What Duty Does Buyer's Broker Owe to Seller of California Vacant Land?

In the recent decision in Greif v. Sanin, the California court of appeal described it as a case of seller’s remorse.

Appellant Earl Greif (Greif) sold 10 acres of raw vacant land (Property) in Rancho Mirage to Yardley Protective Limited Partnership (Yardley). A few days after Greif signed the purchase agreement (Purchase Agreement), he concluded he had sold the Property for less than its fair market value (FMV) and attempted to back out of the sale.

The buyer Yardley sued to enforce the Purchase Agreement. Greif filed a cross-complaint, and later added as cross-defendants Yardley's real estate brokers (collectively Sanin). Greif was not represented by a broker.

After a lengthy court trial, the trial court entered judgment in favor of Yardley and against Greif.

Greif filed three separate appeals. Greif’s first appeal challenged the trial court’s dismissal of the Cross-complaint. The second appeal challenged the trial judgment in favor of Yardley, ordering specific performance of the Purchase Agreement and damages. The third appeal objected to the trial court’s post-judgment order awarding Yardley attorney fees.

The three appeals were consolidated, and rejected, and the judgment in favor of Yardley was affirmed.

Greif filed a cross-complaint against cross-defendants Yardley and Sanin that asserted the cross-claims for: (1) rescission of the Purchase Agreement and damages based on mistake; (2) rescission and damages based on undue influence; (3) negligence; and (4) financial elder abuse.

Greif alleged in his cross-complaint that Greif  was born on May 3, 1925, and before and or at the time of the events alleged in the cross- complaint, Greif suffered from a variety of illnesses and disorders, including suffering a heart attack in 2004 and one or more strokes after that, and before December 2012.

Greif alleged these illnesses and disorders severely impacted his ability to walk, see, hear, and speak, and impaired his cognitive abilities, which should have been readily apparent to others.

In 2006, Greif  purchased 5.04 acres of raw vacant land for $1,850,000 (Parcel 1). In 2011, he purchased 5.04 acres of raw vacant land adjacent to Parcel 1 for the sum of $480,000 (Parcel 2). Parcel 1 and Parcel 2 are collectively referred to as the Property.

The current FMV of the Property was in excess of $4 million based on recent sales of comparable property in the vicinity of the Property. The FMV of the Property when Yardley and Greif executed the Purchase Agreement was near this amount.

The parties met at the Property and negotiated the purchase price for the Property, which ranged from $3,399,000 to $3,380,000 to $3,350,000.

Ultimately, the parties agreed on the purchase price of $3,330,000.

Later, the parties met at Greif’s home in Rancho Mirage, to execute the Purchase Agreement for the Property.

The Property Purchase Agreement stated a purchase price of $330,000.

When presenting the Purchase Agreement to Greif, the purchase price, which was conspicuously stated on the first page of the Purchase Agreement, was pointed out to Greif.

Greif was directed to initial and sign the Purchase Agreement in a cursory fashion, without reviewing and explaining to Greif the key terms of the Purchase Agreement, and without otherwise ensuring that Greif actually understood the terms, including the stated purchase price.

Greif alleged that the circumstances of the parties’ execution of the Purchase Agreement and his health and cognitive issues impaired his ability to read and understand the Purchase Agreement.

Yardley allegedly took advantage of Greif's obvious health conditions and cognitive impairment by having him execute the Purchase Agreement without affording him an adequate opportunity to review the Purchase Agreement or an opportunity to consult his advisors and legal counsel.

Shortly after Greif signed the Purchase Agreement, Greif reviewed the Purchase Agreement, and realized that the purchase price stated in the Purchase Agreement was $330,000, whereas he had understood the agreed purchase price would be $3,300,000 or $3,330,000.

Later, Greif, with the assistance of legal counsel, rescinded the Purchase Agreement by executing escrow cancellation instructions and offered to compensate Yardley by paying interest on the amount Yardley had deposited in escrow. Yardley refused to execute the proposed escrow cancellation instructions.

In the cross-claim for negligence, Greif alleged that Sanin owed Greif a duty to be honest and truthful during the Property transaction under Business & Professions Code sections 10152, and 10176, subdivisions (a)-(c), and (i).

Greif further alleged Sanin breached a duty owed to Greif by Sanin having presumed knowledge of the fair market value of the subject Property at the time of preparing and presenting the Purchase Agreement to Greif, and Sanin’s failure to raise the gross discrepancy between the true value of the Property and the purchase price stated in the Purchase Agreement.

