Buyer Forfeits $1 Million+ Deposit, Blames the Broker,
Ends Up Owing $500K Commission

When a real estate deal goes bad, a common litigation strategy is to blame the brokers, often asserting breach of fiduciary duty, failure to disclose or failure to investigate. That strategy can be potent because brokers are fiduciaries and must disclose material information affecting their clients’ decisions. But how far does that responsibility extend when the client is an experienced commercial real estate investor, has its own professional advisors, receives warnings about the very risk that ultimately kills the transaction, and nevertheless decides to take the risk?

That is what makes the recent California Court of Appeal decision in Urban Sunrise LLC v. Vogt particularly noteworthy. A commercial buyer lost more than $1.1 million in deposits when it could not close because it could not obtain financing, largely due to the unavailability and high cost of fire insurance. The buyer sued its brokers. Not only did it lose, it ended up owing a $492,800 commission, plus interest, attorney’s fees and costs.

A Very Expensive Extension
The buyer was acquiring five commercial properties in South Lake Tahoe as part of a 1031 exchange. Its managing member was an experienced commercial investor with a team that included a mortgage broker, insurance broker, accountant and attorney. The buyer’s attorney also reviewed the transactions.

The buyer signed a buyer-broker representation agreement providing for a commission on properties whether or not listed on the MLS. Four of the five properties were not listed. Before signing the purchase agreements, the buyer knew that the broker had previously represented the seller and that the seller was an existing client of the broker. This prior representation is how the broker knew about the off-market properties. Each purchase agreement identified the brokerage firm as a dual agent, and the required agency disclosures were provided.

As closing approached, the buyer had not obtained financing and needed more time. The sellers agreed to extensions, but only if the buyer removed its contingencies and made substantial deposits that would be immediately released to the sellers on a nonrefundable basis. The buyer agreed and ultimately put more than $1.1 million at risk. When financing could not be obtained, the transactions failed and the buyer lost the deposits.

Buyer Blames the Brokers for the Insurance Problem
The buyer argued that its brokers should have done more to investigate and disclose the availability and cost of fire insurance. The facts made that argument difficult.

The buyer knew fire insurance would be necessary to obtain financing. It received natural hazard disclosures showing the properties were in very high fire hazard severity zones. The sellers advised that insurance costs had increased substantially because of the recent fire season and provided their insurance agent’s contact information.

The agreements also directed the buyer to obtain insurance assistance from appropriate professionals, while the wildfire advisory cautioned that real estate brokers do not have the expertise to advise on insurance availability. The buyer had its own insurance broker. Considering what this particular buyer knew and the professional resources available to it, the court concluded that the brokers had no additional duty to undertake an insurance investigation.

Think Twice Before Going “Hard” and Releasing the Deposit
When the buyer needed additional time for financing, it still could have cancelled and recovered its deposits. Instead, it removed its contingencies and released more than $1.1 million to obtain extensions. The buyer alleged that the brokers breached their fiduciary duties by recommending and encouraging it to enter into extension addenda containing these unfavorable terms.. It relied on a broker’s letter explaining the seller’s motivation and stating that, based on his prior experience with the seller, the seller had never asked for anything “odd or out of the ordinary.”

The court rejected the argument. Read in context, the statements explained the broker’s prior experience with the seller and why the seller was demanding those terms; they did not recommend that the buyer accept them. The buyer also had its own attorney reviewing the transactions. The court therefore found no triable issue that the brokers improperly encouraged or recommended acceptance of the extension terms.

What About the Dual Agency?
The buyer also contended that its consent to dual agency was not fully informed because it had not been told that the broker had represented the seller in approximately 12 transactions during the preceding three or four years..

The court found no triable issue as to materiality. The buyer already knew the seller was an existing client of the broker, which was how it was acquiring largely off-market properties from that seller, and expressly consented to the dual agency. More importantly, the buyer could not explain how knowing the number of prior transactions would have changed its decision or why it would have refused to consent.

When the Broker Is Also a Lawyer
One broker was also an attorney, and the buyer argued that his involvement in the extension addenda crossed the line into practicing law. The court disagreed. The seller established the business terms and the broker made limited clarifying edits. His status as an attorney and use of “Esq.” did not create an attorney-client relationship, particularly where the buyer had its own attorney.

And Then Came the $492,800 Commission
When the buyer sued the brokers, one broker counterclaimed for the commission due under the buyer-broker representation agreement. The agreement provided for compensation if the buyer entered into an acceptable acquisition agreement and the seller completed the transaction or was prevented from doing so by the buyer. The court upheld a $492,800 commission award, plus interest, attorney’s fees and costs. The buyer therefore not only failed to recover its deposits but became obligated to pay nearly another half-million dollars to the broker it had sued.

The Bigger Lesson
The court did not diminish the fiduciary duties owed by real estate brokers.. Brokers must disclose material facts, exercise reasonable care and diligence, and act in the interests of their principals. But those duties must be evaluated in the context of the particular client and transaction. An inexperienced buyer relying heavily on a broker presents different circumstances from an experienced commercial investor with its own attorney, mortgage broker, insurance broker and accountant.