The Demise of Dual Agency: An Analysis of the Recent California Supreme Court Decision Against Coldwell Banker

The Demise of Dual Agent Real Estate Representation? An Analysis of the Recent California Supreme Court Decision in Horiike v. Coldwell Banker November 30, 2016 By Lisa L. Boswell, Alexandria A. Walker Horiike v. Coldwell Banker Residential Brokerage Co., California Supreme Court, No. S218734, Nov. 21, 2016

Last week, the California Supreme Court announced a decision that could modify the way big brokerage real estate firms handle business. In a case of first impression, the Court held that a brokerage company who represents both the buyer and the seller in a real estate transaction owes a fiduciary duty to both parties, even if different agents represent the parties. It is well settled law that an agent who represents both the buyer and the seller owes a fiduciary duty to both parties. In Horiike v. Coldwell Banker, however, the Court extended the fiduciary duty to brokerage companies.

The case began in 2007 when Hong Kong millionaire Hiroshi Horiike purchased a Malibu mansion for $12.25 million. Chris Cortazzo, one of the most successful agents at Coldwell Banker, represented the seller. Horiike was represented by a different Coldwell Banker agent. Both parties agreed to dual representation. Horiike claims Cortazzo told him the house was 15,000 square feet. However, after he moved in, Horiike realized that the house was only 10,000 square feet. Horiike sued Cortazzo and Coldwell Banker, alleging that both Cortazzo and Coldwell Banker breached their fiduciary duties when they sold him the house because they falsely represented the size of the house to him. Cortazzo argued that he could not be held liable because his sole duty was to his client, the seller.

The California Supreme Court sided with Horiike and expanded the 1986 state law that authorizes and regulates dual agents in real estate transactions. The Court held that Coldwell Banker owed a fiduciary duty to Horiike, which included a duty to learn and disclose all material information that would influence the transaction. The Court extended the duty to the information that Cortazzo knew because Coldwell Banker was presumed to be aware of all facts known to its salespersons. The Court declined to decide whether or not either party actually breached their fiduciary duty.

This decision could affect the future of big brokerage real estate transactions. Now a real estate transaction in which a big brokerage company represents both sides is ripe with possibility for conflict. Agents in a dual-agent transaction can no longer only consider their client’s interest when selling a house; they must also consider the interests of both the buyer and seller. As a result, big brokerage companies will need to be more cautious before they enter into a dual agent relationship for a particular transaction. Only time will tell, but this could lead to a limitation in sales involving big brokerage firms and/or restructuring of big brokerage houses into smaller firms.

Buyers Trust & Sellers Trust are global leaders of this concept.

Source: The Demise of Dual Agent Real Estate Representation? An Analysis of the Recent California Supreme Court Decision in Horiike v. Coldwell Banker – Wood Smith Henning & Berman – Attorneys at Law

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How Do REITs Work?

Published on Mar 26, 2014

REITs, or real estate investment trusts, were created by Congress in 1960 to give all individuals the opportunity to benefit from investing in income-producing real estate. REITs allow anyone to own or finance properties the same way they invest in
other industries, through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment, without actually having to go
out and buy or finance property.

This video provides some insight into what REITs are and how they work. The REIT industry has a diverse profile, which offers many benefits. REITs often are classified in one of two categories: Equity REITs or Mortgage REITs. Equity REITs own a wide range of property types including offices, shopping centers, hotels, apartments and much more. Equity REITs derive most of their revenue from rent on those properties.

Mortgage REITs may finance both residential and commercial properties. Mortgage REITs get most of their revenue from interest earned on their investments in mortgages or mortgage backed securities.

In addition, REITs may be publicly registered with the SEC and have their shares listed and traded on major stock exchanges, or they may be publicly registered with the SEC but not have their shares listed or traded on major stock exchanges, or they may be private companies (not registered with the SEC and not having their shares listed or traded on a stock exchange.

Regardless of the type, REITs operate under a specific set of rules established by Congress. A REIT is an entity that:
• is modeled after mutual funds
• is treated by the Internal Revenue Code as a corporation
• must be widely held by shareholders
• must primarily own or finance real estate, and
• must own its real estate with a longterm investment horizon.

The IRS implements the REIT rules and oversees what qualifies as a REIT. The Internal Revenue Code requires a REIT to adhere to the following essential rules: at least 75 percent of the corporation’s income must be earned from real estate as rent, real estate interest or from the sales of real estate assets; at least 75 percent of the corporation’s assets must be real estate assets; and, at least 95 percent of income must be passive.

REITs are required to distribute at least 90 percent of taxable income annually to shareholders as taxable dividends. In other words, a REIT cannot retain its earnings. Like a mutual fund, a REIT receives a dividends-paid deduction so no tax is paid at the entity level if 100 percent of income is distributed. REIT shareholders pay taxes on dividends at ordinary rates versus the lower qualified rate.

Over time, REITs and the rules and regulations that govern them have evolved to meet the changing needs of the real estate industry and the broader economy. But throughout that process, REITs have remained true to the mission laid out by Congress in 1960: to make the benefits of income-producing real estate accessible to anyone and everyone. And that’s still how they work today.
By Mitch Irzinski

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