Agency Highlights: 2Q 2016

October 5, 2016

In several of the cases discussed below, the court considered the extent to which a broker or seller was liable for the acts of a licensee. Generally speaking, a broker is liable for all of the licensee’s conduct within the scope of the agency relationship. In two cases this quarter, both from California, a party was found vicariously liable for another’s conduct. In one of these cases, the broker was responsible for a damage award of $180,619.22, in addition to interest and costs on appeal.

A. Cases

1. Maguire v. Burns, No. D067835, 2016 WL 2936835 (Cal. Ct. App. May 17, 2016)

Broker was responsible for damages resulting from its licensee’s breach of fiduciary duty to his client.

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 who assisted them with the transaction. The buyers claimed that the licensee did not adequately investigate use of the property, improperly advised them regarding development of the property, and failed to disclose an alternative option agreement offered by the sellers. After a bench trial, the court held that the licensee breached his duty to the buyers. The court found the brokerage firm was also liable, but held that the firm was only responsible for only a portion of the damages.

On appeal, the buyers argued that the brokerage firm should be responsible for all of the damages because the licensee was an agent of the firm. The appellate court reversed the judgment and found the broker liable for all damages plus interest because the licensee was acting with the scope of his employment. The broker was liable for $180,619.22 in damages and interest, as well as the buyers’ costs on appeal.

2. Goodman v. Rose Realty West, Inc., No. 4D15-285, 2016 WL 2744975 (Fla. Dist. Ct. App. May 11, 2016)

A broker could be liable for a licensee’s conduct in the course of a real estate transaction even if the conduct was fraudulent, because the conduct occurred within the scope of the licensee’s agency.

Buyer brought a fraudulent nondisclosure action against the seller, who also acted as his own representative in the transaction, and the seller’s real estate broker. The buyer alleged that he discovered a number of defects after closing on the property. The circuit court entered summary judgment for the broker.

On appeal, the court held that the licensee’s duty of disclosure extends to the licensee’s real estate broker. If the seller/licensee withheld information from the buyers, he did so during his work as a licensee to facilitate a sale. The broker was the licensee’s principal, and was liable for the acts of an agent, even if those acts were fraudulent. The seller/licensee was not acting outside the scope of his agency during the transaction, and engaging in fraud does not render the conduct outside the scope of agency. Furthermore, disputed issues of fact precluded summary judgment. The court reversed the judgment and remanded the case for further proceedings.

3. Folmar v. Harris, No. 15-1541, 2016 WL 3057669 (4th Cir. May 31, 2016)

Buyers’ claim for breach of fiduciary duty against a licensee could go forward, even though the court had already determined that the licensee was not liable for fraud.

Buyers of a home sued their real estate representative (who acted as a dual agent for the buyers and the sellers in the transaction), the representative’s real estate company, and the sellers of the property, for fraud, misrepresentation, breach of fiduciary duty, and deceptive trade practices. The buyers claimed the licensee failed to disclose problems with the siding and wood rot.

The buyers originally filed a state court case. The state court granted summary judgment for the sellers, and the buyers then voluntarily dismissed their claims against the licensee and the real estate company.

The buyers subsequently filed suit in federal court. In the federal court case, the licensee and real estate company moved to dismiss the claims on the ground that the issues had already been decided in the state court case. The federal court granted the motion to dismiss, and the dismissal was appealed.

In its decision, the federal appellate court agreed that the fraud and misrepresentation claims had been decided. The issue of breach of fiduciary duty, however, required a determination distinct from the issue of fraud, which had not been addressed in the earlier case. Because the unfair trade practices claim derived from the fiduciary duty claim, that claim also was not precluded. The court reversed dismissal of the fiduciary duty and unfair trade practices claims.

4. Fong v. Sheridan, A144286, 2016 WL 1626221 (Cal. Ct. App. Apr. 21, 2016)

A seller was vicariously liable for the licensee’s statement regarding a foul odor on the sold property.

