In May’s Courtside Newsletter, I discussed two recent cases decided by the California Courts of Appeal that will impact practices in the real estate field. This month will be a continuance of that theme.
The first case is Glen Oaks Estates Homeowners Association v. Re/Max Premier Properties, Inc., et al., which clarifies who has the ability to bring a lawsuit against REALTORS®. In 2005, Glen Oak Estates, located in Pasadena, experienced a landslide along its common slope area and common driveway. As a result of the landslide, in 2007 a lawsuit was filed against the HOA for negligence (DePaul v. Glenoaks Estates Homeowners Association). The HOA counter-sued the developers for indemnity and contribution. During this lawsuit, documents were produced by the developers, which lead to the instant action, Glen Oaks Estates HOA v. Re/Max. In the transactions with Glen Oaks Estates, the REALTORS® were acting as dual agents, both for the sellers/developers, and for the buyers/HOA members who purchased the parcels at Glen Oaks Estates. According to the HOA, the documents that were produced in the DePaul case indicated that the REALTORS® and agents were not acting in the best interests of both the sellers and the buyers. The HOA sued Re/Max Premier Properties, Inc., Dilbeck Realtors GMAC Real Estate, and the agents involved in the Glen Oaks Estates transactions for unfair business practices, breach of fiduciary duty, and intentional misrepresentation.
Based on the documents produced in the DePaul case, the HOA’s complaint alleges that the REALTORS® engaged in unfair business practices by violating the Subdivided Lands Act. The complaint alleged (1) that the REALTORS® failed to provide buyers with a public report regarding the property or other transactional documents prior to the execution of the sales contract; (2) that the REALTORS® engaged in false advertising by failing to disclose, through flyers or other publications, that Glen Oaks Estates was a common interest development subject to the requirements of the Subdivided Lands Act and the regulations of the DRE; and, (3) that Re/Max engaged in unfair business practices by falsely advising developers that the DRE did not require a homeowners association for the Estates and by collaborating with the developers to low-ball the budget.
The HOA further alleged that “the Realtors breached their fiduciary duties to the members of the HOA by failing to provide a final public report, a DRE-approved budget, and other required disclosures and transactional documents pursuant to the Subdivided Lands Act,” failed to investigate the legitimacy of soil reports provided by Pioneer Soils Engineering, Inc., and failed to warn HOA members that the soil reports might not be valid.
Based on these allegations, the HOA claimed that “the HOA members would not have purchased their homes in Glen Oaks Estates had the Realtors acted as proper fiduciaries, not concealed information relating to the budget, warned them about the alleged invalid soil reports and/or complied with the laws required of them to provide a final report and other transactional documents.” However, the reality was that the homes were purchased, a landslide occurred, allegedly due to the misrepresentations and illegitimate soil reports, and the HOA found itself embroiled in third party litigation with damages in excess of 3 million dollars.
When faced with this lawsuit, the REALTORS® demurred to the HOA’s complaint, stating that the HOA did not have grounds to bring the lawsuit since the claims belong to the individual homeowners who purchased the homes in Glen Oaks Estates. The trial court agreed with Defendants, stating that the HOA could not sue the REALTORS®. The HOA appealed, pointing out that under the Davis-Stirling Common Interest Development Act, Section 1368.3 allows for “[a]n association established to manage a common interest development…to institute, defend, settle, and intervene in litigation…in its own name.” The HOA was not alleging that the REALTORS® owed it any specific duties. Instead, the HOA had standing to bring a suit based on alleged breaches of duties that were owed to the Buyers. Since the area damaged by the landslide was “common area” under the Common Interest Development Act Section 1368.3 and the HOA incurred damages as a result thereof, the Court of Appeal found that the HOA did, in fact, have standing to bring a lawsuit against the REALTORS®.
Prior to this ruling, it was thought that homeowners associations could not bring a suit against REALTORS® or real estate agents. However, the court’s interpretation of Civil Code Section 1368.3 (the Davis-Stirling Common Interest Development Act), in this case, redefines the protection afforded to REALTORS® and agents and now enables HOAs to bring suit under certain conditions.
The next case is Lyon & Assoc. v. Superior Court, in which the court “illustrates the perils that real estate brokers and their agents assume when acting as a dual listing agent with duties to both the buyers and sellers of the same house.” The original proceeding arose out of the sale of a home in Rocklin, California. Robert and Denise Costa were the sellers, Ted and Patti Henley were the buyers, and Lyon & Associates (“Lyon”) represented both parties in the transaction. The Costas listed the home in early 2006 with an agent at Lyon. However, the agent became aware of defects and problems with the stucco and paint on the home. Instead of continuing with that agent, the Costas decided to use a different agent at Lyon, Gidal, who continued to list the property. Gidal was present when listing photographs were taken of the property that showed defects in the paint and stucco.
On May 2, 2006, the Henleys signed a buyer-broker agreement giving Lyon the exclusive right to represent them in the transaction. The Agreement affirmed that “a dual agent is obligated to disclose known facts materially affecting the value or desirability of the property to both parties.” Escrow closed on May 9, 2006 and, subsequently, the Henleys began to notice the defects in the property. Allegedly, the defects included water intrusion and efflorescence that extended from the decks to the exterior of the house, causing bubbling, blistering and cracking of the stucco and paint. When the Henleys filed their first amended complaint against the Costas and Lyon in May 2009, they alleged that the Costas knew about these defects but did not disclose them in the sale. Instead, they painted the house a dark brown prior to the Henleys’ inspection so the problems would go unnoticed. Gidel also knew about these problems and failed to disclose.
The buyer-broker agreement signed by the Henleys limits the time to bring an action for breach of the Agreement to two years. Since the Henleys’ action was filed almost three years after the close of escrow, Lyon claimed that they were barred from filing their suit for breach of contract, negligence, fraud, breach of fiduciary duty, and negligent misrepresentation. Lyon relied on California Civil Code Section 2079.4, which imposes the two-year statute of limitations written into the Agreement. However, the Court of Appeal found that section 2079.4 “specifies a statutory duty imposed on seller’s brokers to buyers of residential property.” The Henleys were the buyers of the property; therefore their complaint does not assert claims under section 2079. Further, the Henleys believed that the statute of limitations should be extended by the discovery rule, which begins tolling when the breach was discovered or should have been discovered. According to the complaint, the Henleys began to notice paint blisters at the end of 2006, but only started suspecting the Costas and Lyon in mid-2007. The court agreed with the Henleys, stating that the claim was filed in a timely manner as to all causes of action. “In sum, the buyer-broker agreement’s limitation period is subject to the discovery rule for a breach of contract action alleging active concealment of the breach by the broker.”
As a result of this decision, the California Association of REALTORS® has amended the Buyer Representation Agreements (Exclusive, Non-Exclusive, and Non-Exclusive/Not for Compensation). These forms have been slated for release this month, amongst others.
As a real estate practitioner, it is important to be aware of the duties that are owed and to whom they are owed. Otherwise, one could end up in a situation such as the brokers above. As the court pointed out in Lyon, it is especially harrowing to be a dual agent, thus extra precautions should be taken. As a buyer or seller, it is also important to be aware of your rights and the duties owed to you by your agent or broker. However, whether you are an agent, broker, buyer, or seller, always review the contracts you sign. If you have any questions, seek the advice of qualified legal counsel.