Greif alleged Sanin’s acts constituted a breach of duty owed to Greif and dishonest dealing. As a direct and proximate result, Greif allegedly was damaged in a sum in excess of $250,000, which damages include those sustained due to Greif’s inability to develop the Property or sell it for its true FMV. Yardley allegedly was jointly and severally liable for Sanin’s acts and omissions.

 
After the bench trial on Yardley’s Complaint against Greif to enforce the Purchase Agreement, Greif contended that even though Sanin did not represent him during the sale of the Property, Sanin owed Greif a duty of fairness and good faith, which Sanin breached.

The trial court’s judgment and dismissal of the cross-complaint against Sanin were based on Greif’s failure to allege simple negligence against Sanin.

The elements of a simple negligence cause of action include a duty to use due care, breach of this duty, and the breach proximately causing injury. The trial court granted judgment on the pleadings on the ground Sanin did not owe Greif any duty alleged in the negligence cross-claim.

Real estate brokers are subject to two sets of duties: those imposed by regulatory statutes, and those arising from the general law of agency.

Greif contended that, even though Sanin represented the buyer and not Greif during the real property transaction, Sanin owed Greif a duty of fairness and good faith dealing, which included (1) informing Greif that the sales price stated in the purchase agreement was excessively low, (2) drafting the Purchase Agreement to state Greif's intended purchase price, rather than the stated purchase price of $330,000, (3) obtaining Greif’s informed consent to the 5 percent commission included in the Purchase Agreement, and (4) disclosing to Greif that he had the right to review the Purchase Agreement with an independent advisor.

Greif argued that if Sanin had taken any of these precautionary measures, Greif would have discovered the purchase price was incorrect and would not have signed the Purchase Agreement.

At the time Greif signed the Purchase Agreement in December 2012, there was no statutory duty of disclosure owed by a buyer’s broker to a seller of vacant land.

Civil Code section 2079.16, which required agency disclosure, only applied to residential real property transactions.

It was not until after the Legislature amended section 2079.16, effective on January 1, 2015, that the agency disclosure provision applied to all real property transactions, including transactions involving vacant land.

As a consequence, section 2079.16 did not apply to the sale of the Property to Yardley in 2012.

The parties and their brokers were thus only subject to the common law duties existing at the time of the sale.

In a footnote in Greif’s reply brief, Greif acknowledged that section 2079.16 did not apply, but asserted that the statutory scheme recognizes real estate brokers owe duties to buyers and sellers, and in this respect, does not differ from what caselaw has consistently held.

It is undisputed by the parties that real estate agents, regardless of whether they represent the buyer or seller, owe a duty of care to third parties in a real property transaction.

Section 2079.16 did not assist the court in determining the scope of that duty because the agency disclosure statute did not apply at that time. It therefore had to look to common law in determining the extent of Sanin’s duty owed to Greif.

Under common law, generally any person who performs professional services owes a duty of care to all persons within the area of foreseeable risk.

The standard of care imposed on a real estate broker thus is higher than that applicable to a layperson. The broker is subject to a duty of skill, care, and diligence commensurate with the professional standards that the real estate industry has held out to the public and that the public reasonably can expect.

The real estate broker is brought by his calling into a relation of trust and confidence. Constant are the opportunities by concealment and collusion to extract illicit gains.  The broker is accredited by his calling in the minds of the inexperienced with a knowledge greater than their own.

The standard of care of a real estate broker can be measured by the Code of Ethics of the National Association of Realtors when the broker is a “realtor” (a member of the National Association or local Board of Realtors).

The Code of Ethics of the National Association of Realtors provides that it imposes obligations that may be higher than those mandated by law, and in any instance where the Code of Ethics and the law conflict, the obligations of the law must take precedence; while the obligation of absolute fidelity to the client’s interests is primary, this does not relieve the Realtor of an obligation to treat fairly all persons to the transaction. (Article 7)

The extent of the broker’s duty of care is determined under common law by examining whether a reasonable person would have foreseen an unreasonable risk of harm to a third party and whether, in view of such risk, the broker exercised ordinary care under the circumstances.

Whether a real estate broker has a duty of care to a third party is a question of law that is determined by weighing the following factors: (1) the extent that the transaction was intended to affect the third party; (2) the foreseeability of harm; (3) the degree of certainty that the third party suffered injury; (4) the closeness of the connection between the broker’s conduct and the injury suffered; (5) the moral blame attached to the broker’s conduct; and (6) the policy of preventing future harm.

Under the common law, there is little question that a real estate broker owes a duty of care to third persons in the transaction, where the broker does not have privity with, or fiduciary duties to, such third person.

