Friday, 20 October 2017

Principal Must Be Told Of Agent's Profit

Written by Posted On Monday, 15 August 2016 23:00

Sometimes real estate agents buy their own listings. That is, having contracted to represent a seller, the agent then decides that he or she would like to purchase that property. Doing so can be a little dicey, but, if handled with care and proper concern for the seller's interests, it can be done. Nothing about it is per se illegal.

But, what about this? Suppose a listing agent has contracted to purchase the property at a price acceptable to the seller, and then, during the course of escrow, the agent contracts to sell that property to a third party at a higher price, i.e. at a profit to the agent, without telling the original seller about the profit. Wouldn't that be ok? After all, the original seller was satisfied with the price he received, so what's the problem?

Well, both the courts and the real estate commissioner have a problem with what we have just described. A reminder of their problem is set forth in a decision by California's Third District Court of Appeal in the case of Roberts v. Lomanto.

Lomanto had been the leasing agent for a shopping center owned by Roberts. In June of 1997, Roberts decided to sell the property, and he retained Lomanto also to be the listing agent for the sale of the property. Although several letters of intent were submitted, no sale of the property was forthcoming. Then, in October of 1998, Lomanto herself entered into a purchase agreement with Roberts. She told him he could not get more than $11 million for the property, and that was the price they agreed on.

As a result of certain unsatisfied contingencies, the term of the purchase agreement expired. However, in July of 1999, the parties reentered into a second agreement at the same $11 million price. Then, in November of 1999, Lomanto entered into an agreement with Pan Pacific Retail Properties whereby she assigned to Pan Pacific her rights under the purchase agreement. Roberts executed a written agreement to that assignment.

What Lomanto didn't tell Roberts was that, in addition to taking over her position in the $11 million dollar purchase, Pan Pacific also agreed to pay Lomanto an assignment fee of $1.2 million. Which is another way of saying Pan Pacific paid $12.2 million for the shopping center. Escrow closed in December of 1999. Very close to the time of closing, Roberts learned for the first time that Lomanto was receiving an assignment fee, however she refused to tell him the amount.

When Roberts later read in the newspaper that Pan Pacific had effectively paid $12.2 million for the center, he was grieved. So grieved was he that he brought suit in Sacramento County Superior Court. Surprisingly, the Superior Court granted summary judgment in favor of Lomanto. Not surprisingly, the court of appeal reversed that ruling.

Central to the appellate court's decision were three points: (i) A real estate agent owes fiduciary duty to his or her principal, and that duty includes, "…the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal's decision." (ii) "If the agent, or a relative or associate of the agent, purchases the property, the agent's fiduciary duties continue even though he or she may be a principal in the transaction." (iii) California Business and Professions Code § 10176(g) subjects a licensee to discipline for taking any "secret or undisclosed compensation", that is, compensation or profit that is not revealed to, and approved by, the agent's principal. The court cited Miller and Starr (the Holy Writ of Real Estate Law), which says not only that such profits are not permitted and cannot be retained by the agent, but also points out, "It is totally immaterial that the transaction is otherwise fair to the principal, or that the principal receives exactly the price wanted for the property..."

There's nothing illegal about an agent purchasing his or her listing. And there's nothing illegal about making an immediate profit on that purchase, provided that everything has been disclosed and that the principal has given approval.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way. His email address is This email address is being protected from spambots. You need JavaScript enabled to view it..

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Bob Hunt

Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at scbhunt@aol.com.

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