DR Legal News: Dual Agency

Should Illinois Real Estate Brokers “Freak Out” about Horiike v. Coldwell Banker Residential Brokerage Company et al.?

(Is it a dual agency case, a disclosure case or a little bit of both?)

UrbanceBy Elizabeth (Betsy) Urbance, Legal Hotline Attorney, Sorling Northrup Attorneys

The short answer to the question posed in the title of this article is “No.”  After a brief analysis of the recent California case, this writing will offer some good reasons why not.

Facts of the California Case

In the case of Horiike v. Coldwell Banker Residential Brokerage Company, Cortazzo was the listing agent with Coldwell Banker who represented a seller trust of a luxury property in Malibu, California. Namba was a buyer agent associated with another Coldwell Banker office in Beverly Hills and who represented the buyer, Horiike.  Horiike sued Coldwell Banker and Cortazzo (the seller’s agent) when he learned the luxury home he purchased was not 15,000 square feet as advertised.  There were facts presented in the California Supreme Court opinion to suggest that the public tax assessor’s records showed the property’s living area to be less than that. There was also a building permit application that showed total living space less than 15,000 sq. feet. (Horiike v. Coldwell Banker Residential Brokerage Company, S218734, pp. 6-7) Interestingly, the Court notes a prior deal failed in which Cortazzo provided a note to the would-be buyer suggesting that the buyer double-check square footage.  No such notice was given in the Horiike transaction.

At trial, the California trial court declared a non-suit assessing no liability to either Coldwell Banker or Cortazzo. The Court of Appeal reversed the trial court finding in favor of plaintiff Horiike. The California Supreme Court upheld the Court of Appeal addressing the question “whether associate licensee [Cortazzo, the listing agent] owed to the buyer a duty to learn and disclose all information materially affecting the value or desirability of the property, including the discrepancy between the square footage of the residence’s living area as advertised and as reflected in publicly recorded documents.” (Id. at p. 2) The California Supreme Court upheld the Court of Appeal in a somewhat surprising holding.  

The Supreme Court reasoned that the buyer and seller were both clients of Coldwell Banker (the Broker) which owed fiduciary duties to its clients. As a result, Cortazzo, the listing agent was, under California law, a dual agent owing fiduciary duties to his own client but also to the buyer client (Horiike), even though the buyer had his own agent (Namba). As a dual agent, Cortazzo had a duty to learn (emphasis added) and disclose all material information. The opinion contains discussion regarding agency duties and dual agency, which might cause real estate professionals to jump to the conclusion that any time an agent in a real estate brokerage company represents one party and an agent in the same company represents the other party, dual agency exists. This double duty does appear to be the law in California according to its Supreme Court. Interestingly, the Court implied that while Horiike alleged that Cortazzo breached a fiduciary duty owed to Horiike, Cortazzo would have owed a non-fiduciary duty to disclose adverse material facts about the property anyway. (Id. at p. 18) So, California imposes a non-fiduciary duty to disclose materially adverse facts about the property and a fiduciary duty to “learn (emphasis added) and disclose all facts materially affecting the value or desirability of the property….”  The California Supreme Court said Coldwell Banker owed the latter fiduciary duty to the buyer and as a result, so also did the “associate licensee,” Cortazzo. (Id. at p. 21)

The Illinois Presumption of Designated Agency and Disclosed Dual Agency

Here is why Illinois brokers need not panic about this holding. The Illinois Real Estate License Act of 2000 (RELA) contains Article 15 with regard to agency. First, there is a presumption of designated agency in Illinois. This means that, even though the brokerage relationships and contracts “belong to” the sponsoring brokerage company, the licensee is presumed to be the designated, or legal, agent for the client with whom the licensee is working.  RELA can be distinguished from California law because of this presumption. In fact, the California Supreme Court stated that “the Legislature certainly could enact defendants’ preferred solution to the problem by, for example, adopting legislation to uncouple the associate licensees’ duties from those of the brokers they represent.” (Id at p. 21) This “uncoupling” is exactly what RELA does for Illinois licensed brokers (sponsoring companies) and the licensees that they sponsor. Article 15 of RELA sets forth specific statutory duties that licensees owe to their clients. Paramount among them is the protection of a licensee’s own clients’ confidential information within their offices. It is important to note that in Illinois information regarding the physical condition of the property is not confidential by definition. These statutory duties are fiduciary-like but not exactly the same as common law fiduciary duties.

In Illinois, sponsored licensees must provide their clients with written disclosure as to whom the client’s designated agent is. Often this disclosure is accomplished in the brokerage agreement, but if not, then a separate written disclosure is required. Each designated agent serves as the “legal agent” for his own client, even within the same sponsoring brokerage company (analogous to the term broker as used in the Horiike decision).

In Illinois, dual agency only occurs when the same designated or legal agent is acting for both parties in the transaction. There is a very specific procedure required before a licensee can act as a disclosed dual agent in Illinois. To represent both buyer and seller, the licensee must give both clients a written disclosure form outlining what the dual agent can and cannot do for them. The licensee limits his role substantially and becomes more like a glorified messenger than a counselor. This initial disclosure must be signed by both sides (probably on separate forms) no later than when the licensee acts as a dual agent, i.e. before the listing agent shows his own listing to a buyer.  Consent to dual agency must be confirmed in writing by both sides no later than when they enter a contract. When these statutory forms are signed, the dual agent has the presumption of informed consent. A client or clients may decline dual agency at any time.

Due to the strict nature of disclosed dual agency in Illinois, this practice should be limited and used cautiously. The key concept, and possibly the most onerous requirement, is that the dual agent must keep the opposing parties’ confidential information to himself.

What Does all this Mean to Illinois Brokers?

We know the Horiike case was decided on a narrow disclosure issue and was analyzed under California laws that differ from Illinois. The California Supreme Court held that, by virtue of being associated with Coldwell Banker, Cortazzo owed a higher duty to the buyer Horiike, which included a fiduciary duty to learn about the physical condition of the property.  We know Illinois RELA does not impose common law fiduciary duties on all licensees sponsored by one company to serve the best interests of all of the company’s clients, but has in place the presumption of designate agency.  Therefore, one sponsored licensee can be the legal agent of one party owing all her statutory (fiduciary-like) duties to her client, while another sponsored licensee in the same company can be the legal agent of the opposing party owing all his statutory (fiduciary-like) duties to his client. These statutory duties include, among others, the duty to keep the confidence of their respective clients. Disclosed dual agency is allowed under certain circumstances and substantially limits the role of the dual agent in the transaction.

Here's the Kicker

The real issue of fact (the duty to disclose the square footage discrepancy) has yet to be determined by the California courts. What is clear in California, is that the question will turn on Cortazzo’s duty to learn more about the discrepancy and, having that higher duty, was it materially adverse to the buyer so as to require disclosure? In Illinois, this author believes the question of agency would be secondary to the question about disclosing material information regarding the physical condition of the property to the opposing party, whether that party was a client or not. If a licensee knows there is a latent, or hidden, material defect in the subject property’s physical condition, the licensee must disclose this to the non-client party because, by definition, it is not confidential to his client. There is no duty imposed upon licensees to investigate in order to find hidden defects, but there is a duty to disclose latent physical material defects about which they actually know.  Is the square footage discrepancy a materially adverse physical condition in the subject property? That is the real question….

Breakout Text: 

Want to Know More? Don't Miss These Agency Resources