Despite the absence of privity of contract, a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.

The parties agree a buyer’s broker owes a duty of care to the seller, even when the broker is the exclusive broker of the buyer. There is thus no question that Sanin owed a duty of care to the seller, Greif, not to impose a foreseeable risk on the seller unreasonably.

The issue is whether Sanin owed Earl a duty to tell him the purchase price was less than the FMV. The appellate court concluded that at the time of execution of the Purchase Agreement there was no such duty.

The cases cited by Greif involved the duty of a seller’s exclusive agent or a dual agent representing the seller and buyer. They do not address the issue of whether a buyer’s broker owes a duty to tell the seller that a purchase price is a gross discrepancy between the true value of the Property and the purchase price stated in the Purchase Agreement.

Neither the Legislature nor the courts recognized such a duty exists where there have been arm’s-length negotiations.

Greif argued on appeal that Sanin owed various additional duties that were breached, such as the duty to (1) draft the Purchase Agreement to state Greif's intended purchase price, rather than the stated purchase price of $330,000, (2) obtain Greif’s informed consent to the 5 percent commission payable to Sanin, and (3) disclose to Greif that he had the right to review the Purchase Agreement and commission with an independent advisor.

But Greif did not allege in his negligence cause of action that Sanin owed Greif these duties or cite any supporting legal authority. Greif argued two legal principles: (1) a real estate broker owes a duty of care under negligence principles to other parties in a real property transaction, regardless of whether the broker has a fiduciary, agency, or privity relationship; and (2) a broker, who represents the buyer may owe a duty of care to the seller, where circumstances warrant.

While the appellate court agreed these principles are well established, it did not agree that in the instant case the buyer’s broker owed the seller a duty to disclose that the purchase price was below FMV.

In the instant case: (1) it was conspicuously stated on the first page of the Purchase Agreement that Sanin was acting as the buyer’s exclusive agent, (2) there was no allegation Sanin prepared the Purchase Agreement knowing it was unacceptable to Greif, (3) the real property transaction did not involve an unconsummated purchase agreement subject to an unfulfilled condition precedent; and (4) there was no allegation Sanin knew the Purchase Agreement was unenforceable yet falsely represented it had been accepted, when he had not.

The purchase price information that Greif alleged Sanin negligently failed to disclose to Greif was known or should have been known by Greif, as seller, such that Sanin did not owe him a duty to disclose it.

The law generally assumes one will have some knowledge of the value of that which he owns.

Greif did not allege in his negligence cause of action that Sanin was dishonest or failed to disclose facts which were known or accessible only to Sanin, and which Sanin knew were not known to, or within the reach of the diligent attention and observation of Greif.

Sanin thus did not have a duty to tell Greif he was selling his property for less than the FMV, when Greif knew or should have known the value of his own property before selling it.

Sanin also owed no duty to Greif to explain the significance of facts that were readily accessible or observable by Greif.  Sanin did not owe a duty to tell Greif the purchase price stated in the Purchase Agreement was below FMV.

Under the circumstances in this case, there was no policy justification for placing the burden on the buyer’s exclusive broker to inform the seller that the purchase price is below FMV.

The purpose of a seller and buyer having the option of being represented by separate real estate agents is to protect the buyer and seller’s unique and antagonistic interests; that of the buyer seeking to purchase the property for as low a price as possible, and the seller attempting to sell the property for as high a price as possible.

For this reason, each party benefits from retaining his/her own agent.

Even under the facts alleged in this case, where the seller is elderly and physically infirm, public policy does not favor holding the buyer’s agent responsible for informing the seller that the agreed upon purchase price is below FMV.

That is the responsibility of the seller’s broker and, if the seller chooses not to retain a real estate agent or advisor, the seller is responsible for investigating the value of the Property and determining the sales price.

As a matter of law, Greif did not alleged facts establishing that Sanin owed a duty to advise Greif that the purchase price was less than the FMV or any other alleged breached duty. Therefore, the trial court did not err in granting judgment on the pleadings on Greif’s negligence cause of action against Sanin.

After conducting a court trial lasting over a month, the trial court entered judgment in favor of Yardley and against Greif that enforced the Purchase Agreement, thereby requiring Greif to sell the Property to Yardley and transfer title to Yardley in accordance with the Purchase Agreement, in return for payment by Yardley of $330,000 to Greif.

The judgment further awarded Yardley $43,040.80 in conversion damages, consisting of the interest that accrued during retention of Yardley’s money by the escrow company during Greif’s delay in signing the escrow cancellation instructions.

