Agency Highlights: 1Q 2015

A. Cases

This section looks at two cases where damages were awarded for breaches of fiduciary duty based on misrepresentation. The key misrepresentations involved a development that was failing by the time the plaintiffs invested in it (Haena) and an undeveloped lot that did not have a legal access road (Helmke). In another case, a court determined that a broker cannot be liable for cancelling a listing if its client was not authorized to sell or lease the property (Open Container).

1. Haena v. Martin (California Court of Appeals, Jan. 12, 2015)

• A broker was found liable for using his inside knowledge of the market to induce the plaintiffs to give him money, which he told them was being invested in a real estate project, but was used to buy out his position in the project.

In Haena,¹ defendant real estate broker asked former clients to invest in promissory notes secured by real estate. After receiving interest payments and recouping the invested funds, the former clients gave the broker $25,000 to buy out an unnamed investor’s interest in a $408,000 promissory note financing the construction of twelve townhouses. The broker said the project was almost finished and that the note had second priority. The former clients invested more money into the notes over time. Four months later, the first lender foreclosed. The former clients discovered that the broker no longer owned any interest in his note, but had sold his interest to them and that the developer was in default.

The former clients sued, alleging intentional and negligent misrepresentation, breach of fiduciary duty and other claims. The trial court concluded that the broker had misled the former clients and he had breached his fiduciary duty as a real estate licensee. The broker had previously represented the former clients which gave rise to his fiduciary duty, and that duty carried over to the ill-fated investment. The trial court’s findings and the $363,380 verdict were affirmed on appeal.

2. Helmke v. Service First Realty, LLC (Arizona Court of Appeals Feb. 26, 2015)

• The broker, who was representing both parties to the transaction was found liable for misrepresenting the status of a planned access road to the property.

In this Arizona case, a real estate professional had been involved in subdividing vacant land.² She had discussed the lack of an access road with a civil engineer, who told her that it would take at least a year for the required preliminary work—including permitting—before any construction could begin. However, she represented to the eventual buyers that the access road was usable, stating that although the road was not done, “the county wouldn’t let us sell these lots . . . if this road weren’t built right.”³ Acting as a dual agent, the real estate professional provided several disclosures from the seller about the road, each of which showed legal and physical access to the lot. After the transaction closed, the buyers could not secure a building permit because the access road was built without a permit.

The buyers sued the broker and the seller, alleging breach of fiduciary duty and negligence-based claims. A jury returned a verdict for $318,200.47 and found the broker 70% at fault, making it liable for $222,740.33.

On appeal, the broker challenged the trial court’s instruction on the breach of fiduciary duty claim. The broker’s requested jury instruction stated that the broker was not liable for passing on wrong information from the seller unless the broker knew or should have known that the information was false. The court concluded that this instruction did not properly state that the real estate professional was acting as a dual salesperson and so owed a fiduciary duty to the buyer. Second, the fiduciary duty owed to the buyers required the broker to “‘protect and promote the clients’ interests,’ and, because a salesperson ‘occupies a confidential and fiduciary relationship with the client,’ [the broker] is ‘held to the highest ethical standards of fairness and honesty.’”⁴ The court also reviewed the evidence and concluded that it supported the jury verdict because the real estate professional consistently told the buyers “everything was good about the road” and that they “knew everything there was to know” about it.⁵ The verdict was affirmed.

3. Open Container, Ltd. v. CB Richard Ellis, Inc. (Ohio Court of Appeals, Jan. 13, 2015)

• A broker is not liable for removing a real estate listing from the MLS or taking down a “FOR SALE” sign when the broker learns that its client does not have authority to sell the property.

