the requirements for brokers who supervise an office. Supervising brokers must ensure that only licensed individuals perform activities requiring a license and must review all contracts, forms, and advertising for compliance and accuracy.[16] In a change to another regulation, “each licensee involved in a transaction as a statutory agent or a transaction broker shall ensure the completeness and accuracy” of the agency disclosure.[17]

Louisiana

A revised Residential Agreement to Buy or Sell form issued by the Louisiana Real Estate Commission now requires licensees to provide license numbers and brokerage firm names and license numbers.[18] Also, property sellers are required to provide utilities for use in appraisals.

Maryland

Maryland made a number of changes to its statutory scheme regarding licensee agency. The amendments remove presumed buyer’s agency, and define a buyer’s agent as an associate broker or salesperson who represents a prospective buyer or lessee under a written brokerage agreement.[19] The statutory changes also define dual agent, seller’s agent, and sub-agent.[20] A licensee must disclose an agency relationship at the first contact with a client.[21] If the first contact is not face-to-face, the disclosure must occur in the same medium in which the first contact occurs.[22] Also, seller’s representatives must display a disclosure notice at all open houses.[23] The Maryland Real Estate Commission issued the Open House Disclosure Notice that must be posted by the seller’s representative at open houses.[24]

Michigan

In Michigan, licensees must, at the time of execution of an offer to purchase, recommend to the purchaser that the purchaser require the seller to provide fee title insurance in the amount of the purchase price.[25] Another amendment states that licensees shall not close a transaction on terms different from those stated in the agreement.[26]

Nebraska

The Nebraska Real Estate Commission amended its regulations to require designated brokers to maintain the following records for five years: (1) records relating to all consummated real estate transactions; (2) all listing agreements (if the transaction was not consummated); (3) all agreements entered, but not consummated; (4) all broker’s price opinions and market value analyses; and (5) records of all team members and team leaders.[27]

North Carolina

In North Carolina, a new statute provides that the practice of law does not include a real estate broker’s selection or completion of a preprinted form while acting as a representative in a real estate transaction.[28]

New Mexico

Amended regulations in New Mexico require a qualifying broker’s name and contact information to be clearly and conspicuously displayed on all written documents generated by the brokerage or presented to the client.[29] The regulations require brokers in New Mexico to display a copy of their license. An amendment to that regulation addresses that requirement in the context of virtual offices. If the broker has a virtual office, the broker must display a photo or image of the license on its website. [30] Another amendment requires all real estate advertising to include the brokerage trade name and telephone number prominently displayed in a type size not less than 33% of the type size used for the associate broker’s name.[31] If this disclosure is not practical for an electronic display, the disclosure may be linked to the display. An additional amendment requires the qualifying broker to verify trust account reconciliation.[32]

New York

In New York, licensee business cards must now include the licensee’s license type.[33] Another regulation change states that a broker may not receive compensation from more than one party unless the broker has the consent of the client.[34] The regulation used to require the consent of all of the parties.

Ohio

Ohio revised its licensing statutes to require real estate brokerages to designate a principal broker. The principal broker must oversee operations, maintain records, comply with trust account rules, develop a written policy on agency, ensure advertising compliance, and ensure that only licensees perform real estate activities for which a license is required.[35] In another amendment, the statute provides that a licensee does not breach any duty to the purchaser by preparing or presenting contemporaneous offers for the same property.[36] The licensee must disclose, in writing, the contemporaneous offers to all clients for whom the licensee is presenting offers for that property.

Wisconsin

Under an emergency rule adopted in Wisconsin, licensees must provide a copy of any document prepared or received by the licensee to the person who signed the document.[37] Licensees must also maintain all contracts, agency agreements, offers, leases, closing statements, deposit receipts, and trust account records for two years. Under another amendment, a licensee or broker may not submit a personal written proposal or offer to purchase a property which the brokerage firm has listed.[38]

C.         Volume of Materials Retrieved

Agency issues were identified 60 times in 57 cases (see Table 1 and Table 4; note that some cases address multiple issues). Breach of Fiduciary Duty, Agency: Other, Dual Agency, and Vicarious Liability were the most frequently addressed topics (see Table 2). Thirty-five statutes and forty-eight regulations addressing Agency issues were retrieved (see Table 1). These items addressed Dual Agency, Designated Agency, Agency Disclosure, Transactional Agency, Buyer Representation, Teams, Coming Soon Listings, and Agency: Other.