MARKETING GONE AWRY

The term “marketing” is defined to include the following: (1) the action or business of promoting or selling services, including advertising; (2) the business process of identifying, anticipating, and satisfying customers’ needs and wants; (3) the act or process of attracting customers.

Marketing/self-promotion is something that all of us undertake, but as a recent California appellate court decision (Moore v. Teed, April 24, 2020/2020 DJDAR 3890) illustrates, in a real estate context, it can have significant financial repercussions when the marketing/self promotion is relied upon by a purchaser but turns out to be false.

The Moore case arose out of the purchase and botched remodel of a fixer-upper house in the Pacific Heights neighborhood of San Francisco. Moore claimed that he was fraudulently induced by Teed, his real estate agent, to purchase and renovate a home because of Teed’s representations that the remodel could be accomplished in a cost-effective manner but to high-end standards of construction.

In his marketing material, Teed promoted himself as a real estate agent with “over 25 years of experience as a building contractor with an extensive background in historic renovations and a deep understanding of quality construction.” Teed told Moore that he could locate a lower-priced fixer-upper home in a choice neighborhood and then renovate it in a cost-effective manner but to a high-end standard of construction and that he had a team of construction professionals (engineers, contractors, etc.) who could achieve this result.

Moore and Teed toured several homes that Teed had renovated. Teed showed Moore the fixer-upper in Pacific Heights. The home was built in 1912 and was last updated in the 1950s. Teed proposed a number of renovations to the property that Teed represented he and his team could perform at a fixed price, which would result in a high-end quality home similar to the others that Teed had shown Moore. Moore purchased the property for $4.8 million and expected to spend “only” $900,000 for the renovations. Moore believed that Teed was a general contractor based upon Teed’s promotional material and boasts; however, Teed was not, in fact, licensed as any type of contractor. No contract was signed between Teed and Moore for the renovation project.

Teed recommended that Moore hire an architect and two engineers to design and engineer the renovations that were part of Teed’s “team of professionals”. Once the architect completed his design work, the project was put out for bidding, but the contractor bids were significantly higher than the $900,000 indicated by Teed. Teed told Moore that he would work with the architect to get the project back within budget and proposed cutting costs for some items in the project. Moore signed contracts with the contractors recommended by Teed, and Teed and his contractors then started the renovations. Significant portions of the house were gutted, the lot was excavated, and a new foundation was installed to accommodate part of the anticipated renovation of the living space.

Unfortunately, the work done by Teed and his team on the foundation was defective. Moore became aware of the defects and halted all work on the project. Moore retained other professionals to assist him in completing the project. However, the cost to complete the originally proposed renovations was much higher than Teed had estimated, and Moore ended up spending considerably more money to complete the project.

Moore sued Teed, alleging that he was fraudulently induced to purchase and renovate the property based on the false representations that Teed was an experienced contractor who could deliver a basic, yet high-quality, remodel for $900,000. The jury agreed with Moore and concluded that Teed had defrauded Moore regarding his expertise and contractor licensing status, breached fiduciary duties to Moore, and willfully deceived Moore and induced him to buy the property to his detriment.

The jury awarded Moore damages representing the cost of completing the originally proposed renovation, including increased costs resulting from the delay in completing construction. Moore was also awarded his attorneys’ fees and costs, even though there was no written contract between Moore and Teed. The award of attorneys’ fees was based upon Business and Professions Code § 7160, which permits recovery of attorneys’ fees against a party who fraudulently induces a person to enter into home improvement contracts with third parties.

Teed appealed, but the appellate court agreed with the jury and concluded that a fiduciary should be held responsible for compensating his or her principal for the full amount of the loss caused by his or her breach of duty. The Court of Appeal also upheld the award of attorneys’ fees and costs under Business and Professions Code § 7160.

Real estate licensees should be aware that Moore may cause increased scrutiny of their conduct with respect to the following: (1) their marketing and promotional material, (2) the oral and written statements they may make regarding their knowledge, training, skill, and experience with respect to proposed renovations to a property, the cost thereof, any potential increased value as a result of such renovations, etc., (3) their recommendations of contractors and other individuals to design and/or perform any of the renovations, (4) the license status and knowledge, training, skill, and experience of the contractors and other individuals designing and performing the renovations, (5) who is contracting with the contractors and other individuals for the design and/or performance of the renovations, (6) who, if anyone, is dictating the method and manner in which the renovations are being performed, (7) the license status and/or experience of the individual(s) overseeing, coordinating, managing, and/or supervising the renovations, (8) depending on the foregoing facts and circumstances, whether anyone is acting as an unlicensed general contractor, and (9) who, if anyone, may have exposure for attorneys’ fees pursuant to Business and Professions Code § 7160.

Attorneys’ fees in California are recoverable where provided for by contract or by statute. Real estate industry forms currently do not contain attorneys’ fees clauses that directly expose the real estate licensees to paying their clients’ attorneys’ fees; those clauses are limited to actions between buyers and sellers. While there are potentially other theories of recovery for such fees, Moore puts a spotlight on Business and Professions Code § 7160 as a statutory basis for the recovery of attorneys’ fees where applicable. Recovery of attorneys’ fees under this Code section is authorized when a party is fraudulently induced by the contractor or solicited by any individual (such as a real estate licensee) to enter into a home improvement contract.

The Moore decision also addresses the definition of the term “contractor.” Business and Professions Code § 7026 states, among other things, that

“‘Contractor’ is synonymous with ‘builder’ and, within the meaning of this chapter, a contractor is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to improve  any building or other structures or works in connection therewith.”

In Moore, Teed was found by the jury – a finding upheld by the Court of Appeal – to be a contractor within the meaning of Business and Professions Code § 7026. This finding was reached because Teed offered to undertake, and purported to have the capacity to undertake, renovations to the property by or through others (his team of experienced architects, engineers, and contractors). While there is a distinction between a “construction manager” and a contractor, the appellate court upheld the jury’s findings under the facts in Moore that Teed was a “contractor” under the statutory definition and was therefore liable for attorneys’ fees. The fact that he was an unlicensed contractor did not prevent this outcome (and potentially exposed Teed to other liability).

Lawyers are going to discuss the Moore case because of its analysis of, among others, the following subjects: (1) the measure of damages in an action for fraud by a fiduciary, (2) the instructions that the jury received, (3) whether the damages award was speculative, (4) whether the damages award was duplicative, and (5) the recovery of attorneys’ fees in the absence of a contract.

Real estate licensees should consider consulting with a qualified California real estate attorney if their marketing and/or promotional materials or the nature of their business involves facts and circumstances that are in any way similar to those in the Moore case. This includes agents who are actively involved in significantly upgrading properties for sale.