When can you sue a broker for a bad real estate deal?
Sometimes things don’t go exactly as you planned. If you believe a realtor harmed you in a real estate deal, Sinai Law can assist you in evaluating your case. Our goal in this page is to explain the agent’s duties, possible remedies in a lawsuit, and when a lawsuit is a good idea. To get a free consultation and case evaluation, contact the firm here.
For the purpose of this article, we use all of the following interchangeably – agent, broker, realtor, real estate agent, real estate broker, and salesperson
Quick Guide to this Article
What are the Common Types of Broker Lawsuits?
Most broker lawsuits that we see are variations of the same issue – misrepresentation by an agent. The agent told you something that she knew was untrue (or should have known) and you lost money as a result.
Loss of earnest money is another common reason for a lawsuit. Using a lawyer during escrow is the best way to not lose your earnest money deposit.
For example, an agent represents you in a real estate deal for a 4-plex. After closing, you find out one of the 4 units is not permitted by the city. If city records show the 4th unit didn’t have a permit, you have an action against the agent for failure to verify.
In addition, you may have an action against the listing agent for either non-disclosure of material facts, or failure to verify material information (constructive fraud). If your agent advises you to waive the right for a contractor’s inspection and you later find a problem, that’s actionable too.
Generally speaking, the greater the fraud and larger the damages – the better the case. Attorney’s fees and arbitration are significant factors in case viability.
What are the Responsibilities of a Real Estate Agent in a Real Estate Deal?
The agent-client relationship in California law is a limited agency relationship. It allows the realtor to represent the client in a real estate deal. (Cal. Civil Code § 2297). The California Department of Real Estate regulates agents and realtors. During normal course of business, a broker can:
- Submit offers to buy real estate
- Market property for sale for prospective buyers
- Receive commissions for sale of a property
Fiduciary Duty – the realtor has to act on behalf of the client’s best interest. The agent has to put the client first, even when it means losing a commission. Breach of fiduciary duty is the number one reason brokers get sued.
Duty to Investigate – A broker has a fiduciary duty to investigate the material facts of the transaction. A realtor cannot simply accept information as true from others – they must investigate and verify it for their clients. (Salahutdin v. Valley of California 24 Cal.App.4th 555, 562). Example – a broker must verify a property’s size if he knows it’s material to the client’s decision.
Honest and Fair – real estate agents in California have a duty to be honest with ALL parties to the transaction. (Nguyen v. Scott (1998) 206 Cal.App.3d 725, 735). Note that this duty applies to other parties in the transaction as well, not just the client!
Duty to Disclose – realtors have to disclose material facts that affect the price. The real estate broker must have actual knowledge of the fact in question. (San Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1055). Agents who know of a roof problem and do not provide disclosure to the buyer can be sued for constructive fraud. There is also a duty to disclose a conflicts of interest. Suppose an agent has an exclusive listing to sell a home and presents an offer to buy from a LLC. If the agent has ownership in the LLC – they must disclose that fact to the seller.
The agent also has a duty to disclose all material information to the principal. That includes presenting every offer and counter offer. Not disclosing a profit or commission from the sale is also not allowed.
Duty of Reasonable Care – agents owe a duty to act in diligence and skill representing clients. An agent should only represent you if they know what they are doing. A residential agent should not represent a commercial seller if they have never done it before.
Privacy – Agents must be careful about their clients’ information. Disclosure of sensitive information that undermines the client position is not allowed.
Duty to Follow Client’s Instructions – This may sound obvious, but a real estate agent has to listen to their client and follow their instructions (as long as it’s legal!). If a client wants to submit an offer with specific terms, the agent is not allowed the change them. It is OK for a broker to provide insight and opinion. What is not allowed is going against direct client’s instructions.
Prohibited Actions that could Result in Broker Lawsuits
Aside from breaching the duties mentioned above, brokers are prohibited from doing the following:
- Giving legal advice to clients – unless your agent is also a lawyer, they are not able to give you legal advice. That includes legal advice about a earnest money dispute. Or what the remedies for breaking a residential lease agreement are.
- Failure to Supervise – real estate brokerage must take active steps to supervise an agent’s actions.
- Misrepresentation/Fraud – an agent cannot make false statements that others rely on. If you call an agent about a listing they might tell you there are already multiple offers to buy. Agents cannot lie about that, because this is information the buyer relies on.
- License – to market properties you need to have an active and valid real estate license. If an agent has an assistant, there are certain actions that only the realtor can perform, not the assistant.
What are the Agent’s Duties in Lease Agreements?