In addition, the trial court awarded Yardley, as prevailing party, its costs and attorney fees, to be determined at a later date.

Greif contended he met its burden of proving the unilateral mistake defense and, therefore, the trial court erred in ordering the Purchase Agreement enforced, instead of rescinded.

A party may rescind a contract if his or her consent was given by mistake. (Civ. Code, § 1689, subd. (b)(1).)

A factual mistake by one party to a contract, or unilateral mistake, affords a ground for rescission in some circumstances.

Civil Code section 1577 defines “mistake of fact” as “a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in: 1. An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or, 2. Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed.

The trial court found Greif had not met this burden of establishing clear, convincing, and satisfactory evidence of the unilateral mistake defense.

The trial court concluded that (1) there was insufficient evidence of a mistake by Greif; (2) there was insufficient evidence that buyer knew of any mistake; (3) there was insufficient evidence buyer did anything to encourage or foster any mistake; and (4) any mistake was caused by the neglect of Greif and his representatives.

Greif argued that the evidence established that (1) Greif made a mistake when signing the Purchase Agreement, agreed to the $330,000 purchase price, (2) the mistake had a material effect on him signing the Purchase Agreement, resulting in Greif selling the Property for less than its FMV, (3) Greif did not bear the risk of the mistake, and (4) enforcement of the Purchase Agreement would be unconscionable because Greif was elderly, had physical and mental disabilities, was rushed into signing the Purchase Agreement, and sold the Property for less than the FMV.

The appellate court concluded there was substantial evidence to support the trial court’s finding that Greif did not make a material mistake of fact when he signed the Purchase Agreement.

There was evidence that, at the time of the sale, Greif was mentally and physically capable of comprehending, reading, hearing, and negotiating the sale of the Property, and was competent when executing the Purchase Agreement.

In addition, there was compelling evidence that Greif competently negotiated the purchase price and knowingly agreed to sell the Property for $330,000 when he signed the Purchase Agreement.

It was not until a few days later, after a friend told him the price was too low, that he attempted to back out of the Purchase Agreement by claiming he thought the purchase price was in the $3 million range.

There was substantial evidence supporting the trial court’s findings that Greif did not make a mistake of fact as to the agreed upon purchase price of $330,000 when he signed the Purchase Agreement; there was no miscommunication or confusion by Greif during the Property transaction negotiations or signing of the Purchase Agreement; there was no misunderstanding of the terms of the Property sale by Greif due to any physical or mental issues; Greif did not misread or miscomprehend the purchase price stated in the Purchase Agreement; and there was no error in drafting the Purchase Agreement to reflect the terms orally agreed upon.

Greif was not entitled to relief under the unilateral mistake of fact defense where the evidence showed that any error on Greif’s part was due to his error in judgment in selling the Property for what he later believed was too low a sales price.

Such ignorance or erroneous belief as to the mere value of property does not amount to mistake of fact as defined in Civil Code section 1577.

Therefore, Greif could not rely on a mere mistake by Greif as to value of the Property but instead had the burden of showing by ‘clear, convincing and satisfactory’ evidence that Greif made the mistake of believing he had actually contracted to sell the Property for $3.3 million. The trial court reasonably found there was insufficient evidence to support such a finding.

Furthermore, any mistake Greif made in setting the purchase price too low does not amount to the type of mistake of fact that qualifies for rescission under the unilateral mistake of fact defense.

Merely making a mistake as to the Property’s value is not a valid basis for rescinding the Purchase Agreement based on the unilateral mistake defense.

Greif bore the risk of any mistake in setting the purchase price too low because he was responsible for investigating, evaluating, and determining the purchase price for the Property. As a consequence, enforcing the Purchase Agreement was not unconscionable.

Greif contended that even if the Purchase Agreement is an enforceable contract, specific performance was not an available remedy because there was inadequate consideration.

Specific performance cannot be enforced against a party to a contract if he has not received an adequate consideration for the contract, as measured at the time the contract was made.

The remedy of specific performance is a discretionary, equitable remedy.

Greif argued Yardley did not provide adequate consideration for the Purchase Agreement because the purchase price of $330,000 was a fraction of the FMV of the Property.

The parties introduced expert opinion testimony to assist the court in assessing the adequacy of the consideration, and the value of the property at the time of the Purchase Agreement is a question of fact.

The trial court, in assessing the Property’s value, took into consideration expert opinion testimony regarding the value of the property provided by both parties’ experts.

Greif’s expert appraised the Property at $1.25 million. Yardley’s expert appraised the Property at $705,000. Based on additional evidence affecting the value of the Property, the trial court found that the Property value was in the $500,000 range, and the $330,000 purchase price was substantially fair and just under all of the circumstances of the case.

