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Lane v. Oustalet: Dual Agent Breaches Fiduciary Duty by Giving Information to Only One Client

A Mississippi appellate court has considered whether a real estate salesperson, acting as a fully disclosed dual agent in a transaction, breached her fiduciary duty to a buyer when the salesperson disclosed a termite inspection report to the seller but not to the buyer.

Kathryn and Baxter Lane ("Buyers") were interested in purchasing property owned by A.J.M. Oustalet ("Seller"). The Buyers contacted real estate salesperson, Sherry Owen ("Salesperson") of Alfonso Realty, Inc. ("Brokerage"), about the property. The Buyers received a property condition disclosure statement ("Disclosure Statement") from the Salesperson which stated that the home had prior termite damage. After receiving the Disclosure Statement, the Buyers and Seller entered a purchase agreement. The Buyers agreed to have the Salesperson serve as a dual agent, meaning the Salesperson represented both parties to the transaction. Both parties signed the required disclosure form agreeing to this type of representation. The purchase agreement specified that the Seller would provide at closing a termite certificate for the property that stated there were no signs of termite infestation or termite-caused damage on the property. The contract went on to specify that if the inspector found a termite infestation or damage, the Seller would be responsible for correcting any structural damage caused by the termites. The contract also gave the Buyers the ability to cancel the purchase agreement if they found the termite damage unacceptable.

The Salesperson arranged for a termite inspection of the property. The inspector wrote a report ("Report") that described unrepaired termite damage and recommended the hiring of an expert to determine if repairs were necessary. The inspector delivered the Report to the closing attorney, Jerry Rosetti ("Attorney"). The Attorney's fees were paid by the Buyers to insure that he would represent their interests at the closing. The Attorney reviewed the Report and gave it to the Salesperson, recommending consultation with an expert about the termite damage. The Attorney did not give a copy of the Report to the Buyers.

The Salesperson gave a copy of the Report to the Seller and advised him of the need to have a construction expert evaluate the termite damage, but did not give a copy of the Report to the Buyers. The closing occurred as scheduled, following which the Buyers hired their own termite company to evaluate the property. They also obtained a copy of the Report at this time. Following the receipt of both termite inspection reports, the Buyers hired two contractors to evaluate the amount of damage the termite infestation had caused. Both contractors estimated that the structural repairs would cost over $35,000. The Buyers filed a lawsuit against the Seller, the Attorney, the Salesperson, and the Brokerage. The trial court ruled in favor of the Seller, the Attorney, the Salesperson, and the Brokerage, and the Buyers appealed.

The Court of Appeals of Mississippi partially affirmed the rulings of the trial court and partially reversed the rulings of the trial court. The court first considered the allegations against the Salesperson and the Brokerage. The Buyers alleged that the Salesperson had breached her fiduciary, or heightened, duty to them by failing to disclose the termite damage to them prior to closing. Quoting from Lee Hawkins Realty, Inc., v. Moss (click here to read summary), the court found that a salesperson had a "duty to use the degree of diligence and care which a reasonable prudent person would ordinarily exercise in the transaction of his business." The court found that because of this duty, a real estate licensee owes a fiduciary duty to the licensee's client and this requires "full disclosure, frankness and honesty in dealings with the [client]."

Here, the Salesperson was a fully disclosed dual agent, meaning that she owed both the Buyers as well as the Seller a fiduciary duty. The court ruled that the Salesperson violated her fiduciary duty to the Buyers when she failed to inform the Buyers about the Report after she had notified the Seller. If the Buyers had received the Report, they may have exercised their option of canceling the contract. Since the Salesperson beached her fiduciary duty to the Buyers, the court reversed the trial court's ruling in favor of the Salesperson and sent the case back to the trial court for a jury to determine the amount of liability to impose upon the Salesperson and Brokerage.

Next, the court considered the Brokerage's public policy argument against imposing liability on the Brokerage. The Brokerage argued that it would be unfair to impose liability on a real estate broker for repair costs that no one knew existed until after the closing. The court said that while it agreed with the Brokerage's argument, those were not the facts. The Salesperson received a recommendation to retain a consultant to determine whether repairs were necessary before closing. Since the Salesperson only made this information available to the Seller, she breached her duty to the Buyers. Thus, the court rejected the Brokerage's public policy argument.

The court also considered the allegations against the Seller and the Attorney. The court affirmed the trial court's ruling in favor of the Seller, finding that agents of the Buyers had received the Report prior to closing and that was all that was required of the Seller. The court affirmed the rulings in favor of the Attorney, finding that the Buyers had failed to contradict the evidence submitted by the Attorney that he meet the standard of care required of an attorney in Mississippi. Thus, the court reversed the rulings in favor of the Brokerage and Salesperson, but affirmed the rulings in favor of the Attorney and the Seller.

Lane v. Oustalet, 850 So. 2d 1143 (Miss. Ct. App. 2002).