After buying a home, the purchasers discovered that a foul odor on the property was due to septic and oil tanks that were buried on the property. The purchasers sued the seller and the seller’s representative for breach of contract and misrepresentation. During the transaction, the licensee, who acted as a dual agent for purchasers and sellers in the transaction, told the purchasers that the odor was merely “sea air.”

Before trial, the licensee settled with the purchasers. The trial court found that the seller was not liable on the claims, but that he was vicariously liable for the licensee’s negligent misrepresentation. However, no damages were awarded against the seller because the purchasers’ damages were less than the settlement amount paid by the licensee. Since the seller was not liable on the direct claims against him, the court found him to be the winning party in the suit and awarded him attorneys’ fees. On appeal, the court upheld the liability determination, but vacated the damages and attorneys’ fees awards. The case was remanded for a clearer statement of decision on damages and attorneys’ fees by the lower court.

5. Falconite v. Daroci, 2016 WL 1466385 (N.J. Super. Ct. App. Div. Apr. 15, 2016)

Real estate firm could be liable to buyers if the seller was found to have had knowledge of an easement on the property which he did not disclose.

Buyer sued the seller and the seller’s real estate firm for the parties’ alleged failure to disclose the presence of a drainage easement across the property. Through the course of extended litigation, the court entered summary judgment in favor of the seller and the real estate firm. In this decision, the appellate court reversed judgment in favor of the seller, and remanded the case for a determination of the facts of the case. The evidence presented suggested that the seller might have had knowledge of the easement. Because the real estate firm’s liability was derivative of the claim against the seller, the court reversed summary judgment for the firm as well.

B. Statutes and Regulations

Colorado

The Colorado Real Estate Commission recently amended its regulations regarding the use of Commission-approved real estate forms. Specific rules apply where a broker uses transaction-specific clauses drafted by an attorney that are not included in the Commission-approved real estate forms. If new clauses are inserted into or added to the Commission forms, the broker must ensure that he or she understands the clauses and that the clauses are used appropriately. The broker must also maintain a copy of the forms with those newly-inserted or added clauses for four years. Furthermore, a broker may use a preprinted or prepared addendum that modifies or adds terms to a real estate form. However, if such an addendum does not result from negotiations between the parties, the addendum must be prepared by a licensed Colorado attorney representing the broker or a principal party to the transaction. The addendum may not be included in the body or Additional Provisions section of a Commission form. A broker who is not a principal party to the contract may not insert personal provisions, personal disclaimers, or exculpatory language.

Louisiana

An amended regulation in Louisiana changes the time frame for settling escrow account deposit disputes from 90 days to 60 days.

Nevada

Pursuant to an amended regulation, all brokers must file either (a) a trust account reconciliation, or (b) a declaration informing the Division that the broker is not required to file a reconciliation.

South Carolina

South Carolina recently passed an overhaul of its real estate licensing act, which will take effect on January 1, 2017, and resulted in a number of changes to agency issues in the state. The amended act adds definitions of the terms agent, client, designated agency, dual agency, seller agency, team, and transaction broker. The act modifies the types of available agency relationships to include “designated agency” and “transaction brokerage.”

The act provides several new rules regarding electronic documents and recordkeeping. Offers and counteroffers may be communicated by secure electronic means, including the internet. The real estate transaction records required to be maintained by a broker-in-charge may be maintained electronically if a backup copy is stored in a separate, off-site location, which may be cloud-based. However, licensees are not required to maintain records of communications that are not designed to create a permanent record, such as text messages, instant messages, voice mail, voice recordings, or social media posts.

With respect to buyer representation, the revised code provides that the buyer’s representation agreement must include an adequate property description of the type of property of interest to the buyer. Furthermore, if a licensee has two competing buyer clients in a single transaction, the licensee must give written notice to each buyer client that neither will receive the confidential information of the other.

On the issue of agency disclosure, the amended code states that the sales contract must require the buyer and seller to acknowledge their receipt of customer service in the real estate transaction. In addition, both the listing agreement and sales contract must contain an acknowledgement that the party received the Disclosure of Brokerage Relationships document.

