No Duty Owed for Replacement Tenant

Read the full decision: Steele v. Silver Oak Real Estate of Orange Cty.

California appellate court affirms verdict in favor of real estate professional, finding that the real estate professional who had represented seller in the initial transaction did not have an agency relationship with the seller in the subsequent lease transaction.

The owners of a bakery (“Owners”) decided that they needed a bigger space for their bakery. They contacted a real estate licensee (“Licensee”) to help them sell the business. The Owners held a lease for the bakery space that had over three years remaining. The Owners expected the Salesperson to find a buyer who would assume their lease obligations.

The Salesperson found a buyer (“Buyer”) for the business, and the Buyer provided her financial information to the Licensee. The Licensee shared the financial information with the property manager and the Owners, and they found her credit worthy. The Buyer signed a new lease, but the property manager required the Owners to sign a personal guarantee for the time remaining on their lease.

Before she could open her new business, the Buyer’s fiancé stole all her money. The Buyer was forced to declare bankruptcy and defaulted on the lease. Following the default, the Owners sued the Licensee for breach of fiduciary duty and negligence. Because the Licensee continued sending leads to the Owners for possible businesses to assume the lease, the Owners eventually dismissed the lawsuit.

The Licensee was contacted by an individual interested in leasing the space and the Licensee agreed to represent him in the negotiations with the property manager. The parties entered into lease that was a $1000/month less than the amount personally guaranteed by the Owners. When the personal guarantee expired, the property manager sued the Owners for the unpaid amounts under the personal guaranty and the court entered a stipulated judgment.

The Owners filed a lawsuit against the Licensee and his brokerage firm alleging breach of fiduciary duty, fraud, and negligence. A jury returned a verdict in favor of the Licensee, and the trial court refused to enter judgment in favor of the Owners following the verdict because there was no agency relationship between the Owners and the Licensee for the new tenant’s lease. The Owners appealed.

The California Court of Appeal, Fourth District, affirmed the trial court rulings and the judgment in favor of the Licensee. The Owners argued that the trial court erred by not entering judgment in their favor after the jury verdict because the Licensee was acting as their agent when he obtained a new tenant for the property following the Buyer’s default.

The court ruled that the lower court had correctly denied the Owners’ motion for judgment. To determine whether a person is acting as an agent for another party, there needs to either be an agency agreement or ostensible agency, which occurs when a principal causes a third party to believe that another individual is serving as the principal’s agent. Since there was no agreement for the Licensee to represent the Owners in the second leasing transaction nor was there any evidence that anyone believed the Licensee was representing the Owners, the court affirmed the trial court’s rejection of these arguments and upheld the jury verdict.

Steele v. Silver Oak Real Estate of Orange Cty No. G051180, 2017 WL 3381470 (Cal. Ct. App. Aug. 7, 2017). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information.]

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