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“Hot Markets Put Agents in the Hot Seat; Don’t ignore your Fiduciary Duties”

By James L. Bothwell, Partner and Collin H. Craig, Associate

In today’s red hot real estate market, many potential homebuyers feel compelled, if not forced to adopt extraordinary measures to stay in the running and close on their desired home, including not only offering amounts well above asking price, but also waiving other protections such as appraisals and inspections.

Take, for example, John and Jane Smith, hypothetical homebuyers in a California suburb. Desperate to find a home, the Smiths have attended countless open houses and submitted several offers, none of which have been accepted; likely missing out to someone willing pay way over ask and with all cash.

Following a walkthrough of a beautiful three bedroom, two bathroom home, the Smiths instruct their real estate agent, Anne, to convey an offer to the sellers’ agent, Mike. Mike informs Anne that due to the nature of the other offers, the Smiths must make their offer more competitive by, for example, waiving any third-party inspections prior to close of escrow. Anne communicates this information to the Smiths, who agree to waive any inspections without a moment’s hesitation. Anne updates the Smiths’ offer to include a waiver of inspections, which the sellers ultimately accept. Anne is thrilled, as she will finally be able to place two satisfied clients into the home of their dreams, without any concerns that a third-party inspection will possibly cause the deal to fall through. However, Anne fails to recognize the inherent dangers arising from this transaction.

In respect to the transaction between the Smiths and the sellers, Anne is acting as a fiduciary for the Smiths, her principal. Thus, she is required to comply with certain fiduciary duties. The question is: what fiduciary duties does Anne owe to the Smiths in this context?

Well, to answer this question, we must first ask: what is a fiduciary duty? Judge Cardozo once defined this duty as “the punctilio of an honor the most sensitive.” Meinhard v. Salmon (1928) 249 N.Y. 458, 464. No offense to Judge Cardozo, but this definition inspires more questions than answers. Thankfully, California’s Courts have performed more detailed analyses of a fiduciary’s duty to its principal during the course of a real estate transaction.

In Batson v. Strehlow, the California Supreme Court explained that “[t]he law imposes on a real estate agent ‘the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his beneficiary.’ [Citations omitted]. This relationship not only imposes upon him the duty of acting in the highest good faith towards his principal but precludes the agent from obtaining any advantage over the principal in any transaction had by virtue of his agency. [Citation omitted]. ‘Such an agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal's decision.’ ” Batson v. Strehlow (1968) 68 Cal.2d 662, 674–675.

More recently, the Fourth Appellate District Court, in Field v. Century 21 Klowden-Forness Realty, elaborated on the scope of this fiduciary duty, stating as follows:

The broker as a fiduciary has a duty to learn the material facts that may affect the principal's decision. He is hired for his professional knowledge and skill; he is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal's decision, and he has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision. The agent's duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information […] The facts that a broker must learn, and the advice and counsel required of the broker, depend on the facts of each transaction, the knowledge and the experience of the principal, the questions asked by the principal, and the nature of the property and the terms of sale. The broker must place himself in the position of the principal and ask himself the type of information required for the principal to make a well-informed decision. This obligation requires investigation of facts not known to the agent and disclosure of all material facts that might reasonably be discovered.

Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25–26.

As such, Anne must take several steps to properly satisfy her fiduciary duty to the Smiths. First, she must inform the Smiths of “the propriety and ramifications of the decision” to waive third-party inspections. In this regard, Anne should, at the very least, include the California Association of Realtors (“C.A.R.”) Buyer’s Inspection Advisory form within the scope of the purchase agreement. This standard form advises a buyer to retain third-party professionals to perform an investigation of the entire property.

Furthermore, Anne should clearly advise the Smiths, in writing, that she is not advising the Smiths to waive a professional inspection of the property. Although the C.A.R. Buyer’s Inspection Advisory form discloses the consequences of such a waiver, the Smiths could misinterpret Anne’s communication of the seller’s agent’s instructions as her own recommendation to waive any third-party inspections. See Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 562–563 (“Because of the fiduciary obligations of the broker, the principal has a right to rely on the statements of the broker”).