Agents and brokers owe the same duty of care for their clients in leasing transactions. CA law makes no distinctions between a transaction to sell a property and a lease.
There is no distinction between a $15,000,000 transaction and a $1,000/m lease. The duty of care to a small client is the same duty owed to a client who is going to fetch the agent a large commission.
Remedies in Agent Lawsuits
You may be able to recover damages in a successful lawsuit against an agent. The damages have to be as a result of the realtor’s actions/negligence/breach.
- Listing Agreements – before you sue a broker, read your contract. It may have limitations on liability or an arbitration clause. It is recommended that you consult a lawyer before initiating a mediation/demand.
- Waiver – it is common practice for brokerages to ask clients to sign a “waiver of liability”. Some agents add these documents as an addendum to the purchase and sale agreement. You do not have to sign those waivers, no matter what the brokerage or your agent tell you. Waivers only exist to protect agents, and in many cases are completely not enforceable.
- Punitive Damages – available in cases of fraud. In matters of negligence or breach of contract there are no punitive damages.
- Restitution – principals can demand that agents pay them for ill-gotten profits. Restitution is available in cases of fraud and misrepresentation. Sinai Law was able to secure such a settlement against a broker who purchased a property from our client. The agent did not disclose to our client that he was a member of the LLC that bought the property. Our firm was able to secure $75,000 in profits that the broker made in the sale to a 3rd party.
- Rescission – a transaction can be reversed when an agent failed to disclose dual agency. Vice v. Thacker (1947) 30 Cal.2d 84, 90.
Dual Agency in Real Estate Agent Lawsuits
A minority of real estate transactions in California are dual agent situations. But the majority of broker lawsuits involve dual agency.
An Agent can represent both sides of a real estate transaction, as long as both sides consent in writing (Cal. Civil Code § 2079.14). A dual agent owes owes fiduciary duty to both buyer and seller. (Cal. Civil Code § 2079.16).
“Dual agency transactions are the majority of transactions that give rise to broker lawsuits”
Dual agency creates a complicated dynamic for the agent and the parties. The seller pays the commission to both real estate agents (in this case, the dual agent alone). But the dual agent must provide the same level of care to both parties. Sounds too good to be true?
Agents can make a lot more money in dual agency transactions because they get to keep 100% of the commission. There is a strong monetary incentive for agents to represent both sides.
Dual agency is a fiduciary landmine for agents. Consider the following example:
Agent presents seller 5 offers to buy a luxury home in Santa Monica. All offers are above the list price, but one of the offers is going to create a dual agency situation. For a $5,000,000 home, the difference in 5% commission in dual agency is $250,000, compared to half in a typical transaction. Which offer do you think the agent will push the seller to accept?
Elements of a Breach of Fiduciary Duty in Agent Lawsuits
To establish this claim a plaintiff must show all of the following:
- Agent acted in plaintiff’s behalf for the purpose of selling/buying real estate.
- Agent failed to act as a reasonably careful agent would have acted under the same or similar circumstances.
- Agent harmed plaintiff.
- The agent’s conduct was a substantial factor in causing the plaintiff harm.
The fourth factor is where a lot of realtor lawsuits fail. It’s not enough to show an agent violated her fiduciary duty. If it did not make a material difference in the result, the action is not likely to succeed.
Brokers Liability – Negligent Misrepresentation – Elements – CACI 1903
To establish this claim, the plaintiff must prove ALL of the following:
- The agent represented to the plaintiff that a fact was true
- The representation was not tue
- That although the agent may have honestly believed that the representation was true, agent had no reasonable grounds for believing the representation was true when agent made it
- Agent intended that plaintiff rely on this representation
- Plaintiff relied on the representation
- Plaintiff was harmed
- Plaintiff’s reliance on the representation was a substantial factor in causing the harm.
As stated in CACI 4101, the last factor is where most claims afail. Intentional misrepresentation (CACI 1900) is very similar to this cause of action, and requires actual knowledge on the agent’s part.
Filing a Compliant Against the Agent with the Department of Real Estate
A common question we get is the viability of a DRE complaint as an alternative to a broker lawsuit. You can find the details on this process at the DRE website. In short, the DRE is not a court of law, and you cannot get any damages or order parties to perform from a DRE complaint.
If you are interested in filing a lawsuit against a broker or agent, talk to a lawyer before filing a DRE complaint.
Hiring a Lawyer to Sue a Broker or Realtor
Sinai Law helped many clients that were harmed as a result of broker/agent malpractice. We can assist you in evaluating your potential claim all the way through a judgement in court. Hiring the right attorney is especially important in broker lawsuits.