California case might spell trouble for real estate agents and brokers across the country

The California Supreme Court decided a case in late 2016 that may have wide-ranging effect for real estate companies in that state.* The case involves a Chinese millionaire’s 2007 purchase of a mansion in Malibu for $12.25 million.

The seller, a trust, engaged Chris Cortazzo, a salesman in Coldwell Banker’s Malibu West office to sell the property.  As Cortazzo prepared to list the property, he obtained information from the tax assessor’s office that indicated the property’s living area was 9,434 square feet. The building permit described a single-family residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet and a basement of unspecified area. The MLS listing stated that the property “offers approximately 15,000 square feet of living area”. Cortazzo also prepared and distributed a flyer making the same square footage representation.

In 2007, a couple made an offer to purchase the property. By handwritten note, Cortazzo informed them that Coldwell Banker did not “guarantee or warrant” the square footage, and advised them to “hire a qualified specialist to verify the square footage”. When the couple requested documentation of the square footage, Cortazzo gave them a letter from the property’s architect stating the “size of the house, as defined by the current Malibu building department ordinance is approximately 15,000 square feet.”  In a cover note, Cortazzo again cautioned them to hire a specialist. This sale fell through.

Horishi Horiike had been working for several years with Chizuko Namba, a sales person in Coldwell Banker’s Beverly Hills office, to find a residential property to buy. Namba showed Horiike the residence in question. Cortazzo gave Horiike the marketing flyer advertising approximately 15,000 square feet and an MLS printout that did not specify the square footage and contained note in small print that “Broker/Agent does not guarantee the accuracy of the square footage.” Horiike and the selling trust entered into a contract.

Before the closing, Horiike signed three disclosure forms confirming that Coldwell Banker represented both the buyer and the seller in the transaction. Under California law, a real estate broker may act as a dual agent for both parties, provided both parties consent to the arrangement after full disclosure.  The broker may act through one or more “associate licensees”, typically the salespeople who operate under the broker’s license and supervision. The governing statute provides that when an associate licensee owes a duty to any party in a real estate transaction, that duty is equivalent to the duty owed to that party by the broker.

Cortazzo did not state in writing to Horiike that there may be a discrepancy in the square footage, as he had done with the previous potential buyer. He also did not advise Horiike to retain an expert to verify the square footage. After the closing, Horiike learned that the property had less than 12,000 square feet of living area (although Coldwell Banker experts testified at trial that the living area was 14,186 square feet.)

In 2010, Horiike filed suit against Cortazzo and Coldwell Banker for intentional and negligent misrepresentation, breach of fiduciary duty, unfair business practices and false advertising. He did not sue the selling agent, Namba.

In a unanimous decision, California’s Supreme Court stated that the case presented a single, narrow question:  whether the associate licensee who represented the seller owed a duty to learn and disclose all information materially affecting the property, including the discrepancy in the square footage. The Court held that Coldwell Banker, as broker, owed a fiduciary duty to both parties and that Cortazzo, as associate licensee, had the responsibility to properly investigate and disclose all important information related to the transaction. The Court concluded Cortazzo owed a duty to Horiike equivalent to the duty owed to him by Coldwell Banker.

Several trade associations filed amicus briefs in the case. One concern is that an agent working with a buyer has no idea what property that buyer will ultimately purchase. Whether the same broker will represent the seller can’t be predicted. Another concern is that this decision may also reach commercial transactions. It is also possible that this case may open selling agents open to lawsuits from their clients for over-disclosure.

Could this happen in South Carolina? A provision in our statutory scheme may save brokers from the fate set out in this case, at least where different branch offices of a real estate firm are involved. Here, each branch office must be managed by a broker-in-charge. South Carolina Code §40-57-350 (I)(2) states that a broker-in-charge and associated licensees in one office of a real estate brokerage firm may conduct business with a client of another office of the real estate brokerage firm without creating a dual agency relationship, so long as the branch offices each have separate brokers-in-charge and do not share the same associated licensees.

I can’t find similar protection for listing and selling agents who work in the same branch office, nor for companies with listing and selling agents in the same location.  And, as we all know, there is no predicting what our court might say in connection with real estate matters. We will have to pay attention to see whether other courts, and particularly South Carolina courts, follow the lead of the California Supreme Court.

*Horiike v. Coldwell Banker Residential Brokerage Co., 1 C5th 1024 (2016)