The code also requires brokers-in-charge to ensure that licensees prepare all offers and counteroffers in writing, all changes are in writing and initialed, all terms are included, and executed copies are delivered promptly to all parties.

Nebraska, South Carolina, & Tennessee–Teams

Three states recently issued rules with respect to real estate teams. In Nebraska, an amended statutory section defines team and team leader. A team is defined as two or more persons who work under the supervision of the same broker, work together on real estate transactions, represent themselves as a team, and are designated by a team name. The statutory section regarding actions that may result in discipline of licensees was amended to include actions relating to teams. For instance, failing to provide a current list of team members and utilizing advertising which does not prominently display the broker name may result in licensee discipline.

In South Carolina, the amended statutory scheme defines teams (“two or more associated licensees working together as a single unit within an office established with the commission and supervised by a broker-in-charge”) and sets forth several rules regarding team advertising. Team advertising must contain the team name and full name of the brokerage, and may not include the terms “realty,” “real estate,” or similar terms. Also, the team cannot imply that it is separate from the broker.

New Tennessee regulations provide similar guidelines. Licensees who hold themselves out as a team must be affiliated with the same firm and may not establish a separate physical location from the firm. The principal broker remains ultimately responsible for the team, and the team cannot represent itself as an entity separate from the broker.

Tennessee

Tennessee recently adopted amended regulations regarding advertising and recordkeeping. Licensees may not advertise to sell, purchase, exchange, or lease property in a way indicating that the licensee is not in the real estate business, must list the firm name and telephone number, must use the name as they are licensed, and must list the firm name most prominently. The licensee may not advertise a property listed by another licensee without the consent of the owner.

With respect to recordkeeping, licensees must preserve records regarding every real estate transaction for three years. The records must be readily accessible within 24 hours, and be maintained pursuant to a retention schedule that safeguards security, accuracy, and retains documents in a readable format.

Texas

Texas made several changes to its statutes and regulations regarding agency issues. The definition of broker was amended to include a person who “advises or offers advice to an owner of real estate concerning the negotiation or completion of a short sale.” An amended statute also sets forth several activities which do not constitute real estate brokerage, such as constructing, remodeling, or repairing a home, and entering into an obligation to pay that is secured by an interest in property. A new statutory section provides that a claim against a business entity licensee is also a claim against the business entity’s designated broker. Furthermore, brokers must provide an accounting to each beneficiary of trust money at least monthly if there is any activity in the account.

A number of changes relate to agency disclosure. At the licensee’s first substantive communication with a party regarding a specific property, the licensee must provide written notice, in at least 10-point font, which describes the types of broker representation, the licensee’s duties and obligations, and the licensee’s name and license number. Licensees must provide the Texas Real Estate Commission Information About Brokerage Services form at the first substantive communication, and the licensee must provide a link to the form on the website. Licensees must also provide a link to the Consumer Information form on the homepage of their business website. The link must be at least 10-point font, in a readily noticeable place on the homepage. The regulation regarding real estate transactions in which the licensee acts on his or her own behalf or on behalf of family members was amended to require a licensee to disclose in writing that they are acting on behalf of themselves or a family member.

C. Volume of Materials Retrieved

Agency issues were identified 13 times in 10 cases (see Table 1). Breach of fiduciary duty and dual agency were the most commonly raised issues. Seventeen Agency statutes and 12 regulations were retrieved this quarter.

This second quarter update reviews legislative activity from the following jurisdictions: Alabama, Alaska, Colorado, Connecticut, Delaware, Florida, Hawaii, Louisiana, Maine, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, Oklahoma, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, and Vermont.

4 Colo. Code Regs. 725-1: F-2 (2016).

4 Colo. Code Regs. 725-1: F-3 (2016).

La. Admin. Code tit. 46, § 2901 (2016).

Nev. Admin. Code ch. 645, § 806 (2016).

S.C. Code Ann. § 40-57-30 (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-350(L) (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-135(I)(6) (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-135(D)(2) (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-135(L) (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-135(I)(2)(1) (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-350 (2016) (eff. 1/1/17).

S.C. Code Ann. § 40-57-370 (2016) (eff. 1/1/17).