Duty To Disclose Or Duty To Investigate?

Whether imposed by statute or case law, a real estate professional, broker, associate, salesperson, or their brokerage has a fiduciary duty of disclosure to their client. In real estate litigation consulting, disputes often arise over whether an agent has fulfilled that duty. 

The scope of their duty of disclosure depends upon the nature of their representation. If acting solely as a seller’s agent, California Civil Code Section 2079.16 requires “Diligent exercise of reasonable skill and care in performance”, and imposes “a duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of the parties.”

Examples of such facts cited in Horiike v Coldwell Banker (2016) 1 Cal. 5th 1024 include: “the fact that a murder had been committed on the property; a hostile family who delights in tormenting their neighbors with unexpected noises or unending parties; house sold was constructed on filled land; and that improvements were added without permits, in violation of zoning regulations or building codes (citations omitted).”

Civil Code section 2079(a) requires a seller’s agent “to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective buyer all facts materially affecting the Value or desirability of the property that an investigation would reveal…” The listing agent owes a fiduciary duty solely to his client and is entitled to rely on the seller’s representations regarding material facts, absent knowledge of their falsity, and is under no obligation to investigate further.

However, the fiduciary duty owed by a buyer’s agent to his client requires investigation of the material facts of the transaction rather than simple reliance on seller’s representations. Failure to diligently investigate seller’s representations risks liability.  

In Salahutdin v Valley of California, Inc. (1994) 24 Cal.App. 4th 555, the buyer’s primary concern was purchasing a property capable of being subdivided at a later date. The area’s applicable zoning requirement was that the parcel exceed one acre. The buyer’s agent located a property whose lot size was indicated at 1 acre + on the multiple listing. Visual inspection of the property showed a perimeter fence enclosing more than an acre. Based on this information the broker assured the buyer that the property could be subdivided and the sale proceeded.  

Subsequently, however, it was determined that the fence in question did not accurately reflect the property’s boundaries and that the parcel was only .998 acres and could not be subdivided.

The trial court found the buyer’s agent liable for constructive fraud based on his representations of lot size without confirming their accuracy. Note that constructive fraud may be found absent any actual fraudulent intent, where a fiduciary duty was breached by the agent’s passing on misrepresentations without independent investigation of their accuracy. In these matters, the testimony of a real estate expert witness is often used to understand whether the broker or agent met the applicable standard of care. No liability was found against the seller’s agent who merely passed along the seller’s representation of the lot size.

The distinction between the respective duties of buyer’s and seller’s agents, as well as the perils of dual representation in this regard, was at the heart of the Horiike v Coldwell Banker case discussed earlier. In this case the buyer, Horiike, and the seller were represented by Coldwell Banker agents in separate offices, and Coldwell Banker was designated as a dual agent for both buyer and seller.  

Based on building permits and seller’s representations, his agent prepared a marketing flyer stating that the property had approximately 15,000 square feet of living space. Horiike relied on this representation, despite several detailed advisements from the seller’s agent that the square footage had not been verified, and purchased the property. Upon discovering that the actual square footage was substantially less than 15,000, Horiike sued the seller’s agent and Coldwell Banker, while stipulating that his agent bore no responsibility for failing to investigate the square footage.

The trial court found the seller’s agent had no liability for simply relating seller’s representations to the buyer. As the seller’s agent, he had no duty to investigate these representations. Based on this finding and the stipulation absolving Horiike’s agent of liability, the court instructed the jury that Coldwell Banker’s liability would have to be based on a finding that an agent of Coldwell Banker, other than the agents for buyer and seller, had breached a fiduciary duty to the buyer. Unsurprisingly, the jury returned a verdict in favor of Coldwell Banker.

An appellate court, and ultimately the California Supreme Court, disagreed and remanded the case to retry the issues of breach of fiduciary duty by both Coldwell Banker and the seller’s agent. Simply put, the court observed that when Coldwell Banker opted to represent Horiike as a dual agent they assumed a fiduciary duty to both buyer and seller under the dual agency agreement. 

As the seller’s agent was acting under Coldwell Banker’s corporate license he could not represent a party independently of Coldwell Banker and as their agent assumed their duties to both parties. The effect of this finding was to impose on the seller’s agent a duty to have actively investigated the square footage representations made to Horiike, despite having no contractual relationship with Horiike and

(a) providing Horiike with the form advisory providing, in part, “Only an appraiser can reliably confirm square footage. Representations in a Multiple Listing Service, advertisements…are often approximations or based on inaccurate or incomplete records. Brokers have not verified any such representations.”
(b) having Horiike sign an advisory stating that “Broker…shall not be responsible for verifying square footage.”

As this case clearly demonstrates, dual representation in real estate cases poses substantial risk requiring extreme diligence to determine an agent’s fiduciary duty to all parties.

Finally, note that Salabutdin and Horiike also reinforce the old adage that “an ounce of prevention is worth a pound of cure.” 

Utilizing a surveyor to verify lot size when the issue is critical to the transaction or an appraiser to verify square footage exemplifies the prudent exercise of due diligence to avoid the far more onerous burden of litigation. While such actions may not be required, any additional time or expense is minor when compared to the risks associated with potentially inaccurate representations and the disputes that may follow, including the possible need for dispute advisory services.