A new case sheds light on how California courts view the obligations of real estate brokers in commercial transactions. In Sharabianlou v. Karp (Feb. 5, 2010), the California Court of Appeal confirmed the validity of contract provisions in which the broker disclaims its obligation to provide legal or environmental advice. This article discusses portions of the Sharabianlou opinion that were not ordered to be published, and which are thus not binding on future courts. The Court’s treatment of the broker’s responsibilities nonetheless provides helpful insight into how at least one court is thinking in this area.

In the Sharabianlou case, environmental contamination was discovered on the property after the buyers and sellers signed a purchase agreement, but before contingencies had been removed. Following a series of contract extensions, the buyers agreed that all contingencies would be removed, provided the property appraised for at least $1.7 million. During the appraisal, the buyer’s broker did not discuss the contamination issues with the appraiser, and did not tell him that environmental reports had been prepared for the property. Ultimately, escrow did not close, and the buyers sued their broker as well as the sellers. The claims against the broker alleged that the broker breached his fiduciary duties by failing to tell the appraiser about the contamination issues, which the buyers claimed would have caused the appraisal to fall below $1.7 million and thus penalty-free cancellation of the purchase agreement. The buyers also alleged that the Broker was professionally negligent in drafting an ambiguous addendum to the purchase agreement, and in neglecting to advise them to consult a lawyer under the circumstances.

In its opinion, the Court of Appeal noted that under California law, the broker had no duty to offer his opinion as to how the contamination would affect the property’s value. While a broker owes duties to his or her clients to disclose all material facts, the broker generally owes no duty to offer an opinion of how those facts will affect the property’s value. The court did not address whether a broker may have a duty to at least explain to his client that contamination might impact value negatively, even if there is no duty to quantify the impact.

The Court also noted that no prior cases have held that a broker’s duty extends to disclosing the existence of environmental contamination to a third party, such as a lender’s appraiser. The Court did leave open the possibility that such a duty might arise under different circumstances.

The Court rejected the Buyers’ claim that the Broker was negligent in failing to advise them to consult a lawyer, because both the purchase agreement and the form specifically limited the broker’s duties to provide legal advice, and specifically admonished the parties to the transaction to seek the advice of an attorney on legal questions. Because of these disclaimers, the Court held that the broker had no duty to advise the buyers to consult a lawyer after the environmental issues had arisen.

Some lessons to be learned?

  • It is generally advisable to use transaction forms clearly delineating the limits of the broker’s duties, and disclaiming the obligation to provide legal, tax, or other specialized advice. You may wish to consult with your in-house or outside counsel about how well your current forms meet these goals.
  • Although under the facts of th e Sharabianlou case, the Court found that the broker did not draft an ambiguous agreement, it left open the possibility that a broker who did draft an ambiguous agreement might be held liable for resulting damages. Generally, the best practice is for brokers to encourage their clients to consult their own attorney, and to put that encouragement in writing. Where that is not possible, agents are well advised to consult in-house or outside counsel before drafting contract provisions.