DUAL AGENCY: What You Need to Know

Real estate brokers and salespersons play an integral role in the purchase and sale of residential real estate. In 2018, the average homeownership rate in California was 55.2% and there were more than 440,000 unique residential real estate transactions. On average, 90% percent of all California buyers and sellers used a real estate agent in their transaction. For most of the 20th century, the traditional residential real estate transaction conformed to a model whereby the seller retained a broker who listed the home on a multiple listing service (MLS). Te listing was then noticed by a “cooperating” agent who showed the property to potential buyers. Standard MLS agreements made the cooperating agent a subagent of the seller. It was common practice for the listing broker and the cooperating agent, who were both acting as agents for the seller, to help the buyer purchase the property. Tis traditional model was fraught with problems for a couple of reasons. First, it was not always clear to the buyer that the cooperating agent was an agent for the seller. Tis means the buyer did not always know that the agent was not acting in the buyer’s best interest. Second, the traditional model created an inconsistency between case law and real estate practice. As early as the 1940s, California courts held that listing brokers and cooperating agents were, in fact, undisclosed dual agents who owed fduciary duties to both the buyer and the seller in the transaction. However, the practice in the real estate community was for cooperating agents to be subagents of the seller. Tis dichotomy created uncertainty among agents as to whom they owed fduciary duties. In the early 1980s, the agency relationship involved in traditional residential real estate transactions became the subject of nationwide attention and, in 1986, California became the frst state to enact laws addressing the practice of dual agency. Te focus for California lawmakers was on disclosing and educating the consumer about the dual agency relationship. While some states banned dual agency altogether, California codifed it in section 2079 of the Civil Code. As it stands, a broker can act as a dual agent only when both parties to the transaction are aware and consent to the dual agency.

Disclosure statutes require that every agent provide his or her client with a disclosure form titled Disclosure Regarding Real Estate Agency Relationship. Tis form requires the agent to disclose whether the agent is acting exclusively for the buyer, exclusively for the seller, or as a dual agent representing both the buyer and the seller. Te form also states that, in a dual agency situation, the agent owes “a fduciary duty of utmost care, integrity, honesty and loyalty” to both the seller and the buyer. In contrast, the form says that an agent representing only one of the parties does not owe a fduciary duty to the other party in the transaction, but that the agent must act with diligence, honesty, and good faith. What is Dual Agency? Dual agency arises when a real estate broker, including a corporate broker, represents both the buyer and the seller in a transaction. It is often the case that two salespersons represent both the buyer and the seller in a transaction, but both work under the supervision of the same broker. In most of these cases, each party to the transaction interacts exclusively with his or her own salesperson, rather than the supervising broker. Nevertheless, California law considers the client’s relationship to be with the broker who acts through the licensed salesperson. Tis means that the broker is a dual agent and must fulfll fduciary duties to both parties in the transaction. In 2016, the California Supreme Court expanded the legal defnition of dual agency in the landmark case Horiike v. Coldwell Banker Residential Brokerage Co. (2016) 1 Cal. 5th 1024. Horiike arose from the sale of a luxury home in Malibu. Te seller in the transaction retained Cortazzo, a salesperson employed by Coldwell Banker. As Cortazzo prepared to list the property, he learned that the living area was 9,434 square feet. However, he listed the property as being “approximately 15,000 square feet of living area.” Cortazzo also prepared and distributed fyers bearing the exaggerated estimate. Horiike (the buyer) hired Namba, another Coldwell Banker salesperson, to help him fnd a residential property. Namba arranged for Cortazzo to show Horiike the Malibu property. After viewing the property and receiving Cortazzo’s marketing fyer listing the living areas at 15,000 square feet, Horiike agreed to buy the property. When Horiike later discovered the discrepancy between Cortazzo’s representations and the actual square footage of the living area, he fled suit for breach of fduciary duty against both Cortazzo and Coldwell Banker. Te trial court found that Cortazzo owed a fduciary duty to the seller, but not to Horiike. Te Court of Appeal reversed, holding that, based on Civil Code section 2079.13, Cortazzo owed equivalent fduciary duties to both the buyer and the seller due to his position as associate licensee for Coldwell Banker, the dual agent. Te California Supreme Court afrmed the decision, holding that Cortazzo, as the seller’s representative and associate licensee of Coldwell Banker, owed equivalent fduciary duties to both the buyer and seller in the transaction. Te court acknowledged the potential, and sometimes unavoidable, confict of interest in a dual agency relationship, and encouraged the California Legislature to protect consumers by directly addressing “the signifcant concerns … inherent in dual agency, whether at the salesperson or at the broker level.”

Concerns with Dual Agency While most agents understand the basics of agency law, not all understand the pitfalls of dual agency. In an exclusive agent situation, the buyer’s agent represents the buyer and the seller’s agent represents the seller. Representing a client, whether in a dual agency or an exclusive agency, means the real estate agent becomes the fduciary of the client and everything the agent does related to that transaction must be in the client’s best interest. Tis means counseling the client on price, negotiating for the client’s best interest, and advising the client on various decisions. It also means placing the client’s interest above the agent’s own interest. Te concern with dual agency is the inherent confict that arises when representing both parties (i.e., the buyer and seller) in a transaction. Tis is especially important when it comes to price. It is the buyer’s agent’s obligation to negotiate the lowest possible price for the buyer. It is also the seller’s agent’s obligation to negotiate the highest possible price for the seller. Since the dual agent cannot focus both on negotiating for the lowest price and negotiating for the highest price, it is easy to see how dual agency creates a confict. California lawmakers attempted to address this problem by placing limitations on dual agents. Section 2079.21 of the Civil Code states that a dual agent “may not disclose to the buyer that the seller is willing to sell the property at a price less than the listing price, without the express written consent of the seller,” nor may the dual agent “disclose to the seller that the buyer is willing to pay a price greater than the ofering price, without the express written consent of the buyer.” However, this provision does not change in any way “the duty or responsibility of a dual agent to any principal with respect to confdential information other than price.” Another potential pitfall with dual agency is that the agent may be unethically infuenced by the double commission. Since the dual agent receives commission from both the buyer and the seller, the agent may become over-incentivized to close the deal at all costs, even when the deal is not in the best interest of one or both clients. For instance, a dual agent may also be tempted to not disclose a material fact about the property for fear of losing out on the double commission if the transaction does not close. An agent can also be unfairly infuenced by a longstanding relationship with a client. Te buyer or seller may have a special rapport with the agent because of a prior transaction. In this case, the parties and agents may be better served to use separate agents because of the perception that the agent is more dedicated to the party with whom they have a pre-existing relationship. On the other hand, one of the positive aspects of using a dual agent is streamlining the transaction process. Ofers and counterofers reach the parties faster, documents and forms are prepared and transmitted with ease, property inspections are easier to schedule, and the buyer has access to more information about the property. Another positive aspect to dual agency is that the listing agent may ofer to reduce his or her commission when representing both the buyer and the seller. Tis makes the dual agency relationship more attractive to the seller since the reduced commissioner efectively reduces the seller’s cost. Final Recap Dual agency is a hot-button issue in the real estate community. Some agents are passionately in favor of dual agency, while others are strongly opposed. Although several states have banned dual agency, the practice is legal in California. However, dual agency relationships carry risks for both the agent and the client, and both should weigh its pros and cons based on the specifcs of the transaction and their individual level of comfort. If a broker is interested in serving as a dual agent, the Department of Real Estate reminds brokers of their fduciary duties owed to each client, the dangers of representing both the buyer and seller, and recommends disclosing more (rather than less) information to their clients.