Daily Development for Wednesday, September 10, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

BROKERS; BUYER’S BROKER DISCLOSURE: Broker for proposed lessee has no duty to disclose to lessor during negotiations any financial difficulties faced by proposed lessee. 

Blickman Turkus, LP v MF Downtown Sunnyvale, LLC 162 CA4th 858, 76 CR3d 325 (2008) 

CPS entered into a listing agreement, on commission (to be paid one half on lease execution and one half on commencement of rent), to obtain a lessee for buildings to be built on property owned and managed, respectively, by MF Downtown Sunnyvale, LLC and Mozart Development Co. (collectively, Mozart). The agreement provided that cooperating brokers would receive half of any commission paid.  In early 2001, Mozart signed written leases with Handspring, Inc. for two buildings to be completed to Handspring's specifications by approximately September 2002. Handspring's obligations were secured by letters of credit. Blickman Turkus, LP, doing business as BT Commercial Real Estate (BTC), represented Handspring in the lease transaction.

Handspring began to have financial difficulties beginning in October 2001. Mozart learned of Handspring's financial problems in August 2002, when it was contacted by another agent for Handspring to negotiate a termination of the leases. In exchange for termination of the leases, Mozart received stock, notes, and cash, and was permitted to draw on the letters of credit for a total consideration valued at more than $50,000,000.

BTC claimed that it was the procuring agent and a cooperating broker under Mozart's listing agreement with CPS and entitled to a commission. Claiming that Mozart had paid the first half of the commission but had refused to pay the second, BTC asserted claims for breach of contract, the covenant of good faith and fair dealing, an implied promise to complete the lease transaction, and tortious interference with advantageous relationship. Mozart cross-claimed, alleging that BTC had been aware of Handspring's financial problems as early as October 2001 and had failed to inform Mozart, which suffered damages as a result. Mozart and BTC both successfully challenged the other's claims before trial, and the superior court entered judgment that neither party take anything. Mozart's motions to vacate the judgment and for attorney fees were denied. Both sides appealed. The court of appeal affirmed the judgment.

The fatal flaw of Mozart's cross-claims was that BTC had no duty to disclose to Mozart the information about Handspring's financial problems - whether as agent for Handspring or, hypothetically, for Mozart or as a result of representations made at the time Handspring entered into the lease. Mozart never believed or rationally could have believed that BTC represented Mozart's interests.

Further, there was no evidence in the record of any basis for Mozart to expect that BTC would disclose Handspring's confidential information other than as Handspring might direct. Nor was there any duty for BTC to correct statements, made before execution of the lease, that allegedly became incorrect thereafter.

Mozart sought to recover for alleged harm not in entering into the lease, but from the failure to withdraw from the lease sooner than it did. Mozart's claims based on dual agency also failed because even if BTC were a dual agent, its obligation, when faced with a conflict between two principals, would be to withdraw from the representation rather than to disclose confidential information.

Mozart's claim for attorney fees failed as well. Even if BTC had succeeded in its claims, it would not have been entitled to attorney fees because it was not a party to the contract (between Mozart and CPS) containing the attorney fee provision.

Comment 1: In Lombardo v. Albu, 14 P. 3d 288 (Ariz. 2000) (the DIRT DD for 12/14/00) the Arizona Supreme Court found that is a general duty at common law for both a buyer in the course of contract negotiations and the buyer’s agent to disclose adverse financial information concerning the buyer’s ability to purchase even when that information is available to the seller in some other way.  The same rule would apply, of course, by extension to lessees and lessee’s agents.  Although the California court here does not cite the Arizona precedent in Lombardo, it seems to be at odds with that decision.  The editor, incidentally, criticized the Arizona decision and began uttering “Pandora’s box” comments. 

Comment 2: Not surprisingly, the NAR agreed with the editor and in lobbying through the disclosure rules for buyer’s and lessee’s brokers for Missouri and other states, there was included  language substantially similar to the following, protecting confidential financial information about the client buyer or tenant:

“A licensee acting as a buyer's or tenant's agent shall not disclose any confidential information about the client unless disclosure is required by statute, rule, or regulation or failure to disclose the information would constitute a misrepresentation or unless disclosure is necessary to defend the affiliated licensee against an action of wrongful conduct in an administrative or judicial proceeding or before a professional committee. No cause of action for any person shall arise against a licensee acting as a buyer's or tenant's agent for making any required or permitted disclosure.” RMS 339.740. 2.

Similar language in Colorado displaced earlier statutory language, contained in Colo. Rev.  Stat. Section 12-61-801 (now superceded) that would have imposed on the buyer’s or tenant’s broker the duty to disclose to the other side “. . . all adverse material facts actually known by the broker including but not limited to adverse material facts concerning the buyer's . . . financial ability to perform the terms of the transaction.”  So it looks as if the U.S. is turning away from the requirements of Lombardo and in fact requiring brokers to protect information about the client’s adverse financial situation unless to do so would amount to an affirmative fraud by affirming another’s statement of inaccurate contrary information. 

Readers are encouraged to respond to or criticize this posting.

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