Legal Update

C.A.R.'S ATTORNEY FEES PROVISIONS WITHSTAND COURT SCRUTINY
The courts in two recent cases judicially enforced the attorney fees provisions in C.A.R.'s standard forms. These cases serve to remind REALTORS® to familiarize themselves with the wording in the C.A.R. forms, such as the widely-used Residential Purchase Agreement and Residential Listing Agreement.

First, C.A.R.'s Residential Purchase Agreement generally allows the prevailing seller or buyer to recover attorney fees and costs for any action, proceeding, or arbitration. This provision came under scrutiny in a case involving a licensed real estate broker, Thomas Horning, who entered into a contract to buy a $715,000 property in 2001. The seller agreed to pay Tom a 3% commission, even though Tom merely represented himself as buyer. When the seller breached the contract, Tom sued for specific performance, or in the alternative, monetary damages. Tom also recorded a lis pendens against the property. The seller, however, successfully moved to expunge the lis pendens, and then sold the property to a third party for $920,000 in 2003.

In pursuing his remaining claim for monetary damages, Tom sought to recover his lost profits and the 3% commission. As for the lost profits, Tom claimed the difference between the $715,000 contract price set in 2001 and the $920,000 sales price in 2003. The court denied this claim because the proper measure of damages was the difference between the purchase price and the fair market value on the date of breach, not at the time of trial. Yet, Tom failed to present any evidence of the fair market value on the date of breach.

The court also denied Tom's claim for the 3% commission. The court noted that a person acting on his own behalf is not a broker, because a broker is defined as someone acting for compensation on behalf of someone else. Hence, the court considered the 3% commission as a 3% credit to the buyer. The court would have awarded Tom the difference between the $693,550 net price and the fair market value of the property on the date of breach. However, as mentioned above, Tom failed to present any evidence of the fair market value on the date of breach.

Because Tom ultimately recovered nothing, the court deemed the seller as the prevailing party of this case. As a result, the court awarded the seller, the party who breached the underlying contract, over $85,000 in attorney fees and costs. This case is called Horning v. Shilberg, 120 Cal. App. 4th 1023 (decided June 14, 2005).

The second case of interest addresses the attorney fees provision in C.A.R.'s Residential Listing Agreement. This provision allows the prevailing listing broker or seller to recover attorney fees for any action, proceeding, or arbitration regarding the obligation to pay compensation. In the case of interest, a seller alleged that his listing broker failed to disclose that his property, which sold for $3.7 million, was actually worth $4.5 million.

The seller sued for fraud, breach of fiduciary duty, and breach of the duty to disclose, but later dismissed his own complaint voluntarily. The listing broker asked the court to award her, as the prevailing party, her attorney fees. The court refused because the case did not involve "the obligation to pay compensation" as called for by the listing agreement. Upon winning that particular issue, the seller now asked for an award for his attorney fees. The seller argued that, as a matter of reciprocity, he was entitled to recover his attorney fees because the listing broker previously claimed a right to her attorney fees. The court disagreed. The court held that the seller was not entitled to attorney fees merely because the listing broker requested them. This case is called Hasler v. Howard, 2005 WL 1530520 (decided June 30, 2005).

For more information, C.A.R. members may contact C.A.R.'s Member Legal Hotline at 213.739.8282, or for office managers, broker/owners, and designated REALTORS®, call 213.739.8350. Access to Member Legal Hotline is also available through C.A.R. Online at http://www.car.org/index.php?id=NTk2.