Hello everybody. Real estate agents, including brokers and salespersons, are back in our legal news. In separate cases, the California Supreme Court and the California Court of Appeal have once again ruled against real estate licensees for not strictly complying with their obligations under real estate law. One case involved the failure of the real estate broker to obtain a $925,000 commission on a $46,000,000 sale of a home in Bel Air, and the other involved the potential liability of a seller’s individual agent to disclose that the home he advertised as approximately 15,000 sq. ft. in his marketing flyer might only have been 9,434 sq. ft.
The Case of the Lost $925,000 Commission
For more than 100 years it has been the law in California that for a broker to recover a real estate commission from either a buyer or seller, some aspect of the agreement must be documented by a signed writing. A verbal agreement is insufficient.
Customarily, it is the seller in a transaction that pays the commission upon the close of escrow. The broker representing the seller (i.e., the “listing broker”) typically has the seller sign a listing agreement which ensures a commission to the listing office, as well as to the broker who represents the buyer, typically called the “selling broker.”
In 2014, certain well-to-do husband and wife buyers verbally engaged their longtime friend and real estate broker Stephen Shapiro to find them a home to purchase in Los Angeles. Shapiro was the principal of the prestigious Beverly Hills real estate company known as Westside Estate Agency, Inc. (“Westside”). Shapiro verbally agreed to represent the potential buyer, but never put the agreement into writing.
In October 2014, Shapiro identified a potential property for the buyers, namely a $65 million estate in Bel Air. Through Shapiro, the buyers made a $42 million offer on the property. The buyers and seller were unable to reach agreement for the terms of the purchase.
In February 2015, the buyers made a $47 million offer on the same property through their personal attorney who also acted as their broker. Escrow closed a month later at a final purchase price of $46,250,000. The attorney applied his two percent $925,000 cooperating broker’s fee against the purchase price and escrow closed in March 2015.
In April 2015, Shapiro’s company, Westside, sued the buyers for breach of an implied contract as well as the buyer’s attorney for intentional interference with an implied contract. (Westside v. Randall) Westside sought $925,000 as compensatory damages, which was the same amount that the buyer’s attorney obtained as a commission but credited to the purchase price on behalf of his clients.
The buyers and their attorney sought to have the case dismissed on the basis that it was barred by the Statute of Frauds. The Statute of Frauds is a legal doctrine that provides that unless a contract or other written notation of a verbal commission agreement is in writing and signed by the buyer or seller, as the case may be, it is unenforceable by the broker.
Unfortunately for Westside, as well as Shapiro, they never had the buyers sign anything that assured Westside that if the buyers purchased the property, Shapiro’s company would receive a commission.
In December 2016, the Court of Appeal ruled against Shapiro and his firm, holding that there are three exceptions to the rule that commissions agreements must be in writing, but none of them applied in the case.
The first exception protects against actual fraud. For example, if the principal has told the agent that the principal had signed the commission agreement, when in fact he had not, that would be an instance of fraud and an exception to the rule.
Second, a broker might be able to recover a commission if the buyer and seller execute a binding purchase agreement which specifies that the broker will receive a commission, and thereafter the buyer and seller cancel the agreement so as to avoid paying the commission.
Third, the broker may collect a commission based on an unwritten agreement if his client subsequently ratifies (i.e., approves of) that agreement in writing.
In the Westside Estate Agency case, none of those exceptions applied. Accordingly, the Court of Appeal upheld the dismissal of Westside’s lawsuit to recover the $925,000 commission. No doubt, that was the end of the longtime friendship between the buyers and Shapiro.
The Case of the Agent Who May Have Failed to Advise of Discrepancies in Square Footage
In a case decided in December 2016 by the California Supreme Court (Horiikev v. Coldwell Banker), the high court held that when a real estate brokerage firm, such as Coldwell Banker, represents both the buyer and seller in the sale of a home, the seller’s individual agent has a duty to disclose to the buyer any apparent discrepancy in the square footage of the property.
In that case, an individual salesperson who worked for Coldwell Banker at its Malibu office listed a home in Malibu. When preparing to list the property, that salesperson had obtained public record information from the County Tax Assessor’s office which stated that the property’s living areas were 9,434 sq. ft. Evidently, the listing agent also obtained a copy of the building permit which described the main house as a single family residence of 9,224 sq. ft. and a guest house of 746 sq. ft.
During a viewing of the property, the seller’s agent gave the prospective buyer a flyer he prepared which stated that the property offered “approximately 15,000 square feet of living areas.”
Because the prospective buyer’s individual salesperson also worked for Coldwell Banker, albeit out of its Beverly Hills office, Coldwell Banker became a dual agent for the buyer because it represented both sides of the transaction.
After purchasing the Malibu estate, the buyer, a resident of Hong Kong, learned that the residential portions of the property were not 15,000 sq. ft., but rather a little shy of 10,000 sq. ft.
He then sued Coldwell Banker and the individual listing agent (but surprisingly, not his own agent who worked at Coldwell Banker), claiming that the defendants should be liable for breach of fiduciary duty and misrepresentation. The Chinese national asserted that he overpaid by $5,000.000.
He also alleged that Coldwell Banker and the individual listing agent could be held liable for breach of a fiduciary duty if it were shown at trial that the agent failed to disclose the discrepancy between the square footage in the flyer and the square footage as shown in publicly recorded documents.
The seller’s individual agent claimed that he did not owe a fiduciary duty to the buyer because he, unlike Coldwell Banker, only represented the seller. The trial court agreed and dismissed the case against the individual Coldwell Banker listing agent.
Later, the buyer appealed that dismissal to the California Supreme Court. The high court reinstated the lawsuit, holding that not only might Coldwell Banker, as a dual agent of the buyer and seller be liable to the buyer, so too might the individual listing agent in the Malibu office.
The Supreme Court explained that an individual listing agent owes a duty to a buyer to inform about a residence’s square footage, and specifically, to investigate and disclose all facts materially affecting the home’s value or desirability whether or not those facts could also have been discovered by the buyer or the buyer’s agent.
While the Supreme Court specifically said that it expressed no view about whether, as a factual matter, the agent breached his duty, it ordered that the case be returned to the lower court for a new trial against the individual listing agent.
Two lessons can be learned from these recent cases.
First, real estate brokers and their licensed agents should disclose to the buyers any apparent inconsistency between house or lot sizes which they represent verbally or in their promotional literature as compared to that which is contained in the public records. The listing broker and individual salesperson have a duty to verify the accuracy of information transmitted to the buyer, or alternatively explain that it is unverified and that the buyer should ascertain the accuracy for himself.
Second, when representing a buyer, a broker should be certain to have both himself and the buyer sign a written agreement or memorandum which provides for a commission if the agent is expecting to get paid by the buyer, rather than the seller. Verbal commission agreements will almost always be unenforceable.
While both of the preceding cases involved the sale of very expensive single family residences, listing brokers and their individual listing salespersons should be forthcoming with disclosures to buyers with all kinds of properties, including apartment buildings, when they are aware of facts which may affect the value or desirability of the land or the improvements..
Additionally, brokers and salespersons representing buyers and who contemplate that the buyer will pay them a commission, should sign a written commission agreement with the purchaser, including purchasers of apartment buildings, if they expect to receive a commission from their client.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 40 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell. An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity.
The foregoing article was authored in January 2017. It is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Questions of a general nature are warmly invited. Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California 90067. Phone: (310) 277-7300.