In order to ensure there are no misunderstandings in this regard, Anne should clearly explain, in writing, that she is not recommending that the Smiths waive their right to a third-party inspection, as there may be conditions or defects which may not be apparent from a layperson’s walkthrough of the home but that may be identified through a more detailed inspection performed by a professional inspector. See Chapple v. Big Bear Super Market No. 3 (1980) 108 Cal.App.3d 867, 875-876.

If the Smiths elect to proceed, Anne should request that the Smiths complete the C.A.R. Buyer’s Inspection Elections form, which reiterates the import of a professional inspection and advises the buyer that the buyer’s broker recommends a professional inspection relative to all aspects of the property. Moreover, the form provides that if the buyers elect to forgo a professional inspection, they are acting against the broker’s advice. If the Smiths confirm through this form that they are, indeed, comfortable with waiving any professional inspections of the property, Anne should then include a C.A.R. Buyer’s Inspection Waiver form in the purchase agreement. This form yet again advises the Smiths of the importance of a professional inspection and cautions the Smiths that if they desire to proceed in the absence of such an inspection, they are doing so against the advice of their broker.

Are all of these forms and communications overkill? Perhaps. But they are necessary to ensure that an agent complies with best practices in this regard.

Next, Anne must ask: what information must the Smiths be aware of prior to purchasing the home? Is Anne required to inspect every nook and cranny of the home without the assistance of professional inspectors?

Fortunately, California does not require a real estate agent to perform the same type of detailed inspection as a professional inspector. Civil Code Section 2079 merely requires an agent to conduct a reasonably diligent visual inspection of the property. If, during this visual inspection, the agent discovers or observes certain “red flags,” then the agent has a duty to investigate these issues in additional detail. See Salahutdin v. Valley of California, Inc., supra, 24 Cal.App.4th 555, 562, fn. 3; Padgett v. Phariss (1997) 54 Cal.App.4th 1270, 1286.

For example, if Anne observes a stucco crack on the exterior of the home, Anne must at least disclose this information to the Smiths and advise them that a professional should inspect this condition. See Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 416 (“[T]he fiduciary duty of [a dual agent real estate agent] were fulfilled when the buyer was informed that a construction defect lawsuit had been filed and settled. At that point, the buyer should have investigated further.”). The agent’s visual inspection is limited to “a reasonably competent and diligent ‘visual’ inspection and disclosure of any material defects which ‘such an investigation’ would reveal.’ ” Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 308. Additionally, the inspection “does not include or involve […] areas that are reasonably and normally inaccessible to such an inspection.” Ibid. Thus, Anne would not be required to inspect an inaccessible crawl space or other area of the home which is “reasonably and normally inaccessible to such an inspection.”

Finally, at the time Anne conducts her visual inspection of the home, it is possible that the sellers and/or the sellers’ agent will disclose or impart certain information about the property. For example, Anne may notice a walking trail on the property that the sellers’ agent may identify as a private trail that also serves as a public easement. To ensure compliance with her fiduciary duty to the Smiths, Anne must take care to either verify this information or disclose to the Smiths that the information was provided by the sellers’ agent and has not been verified. See Field v. Century 21 Klowden-Forness Realty, supra, 63 Cal.App.4th 18, 26; Salahutdin v. Valley of California, Inc., supra, 24 Cal.App.4th 555, 562.[1]

In summary, it’s not time for Anne to celebrate just yet.. The Smiths’ decision to waive any third-party inspections, while potentially streamlining the escrow process, has imposed a larger burden on Anne to ensure compliance with her fiduciary duty to the Smiths. She should tread carefully, ensure all communications are in writing, and err on the side of disclosure.

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.

[1] The duty to verify or disclose does not extend to information acquired from a preliminary title report prepared by a title company. The non-published Fourth Appellate District decision, Swartz v. Coldwell Banker Residential Brokerage Company, held that a real estate agent “does not have an affirmative duty to independently scour the public record to ‘double check’ the work of a title company.” Swartz v. Coldwell Banker Residential Brokerage Company (Cal. Ct. App., Nov. 15, 2013, No. D062324) 2013 WL 6048996, at *6. The Court further held that “[a] real estate agent is entitled to rely on the reporting of a title company to the same extent as a purchaser of real property.” Ibid.

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