Broker-Agent Fiduciary Duties in Real Estate Transactions

Real Estate Broker Fiduciary Duty

Lawsuits and litigation frequently arise from California real estate transactions over the duties and disclosures a real estate broker is required to make to their client. There are multiple levels of duties owed to the client, both statutory and common law. However, the most important duty a real estate broker owes to their client is undoubtedly their fiduciary duty, a duty that is substantially greater than their duty of standard of care.

Under California law, a real estate broker has a fiduciary duty to their client. The broker’s fiduciary duty to the client requires the utmost good faith and undivided service and loyalty. The broker fiduciary duty is greater than the negligence standard of due care of under Civil Code § 2079. Under § 2079, a real estate broker or salesperson has a duty to a prospective buyer of residential real property with one to four units to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to the prospective buyer all facts materially affecting the value of desirability of the property that an investigation would reveal, if that broker has a written contract with the seller to find a buyer or is a broker who acts in cooperation with that broker to find or obtain a buyer.

Real Estate Broker Standard of Care and Fiduciary Duty

The standard of care owed by a real estate broker is further defined in Civil Code § 2079.2:

‘The standard of care owed by a broker under this article is the degree of care that a reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge, education, experience, and examination, required to obtain a license …”

Thus, a broker can be professionally competent under Civil Code § 2079 (and § 2079.2 as well) but still fall short of the greater duty of a trusted fiduciary. In essence, the fiduciary duty owed by real estate brokers to their clients is substantially more extensive than the nonfiduciary duty codified in section 2079. 

Real Estate Broker Fiduciary Duty and Constructive Fraud

A fiduciary must tell its principal (the client) all information it possesses that is material to the principal’s interests. A fiduciary’s failure to share material information with the principal is constructive fraud, without actual fraudulent intent.

This is codified in Civil Code § 1573, which defines Constructive Fraud as:

  1. In any breach of duty, which, without an actually fraudulent intent, gains an advantage to the person at fault, or any one claiming under him, by misleading another to his prejudice …
  2. In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.

As the court stated in Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 415, …

“a real estate agent, as a fiduciary is “…liable to his principal for constructive fraud even though his conduct is not actually fraudulent. Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship.” As a general principle constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another even though the conduct is not otherwise fraudulent. Most acts by an agent in breach of his fiduciary duties constitute constructive fraud. The failure of the fiduciary to disclose a material fact to his principle which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 562.

Notably, under a constructive fraud theory, for a real estate broker to be liable under constructive fraud, the broker need merely fail to disclose material or important information to the client, without necessarily having an intent to defraud, although it is stated that an “intent to deceive” is a requirement.

The elements of a cause of action for constructive fraud in California are (1) a fiduciary or confidential relationship; (2) nondisclosure (or other breach of fiduciary duty); (3) intent to deceive, and (4) reliance and resulting injury. Prakashpalan v. Engstrom, Lipscomb and Lack (2014) 223 Cal. App. 4th 1105, 1131.

Constructive fraud exists in cases in which conduct, although not actually fraudulent, ought to be so treated, that is, in which such conduct is a constructive or quasi fraud, having all the actual consequences and all the legal effects of actual fraud. This is a highly factual and circumstantial analysis. Whether a fiduciary duty has been breached, and whether the conduct constitutes constructive fraud depends on the facts and circumstances of each case. Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 415.

To summarize, real estate brokers owe a duty to their clients to perform to a certain standard of care and in addition, have a higher and more substantial fiduciary duty to their client to disclose material information that may affect their client’s decision or which may affect the motives of the agent. Further, this conduct may amount to constructive fraud, even without a specific intent to defraud on the part of the broker. Where questions arise as to the performance of a real estate broker’s fiduciary duty to the client, and whether the conduct amounts to fraud or constructive fraud, is a fact driven analysis that depends on the facts and circumstances of each case.

For an in-depth analysis and evaluation of any real estate broker negligence, misconduct and failures including breach of the standard of care, statutory violations, fraud, constructive fraud and damages in the performance of their duties, or any failure to disclose or to inform, please contact Timothy Norton, of Norton & Associates today. 35+ years’ experience litigating real estate disclosure and breach of fiduciary duty claims. Available to consult and evaluate the facts, circumstances, applicable law and potential damages present in your claim.

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