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"Do Tell."

By Joshua H. Willert, Partner

While every broker is likely familiar with the fact that they owe their clients a fiduciary duty in connection with any given transaction, they may not fully grasp the nature and potential extent of duties owed to non-clients as well. Under both the Real Estate Law and general tort law principles, brokers owe a duty of care to not cause an unreasonable risk of harm to the other parties to the transaction. (See e.g., Bus. & Prof. Code §§ 10176-10177.2; Hale v. Wolfsen (1969) 276 Cal. App. 2d 285, 292.) This duty is based in large part not only on the broker’s knowledge and training, but the public's general reliance on their truth and honesty.

The existence, nature and scope of such duties can depend, in some instances, on the unique facts of a given transaction. For example, in Merrill v. Buck (1962) 58 Cal. 2d 552 a broker who conducted a showing for a potential lessee forgot to point out that the stairs leading to the basement were dangerous and defectively constructed. (Id. at p. 562.) The lessee fell down the stairs after she leased the premises and moved in. Both the broker, and her employer were found liable for the lessee’s injuries following a jury trial. In upholding the jury’s verdict on appeal, the court held that:

“having affirmatively undertaken to show the house to [the prospective lessee] in the regular course of their business with the purpose of earning a commission if she decided to rent it, these defendants [broker and salesperson] were under a duty of care to warn her of a concealed danger in the premises of which they were aware and from which her injury might be reasonably foreseen if she did become a tenant.” (Id. [emphasis added])

In other instances, a brokers’ duty is expressly set forth in specific statutes and regulations. For example, brokers owe a broad obligation to act honestly and fairly in dealings with all parties to a transaction (e.g., no misrepresentations or false promises to influence, persuade or induce third-party conduct). (See Bus. & Prof. Code §§ 10176(a), (b), (i), 10177(j); Nguyen v. Scott (1988) 206 Cal.App.3d 725, 735-736.) The penalties for breaching these duties can be substantial.

For example, in Ward v. Taggart (1959) 51 Cal.2d 736, a broker was ordered to disgorge “secret profits” gained through deception practiced upon a third-party buyer. The facts in Ward were as follows:

Plaintiff’s broker was instructed to look for properties that would fit the Plaintiffs’ specific needs. During a conversation about unrelated matters, Defendant (also a real estate broker) told Plaintiff’s broker that he had several acres of land in Los Angeles County for sale. Plaintiff’s broker made an offer to Defendant to purchase one of the parcels ($4,000 per acre). In response, Defendant falsely told Plaintiff that the seller had refused the offer and would not take less than $5,000 an acre for the property. Plaintiff ultimately ended up purchasing this parcel for that price. After the transaction was complete, Plaintiff learned that Defendant never had the listing, and had never presented the initial offer. Instead, Defendant presented his own offer of $4,000 per acre to the seller, which was accepted. After purchasing the property for himself, the Defendant then resold it to Plaintiffs at a profit of $1,000 per acre.

Even though the defendant broker was not the buyer's agent and therefore breached no fiduciary duty to the buyer, the Court found he violated his statutory obligation to be honest and truthful in his dealings. Per the Court, this broker therefore held the profits he obtained as constructive trustee for the buyer and was liable to the buyer on an unjust enrichment/quasi-contract theory. (Id. at p. 741-743.)

Similarly, a seller's broker was found to have breached his duty of honesty and fair dealing by failing to transmit a potential buyer's offer to the seller, secretly competing with the buyer for the property, and ultimately purchasing the property for himself. (Nguyen v. Scott, supra, 206 Cal.App.3d at 737-741.) Though the broker did not resell the property to the aggrieved prospective buyer (and thus earned no “secret” monetary profit through deception like in Ward supra), the law did not permit him “to take advantage of his own wrong.” (Civ. Code § 3517.) Consequently, the broker held the property in constructive trust for the prospective buyer, who could compel a conveyance by tendering the consideration the broker paid for the property and assuming any obligation still owing to the original seller. (Id. at p. 737-741.)

The scope of these myriad duties are not without limits however. Notably, a broker's inspection and disclosure obligations run only to the “intended beneficiaries” of the broker's advice (ordinarily the buyer and prospective buyers). No inspection and disclosure duties are owed to third persons who are not parties (or in privity with parties) to the purchase and sale transaction. (See e.g., Coldwell Banker Residential Brokerage Co., Inc. v. Sup.Ct. (Salazar) (2004) 117 Cal.App.4th 158, 166.) Thus, when guests at buyer's newly-purchased home were injured when the home's balcony collapsed from a defective beam, Sellers Brokers were not liable because they owed no duty to the guests. (FSR Brokerage, Inc. v. Sup.Ct. (Blanco) (1995) 35 Cal.App.4th 69.) Per the Court, the guests had no customer relationship with Brokers and could not be classified as “intended beneficiaries” of the allegedly negligent information provided by Broker concerning the balcony's defect. (Id.)

A similar outcome was reached in Coldwell Banker Residential Brokerage Co., Inc. v. Sup.Ct. (Salazar), supra, 117 Cal.App.4th at 166-167. While living in his mother's newly-purchased house, Plaintiff (a minor) allegedly developed asthma caused by toxic mold in the house that was not disclosed by Seller's Broker. The court found that the injured party could not maintain a cause of action against the Broker because a broker-customer relationship existed only between his mother and Broker. The information supplied by Broker regarding the property was solely for the mother's benefit (to guide her in a real estate transaction). “Any benefit to, or effect on, [plaintiff minor] resulted not as an intended objective or purpose of defendant’s role as broker in the real estate transaction, but rather from [plaintiff's] relationship to [his mother] as buyer of the house.” (Id. at 166-167 [emphasis added].)

From the foregoing authority, it should be clear that the duty a Broker owes in a given situation can be varied and not always predictable. Thus, the safest course of conduct may well be, when in doubt, disclose it.

If you have any questions regarding the above or any other legal matter affecting your business, the experienced attorneys at Huguenin Kahn are here to assist you. The firm caters to a variety of business and individual clients in California, Washington, Nevada and Texas, and its principal office is located right here in Placer County. The attorneys at Huguenin Kahn are not only seasoned trial attorneys but have vast experience in a whole host of employment and transactional matters affecting the real estate industry. Please call for an appointment today at (916) 367-7098.

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