As discussed in our article on the fiduciary duty real estate agents owe to their clients, a real estate agent is required to represent the interests of the client without any conflict of interest and with the interest of the client of paramount importance.
At times, real estate agents represent both the buyer and the seller on a transaction, often reducing their commission to each to do so. This is allowable and is termed “dual agency” but is only allowed if all parties make informed and full consent prior to the dual agency being created. Without such consent, the liability described in this article may attach.
The Basic Law:
The reader should first review our article on Real Estate Transactions in California.
Dual agency is not illegal in California, but it is a heavily litigated area of real estate law. A dual agent is defined by California Civil Code §2079.139d) as “an agent acting, either directly or through an associate licensee, as agent for both the seller and the buyer in a real property transaction.” California Civil Code §2079.17 specifies the disclosure requirements for dual agents.
California Business and Professions Code §10000 et seq. governs Real Estate and Licensing of Real Estate Persons. The Real Estate Commissioner is authorized to investigate and temporarily suspend or permanently revoke the license of any person found guilty of “acting for more than one party in a transaction without the knowledge or consent of all parties thereto.” (emphasis added) Bus. & Prof. C. §10176(d).
California’s Department of Real Estate publishes a reference book of information relating to real estate practice, licensing and examinations. Chapter 10 discusses agency and states the fiduciary duty owed by real estate brokers to their principals has been compared by the courts to the duty owed to beneficiaries by a trustee under trust. Specific to dual agency, the failure to disclose and obtain the consent of the principal to the dual agency may result in disgorgement of the broker’s compensation and rescission of the transaction.
This last finding is well supported by case law.
In Culver v. Jaoudi ((1991)1 Cal. App. 4th 300), Broker was retained by Buyer to identify a property for acquisition. Upon doing so and obtaining authorization to initiate negotiations, Broker directed one of its agents to contact Seller. When asked, the agent denied having any relationship to the Buyer. The trial court found that there was an undisclosed dual agency relationship which precluded recovery of the Broker’s commission. On Broker’s appeal, the appellate court affirmed the trial court’s decision, and further clarified, “Unless both principals know of the dual agency at the time of the transaction, the agent cannot recover a commission from either.”(Citing Jarvis v. O'Brien (1957) 147 Cal.App.2d 758, 759; McConnell v. Cowan (1955) 44 Cal.2d 805, 811.)
When Broker claimed that Buyer accepted the benefits of the transaction and impliedly waived any right to object to Broker’s failure to disclose, the Culver court ruled, “[T]he fact that [Buyer] received a financial benefit from [Broker’s] efforts is of no consequence on the issue of no recovery for failure to disclose a dual agency. A bar to recovery is a matter of public policy.” (Citing McConnell v. Cowan, supra, 44 Cal.2d at pp. 810- 813; Jarvis v. O'Brien, supra, 147 Cal.App.2d at p. 759.)
In an earlier and much cited case, Glenn v. Rice ((1917) 174 Cal. 269), the court established the same precedent that dual agency must be disclosed to both parties or the broker cannot recover from either:
“The authorities, with practical unanimity, declare that if an agent is engaged by both parties to effect a sale of property from one to the other, or an exchange between them, not as a mere middleman to bring them together, but actively in inducing each to make the trade, he cannot recover compensation from either party, unless both parties knew of the double agency at the time of the transaction. The reason for the rule is that he thereby puts himself in a position where his duty to one conflicts with his duty to the other, where his own interests tempt him to be unfaithful to both principals, a position which is against sound public policy and good morals. His contract for compensation being thus tainted, the law will not permit him to enforce it against either party. It is no answer to this objection to say that he did, in the particular case, act fairly and honorably to both. The infirmity of his contract does not arise from his actual conduct in the given case, but from the policy of the law, which will not allow a man to gain anything from a relation so conducive to bad faith and double dealing. And the fact that the party whom he sues was aware of the double agency and of the payment, or agreement to pay, compensation by the other party, and consented thereto, does not entitle him to recover. He must show knowledge by both parties. One party might willingly consent, believing that the advantage would accrue to him, to the detriment of the other. The law will not tolerate such an arrangement, except with the knowledge and consent of both, and will enter into no inquiry to determine whether or not the particular negotiation was fairly conducted by the agent. It leaves him as it finds him, affording him no relief. The following cases declare these rules, although the list by no means includes all the cases so holding: Chapman v. Currie, 51 Mo. App. 43; Capener v. Hogan, 40 Ohio St. 203; Rice v. Wood, 113 Mass. 133, [18 Am. Rep. 459]; Finnerty v. Fritz, 5 Colo. 175; Green v. Southern States L. Co., 141 Ala. 686, [37 South. 670, s. c., 163 Ala. 514, 50 South. 917]; Skirvin v. Gardner, 36 Okl. 615, [129 Pac. 729]; Sullivan v. Tufts, 203 Mass. 157, [89 N. E. 239]; Lynch v. Fallon, 11 R. I. 311, [23 Am. Rep. 458]; Meyer v. Hanchett, 43 Wis. 250; Rice v. Davis, 136 Pa. 441, [20 Am. St. Rep. 931, 20 Atl. 513]; Bollman v. Loomis, 41 Conn. 582; Boyd v. Hughes, 84 Ill. 174, [25 Am. Rep. 442]. The doctrine was also stated by this court in Berlin v. Farwell, 3 Cal. Unrep. 643, [31 Pac. 527]. The case was not inserted in the official reports, but it has never been overruled.”
Lastly, failure to disclose dual agency may be construed as a breach of good faith. Cal. Civ. Code § 2306 states: “An agent can never have authority, either actual or ostensible, to do an act which is, and is known or suspected by the person with whom he deals, to be a fraud upon the principal.”
Should an agent be accused of a breach of good faith, it is the agent’s burden to prove “that he acted with the utmost good faith toward his principal and that he make a full disclosure prior to the transaction of all the facts relating to the transactions under attack.” Bate v. Marsteller ((1959) 175 Cal. App. 2d 573), citing Schwarting v. Artel, 40 Cal.App.2d 433, 441.
The Bate court further ruled that a broker who breaches his duty of good faith is not only precluded from recovering compensation for his services, but he may also be held liable for the damages caused by his fraud (or his agent’s fraud) (9 Cal.Jur.2d 200-201).
Note that the broker is not only liable for damages for such breach of fiduciary duty, but is barred from collecting any of his or her commission or compensation from either party…and that such conflict of interest does not require the wronged client to prove particular improper stances in the negotiations-only that the conflict of interest existed. As the courts stated, the conflict inherently makes compliance with fiduciary responsibilities impossible.
This danger facing the broker is easily avoided by prior executed informed consent and most standard real estate listing forms have sections that allow the broker to make full disclosure and the client to sign off. If executed, the broker has complied with his or her obligations.
What is somewhat surprising is how often clients agree to such dual agency despite the fact that clearly it will alter the mindset of a broker. No longer can aggressive stances in negotiations occur since the broker will necessarily have to undercut the position of his “other client.” Often brokers offer a reduced commission to each party to encourage agreeing to dual agency, but we have found that most clients are simply reluctant to argue with the broker when he or she asks for dual representation and feel somehow it would be churlish to refuse. Brokers are, after all, sales people and likable in most instances. It may seem hard to say no.
But as the law indicates, if you rely on a broker for guidance and advice and also agree to dual agency, you are expecting something that is illogical. Dual agency must necessarily eliminate much of the advantage that having a broker entails.