March 2017

March 2017
LEGAL
by
by Mary Gram
Steve Fillingim
THE VALLEY BUSINESS JOURNAL
www.TheValleyBusinessJournal.com
Dual Agency Transactions Can Increase Risks
for Sellers who Face Severe Consequences if
they need to Cancel a Sale
A dual agency relationship exists
one broker handles both sides of a
transaction, even if two different agents
working in the office represent the buyer
and the seller respectively. Although it
is generally discouraged, dual agency is
legal in California residential real estate
transactions if fully disclosed in writing
to both parties. However, because the
buyer’s interest in paying the lowest price
necessarily conflicts with the seller’s interest
in getting the highest price for the
property, it is virtually impossible for a
dual agent to fairly represent the interests
of both parties.
The problems associated with dual
agency are usually considered to negatively
impact buyers more than sellers.
Since the seller has elected to list the
property with the broker, they likely have
a pre-existing relationship in which the
seller will tend to be favored. In addition,
they both share an interest in getting the
highest price for the property (which
results in the highest commission for the
broker).
However, circumstances can change,
and on occasion a buyer or seller may
need to cancel a transaction. If buyers
need to back out of a deal, the consequence
they usually face is the loss of
their “liquidated damages” deposit,
typically a small percentage of the sales
price. In contrast, sellers can be forced
to sell their homes against their will (in
a lawsuit seeking specific performance
of the purchase contract) if the sellers
need to back out of a transaction. Thus,
sellers should be just as wary as buyers
of entering into transactions that involve
dual agency relationships. In my legal
practice, I have personally encountered
cases in which the buyers used the threat
of the forced sale to demand huge monetary
settlements from sellers in exchange
for agreeing to allow them to remain in
their home, while the dual agents also
demanded that sellers pay the full commission
for the cancelled sale.
In one particularly painful case, the
Seller, a widower with two young daughters
listed his $3.5 million home for sale
with the Listing Agent who worked for
Uptown Broker. Seller began his search
for a new residence to purchase in the
area. Selling Agent, who also worked
for Uptown Broker, brought an offer that
was substantially below the listing price,
which Listing Agent convinced the Seller
to accept. Within a very short time, Seller
realized he would not be able to afford
the type of house he needed in the same
area, and his daughters became distraught
when he told them they may have to
move away from their friends and attend
different schools. He realized he had
made a terrible mistake, and advised his
Listing Agent, in confidence, that he had
changed his mind and told her why. He
instructed her to provide written notice to
the Buyers to perform all contingencies
within 48 hours, a fairly routine document,
but also a pre-condition necessary
to allow Seller to cancel the sale.
In retrospect, it was obvious that
Listing Agent had immediately advised
Selling Agent that Seller was going to
cancel the sale the moment the 48-hour
deadline elapsed. A flurry of activity
ensued. Selling Agent obtained a report
on the physical condition of the property
identifying numerous alleged deficiencies
in the property, and faxed it directly
to Seller noting “you will now have to
disclose all this to anyone else you try
to sell the property to.” As soon as the
48 hours elapsed and all contingencies
had not been removed, Seller instructed
his Listing Agent via email (as she was
suddenly unavailable via cellphone) to
take all necessary actions to cancel the
sale immediately.
However, Listing Agent claimed that
the email was not read until several hours
later, during which time Selling Agent’s
clients succeeded in removing the remaining
contingencies. Thus, although
he had been in escrow less than a month,
Seller ultimately agreed to pay hundreds
of thousands of dollars to the Buyers and
pay the full commission to Uptown Broker
(approximately $180,000 on the $3
million cancelled sale). The risk of being
forced from his home was more than he
could bear to face, and the Listing and
Selling Agent (and the Broker) knew it.
This situation is not the norm. Most
real estate agents are honest, diligent and
do their best to protect their client’s interests.
However, in my opinion, entering
into a dual agency transaction increases
the likelihood of collusion by the agents
in order to push deals through, or to the
exchange of confidential information
(even accidentally or subconsciously)
that has the same effect. In my experience,
I find that Brokers often downplay
the very serious risks of the dual agency
relationship to Buyers and Sellers when
presenting the written disclosure form for
their signature.
If you are comfortable with your
broker promising to do the best for both
you and your opponent, then go ahead
and enter into a dual agency transaction.
If, however, you want your broker to
have only your best interests in mind
and do their best to fight for what you
want against all comers, then make sure
the listing agreement or buyer’s agent
agreement you sign specifies that you
will not accept any dual agency relationships
in your transaction. Never forget
dual agency is not a mere formality, it is
a choice for you to make which can have
very serious consequences.
Mary E. Gram, Esq. is a Senior Counsel
with Messina & Hankin LLP in the
Temecula Valley office. She has more
than 20 years of experience in litigating
a broad range of business related cases
and appeals.
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