In Open Container,⁶ the tenant in a long-term lease made an offer to purchase property from a landlord. Even though the transaction never closed, the tenant believed there was an ongoing agreement that it could buy the property. Two years later, the tenant listed the property with CB Richard Ellis (CBRE). CBRE required documentation that the tenant had the authority to sell the property, and referred to the purchase agreement. CBRE listed the property and put up a For Sale sign. When the landlord saw the For Sale sign, it called CBRE and told CBRE that the purchase agreement was null and void. CBRE took down the sign and the cancelled the listing. The tenant brought CBRE into the subsequent eviction case, claiming that it wrongfully terminated the listing agreement. The trial court granted CBRE summary judgment, noting that Ohio’s licensing statute prohibits a broker from listing a property for sale or lease without the owner’s knowledge or consent.⁷ The appellate court affirmed.

B. Statutes and Regulations

1. Arkansas

The Arkansas General Assembly enacted a new provision relating to unlicensed personnel working for real estate brokers. Unlicensed personnel are not permitted to “engage in or offer to perform any practice, act, or operation” within the definition of a broker, except unlicensed personnel may receive a security deposit or payment for delivery to, and made payable to, the principal broker, real estate firm, or owner.⁸

2. Indiana

Indiana revised several parts of its real estate licensing regulations. One new provision states that listing agreements and authorizations to sell property must be in writing (including electronic writing) and that offers to purchase, or authority to purchase, must be conveyed immediately to client.⁹ Also, before a broker may acquire a direct or indirect interest in listed property, the broker must make the owner aware of the “broker’s true position.”¹⁰ The broker must disclose in writing to all parties involved in the transaction that the broker has such an interest and the fact that the broker is a real estate licensee.¹¹ Another new provision addresses “incompetent practice.” Incompetent practice includes (1) acting as both a real estate broker and an undisclosed client, and (2) inducing a party who has a written agency agreement or contract of sale to breach that agreement for the purpose of making a new contract.¹²

C. Volume of Materials Retrieved

Agency issues were identified ten times in seven cases. (See Table 1; some cases addressed more than one Agency issue.) Most of the cases addressed Breach of Fiduciary Duty. This result is consistent with the prior updates. Dual Agency, Buyer Representation and Agency: Other were also addressed in the case law. (See Table 2.) Two statutes and six regulations addressing Agency issues were retrieved.¹³ (See Table 1.) Most of these items were categorized as Agency: Other. (See Table 2.)

¹ Haena v. Martin, No. C066280, 2015 Cal. App. Unpub. LEXIS 170 (Cal. Ct. App. Jan. 12, 2015).
² Helmke v. Service First Realty, LLC, No. 1 CA-CV 14-0078, 2015 Ariz. App. Unpub. LEXIS 230 (Feb. 26, 2015).
³ Id. ¶ 3.
⁴ Id. at ¶¶ 10–11.
⁵ Id. at ¶ 13.
⁶ Open Container, Ltd. v. CB Richard Ellis, Inc., No. 14AP-133, 2015-Ohio-85, 2015 Ohio App. LEXIS 73 (Jan. 13, 2015).
⁷ Id. at ¶ 16 (quoting Ohio Rev. Code 4735.18(A)).
⁸ Ark. Code § 17-42-104(a)(6)(A) (2015) (Act 278, § 2; HB 1244).
⁹ 876 Ind. Admin. Code 8-2-1, -2 (2014).
¹⁰ 876 Ind. Admin. Code 8-2-5 (2014).
¹¹ 876 Ind. Admin. Code 8-2-6 (2014).
¹² 876 Ind. Admin. Code 8-2-7 (2014).
¹³ This update covers the 2015 legislative sessions for the states in Group I. The Group I states are: Arizona, Arkansas, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Maryland, Mississippi, Montana, New Mexico, North Dakota, South Dakota, Utah, Virginia, Washington, West Virginia, and Wyoming. Two states, Montana and North Dakota, do not meet in evennumbered years. The update also covers the end of the 2014 sessions for the legislatures in “Group IV.” Group IV includes: California, District of Columbia, Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Wisconsin. Group IV also includes the territories of Guam, Puerto Rico, and the U.S. Virgin Islands.