It is the universal rule that the market value of property is measured by the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all the uses and purposes to which it was adapted and for which it was capable.

Thus, in determining whether consideration was fair and adequate, all circumstances surrounding the transfer of the property as they existed at that time, must be considered.

A consideration, to be adequate, need not amount to the full value of the property. The test is not whether the seller received the highest price obtainable for his property, but whether the price he received is fair and reasonable under the circumstances.

Evidence Code section 813 provides in relevant part: (a) The value of property may be shown only by the opinions of any of the following: 1) Witnesses qualified to express such opinions. (2) The owner of the property or property interest being valued. (b) Nothing in this section prohibits a view of the property being valued or the admission of any other admissible evidence (including but not limited to evidence as to the nature and condition of the property) for the limited purpose of enabling the court to understand and weigh the testimony given under subdivision (a); and such evidence is subject to impeachment and rebuttal.

Evidence Code section 813 does not preclude the court from assessing the value of real property differently than the value stated by an expert based on other relevant evidence.

Subdivision (b) of Evidence Code section 813 clarifies that the trial court can consider other relevant evidence when considering and weighing expert testimony. A court is thus not bound by the property value assessments provided by the experts, where other evidence supports rejection of the expert’s property value assessment.

The trial court found the Yardley's expert appraisal of the Property was more credible than Greif's expert appraisal, and the Property’s actual value was lower because of consideration of the significant issues bringing water to the Property. Such a factor would have a material impact on the appraised value of the Property.

Based on evidence there were no water services for the Property and obtaining them would be a massive, expensive undertaking, the trial court reasonably rejected the expert witness appraisals and concluded the Property’s value was closer to $500,000.

The trial court reasonably found that, although the purchase price was $330,000, it was substantially fair and just under the totality of the circumstances.

Although the price may be less than the FMV at that time, it was not an unreasonable price based on evidence the Property could not be developed without a massive, expensive undertaking to obtain water services.

As the trial court noted, “adequate consideration” need not be the full value of the property. It need only be fair and reasonable under all of the circumstances of the case.

The trial court found that Greif committed conversion of Yardley’s funds by delaying for almost two years signing escrow cancellation instructions required to release Yardley’s funds deposited in escrow.

Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.

Conversion is a strict liability tort.

The foundation of the action rests neither in the knowledge nor the intent of the defendant. Instead, the tort consists in the breach of an absolute duty; the act of conversion itself is tortious. Therefore, questions of the defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial.

Conversion damages are calculated based on the detriment caused to the plaintiff. Such detriment caused by wrongful conversion of personal property is presumed to be the value of the property at the time of the conversion, with the interest from that time, or, an amount sufficient to indemnify the party injured for the loss which is the natural, reasonable and proximate result of the wrongful act complained of and which a proper degree of prudence on his part would not have averted.

Money may be the subject of conversion if the claim involves a specific, identifiable sum.

Even though the escrow company, not Greif, had possession of Yardley’s funds for almost two years, Greif acted wrongfully in delaying the release of the escrow funds to Yardley.

A conversion claim does not require that a specific lump sum of money be entrusted to defendant; the plaintiff must merely prove a specific, identifiable sum of money that was taken from it.

Substantial evidence supported such a finding where there is evidence Greif unjustifiably delayed signing escrow cancellation instructions, which resulted in tying up Yardley’s money for almost two years.

LESSONS:

1.         Parties to a sales transaction should obtain qualified advice from a broker or other professional such as an attorney in order to understand and knowingly agreed to all of the terms, including the sale price.

2.         Real estate agents, regardless of whether they represent the buyer or seller, owe a duty of care to third parties in a real property transaction.

3.         The standard of care imposed on a real estate broker is higher than that applicable to a layperson, and the broker is subject to a duty of skill, care, and diligence commensurate with the professional standards that the real estate industry has held out to the public and that the public reasonably can expect.

4.         Whether a real estate broker has a duty of care to a third party is a question of law that is determined by weighing the following factors: (1) the extent that the transaction was intended to affect the third party; (2) the foreseeability of harm; (3) the degree of certainty that the third party suffered injury; (4) the closeness of the connection between the broker’s conduct and the injury suffered; (5) the moral blame attached to the broker’s conduct; and (6) the policy of preventing future harm.

5.         Under the common law, there is little question that a real estate broker owes a duty of care to third persons in the transaction, where the broker does not have privity with, or fiduciary duties to, such third person.