Category Archives: Duties of Real Estate Brokers

Buyer’s Deposit and Broker Duties

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In my law practice, I often counsel buyers who are in escrow and can cancel escrow as they have not released some contingencies, but the Seller refuses to release the buyer’s deposit.

In California, if you are using the C.A.R. (California Association of Realtors) RPA (Residential Purchase Agreement) form, the buyer  can elect to have several types of contingencies.

In some cases, it may not be clear to a buyer or agent whether a particular “issue” is covered by one or two different contingencies.  This is where the buyer’s agent must discharge his or her Fiduciary Duty of Care, Diligence and Loyalty and advise the Buyer to either seek legal advice or not remove any contingencies until all due diligence items are clarified, lest they be in jeopardy of losing their deposit.

For example, let’s suppose you are a Buyer and you have made it clear to your agent that “square footage” of the house is very important for you. Your agent advises you to release your “physical inspection” contingency while you wait to release your “appraisal” contingency.   Let’s further suppose that you may not receive complete and accurate information regarding square footage until your appraisal report comes in, and you have not received the report yet.

How safe is it for you to remove your “inspection” contingency even if you still have your appraisal contingency open, despite your agent’s assurances to move forward with the sale?

The NAR and California Code of Ethics and the Standard of Care in California set the bar high for real estate agents and brokers, in terms of what their obligations are to their clients.

In California, Agents and brokers are held to be “fiduciaries.”   Under California law, fiduciaries are held to a very high standard much like “Trustees” of a trust.

In these circumstances, I believe that California’s “standard of care” and the law of fiduciary duty requires that a real estate agent not advise their client to lift contingencies rather protect their client by creating the necessary time and space for the client to receive, review and understand the ramifications of the material information obtained prior to lifting a contingency.

Creating this time and space, free from pressure, starts when a real estate agent is first drafting the offer. It continues in the “manner” in which the agent documents the client’s file so as to make the client’s subsequent requests be deemed “reasonable.”

Creating additional time may become increasingly difficult if the agent is a dual agent.  Dual agency is fraught with peril and covered in my other posts.

The best practice is to draft long enough contingencies and set them all to expire at the latest date possible, so as to avoid this type of scenario.

In this particular case, the appraisal contingency will not be the appropriate vehicle to use to cancel escrow due to square footage issues, if the buyer has already removed his “physical inspection” contingency.

 

A new California appellate case expands liability for real estate brokers

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Holmes v. Summer 188 Cal.App.4th 1510 (2010).

Prior to our current foreclosure debacle, I believe that this case may have come out differently. However, in this era of rampant foreclosures and upside-down properties, this ruling makes sense. The appellate court admits that its holding is based in part upon the current economic climate.  It stated that transactions like this one that are “doomed to fail” in a “downtrodden economy” when the public needs to have confidence in real estate agents and brokers.

Holmes v. Summer holds that if a real estate broker knows that a listed property is substantially upside-down and cannot be sold without a “short sale”, that broker has a duty to disclose to this material fact to a potential buyer. In this case, the buyer entered into a contract with a seller to purchase a house for $749,000. Then, the buyer (in reliance upon the sale) sells his own home to get the money to buy the new one, only to discover to his horror that the loans on the house total over $1.14 million, so the agreed upon purchase price won’t cut it. Holmes v. Summer, G041906 (Cal. App. 4th, filed Oct. 6, 2010). For the sale to have gone through, either the seller would have had to come up with the extra $392,000 or the various lenders would have agreed to write it off. Justice Moore writes “$392,000 is not exactly ‘chump change.”

Here, homebuyers sued the seller’s broker, claiming that the broker was under an obligation to disclose to the buyers that the property was over-encumbered and could not be sold at the agreed upon purchase price.

The Court of appeal reversed the trial court’s judgment sustaining the brokers’ demurrer to the complaint. The Court found that under the facts of this particular case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.

The seller’s broker argued that she had a duty not to disclose the seller’s confidential financial information. However, the court ruled that the existence of the three deeds of trust was public record and could be disclosed.

I believe that even though most competent brokers do disclose the existence of a short sale on the MLS and do use the C.A.R.’s “Short-Sale Addendum”, the risks and the details of the “short fall” in dollars are often not clearly communicated to buyers.

Thus, this decision expands broker liability.

The court now tells brokers they are “obligated to disclose to the buyers” when there is “a substantial risk that the seller [can] not transfer title free and clear of monetary liens and encumbrances.”

This ruling raises troubling issues for brokers and it will be interesting to see if the California Association of Realtors becomes involved in the case if it is appealed further.

For a copy of the court opinion please click here.