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Risk Management 4: Fullfilling Fiduciary Duty of Loyalty

A major cause of potential liability relates to agency representation and a licensee’s breach of fiduciary duties. The agency relationship is at the center of all client real estate transactions. It is often the failure of the licensee to understand the duties and responsibilities imposed by agency law that lead to license revocation and licensee civil liability.

A licensee’s initial obligations to a principal are based upon contract law. A licensee owes to his/her principal the duty to comply contractually with the terms of the agency agreement. In the case of an agent representing the seller, it will usually be the listing agreement. In the case of an agent representing a buyer, it will usually be the buyer broker agreement. In the case of the property manager, it will be the property management agreement. Obviously, a breach of any of these contracts will give rise to potential liability. Therefore, the first line of defense relates to the licensee complying with the terms of the employment contract into which he/she has entered with the client.

In addition to the compliance with the terms of the underlying contractual agreement, the agent will owe the certain fiduciary duties to the principal. These duties depending on state law will be based upon common law fiduciary duties, state statute relating to fiduciary duties owed or a combination of both common law and statutory duties.

As a fiduciary, a licensee is held to the highest amount of good faith, is required to exclude all self-interest, is prohibited from putting themselves in positions where personal interest and representative interest will conflict, and must in any direct dealing with the principal make full disclosure of all relevant facts and give the latter an opportunity to obtain independent advice.

The following are the traditional common-law fiduciary duties imposed upon an agent: care, disclosure, accounting, obedience and loyalty.  In this article the focus is on the duty of loyalty.

The duty of loyalty requires the agent to place the interests of the principal above all others, including the agent’s own interests. Some of the implications of this duty in the real estate industry are:

  • Information relating to confidential matters gained from the principal may not be disclosed. A seller’s agent may not disclose the financial condition of the seller, the seller’s willingness to take a lesser price, the seller’s desperation to sell, etc., unless specifically authorized by the seller. Simply put, unless the principal desires that certain matters be disclosed to third parties, the agent is under a legal obligation to protect the confidentiality of those matters. However, there is a limitation imposed on this duty by statute and case law. The protection of confidential information does not include or permit a broker to withhold material facts and that must be disclosed as a matter of good faith and honest dealing. Because the concept of confidentiality is so intertwined with the duty of loyalty, it is viewed as one aspect of the duty of loyalty, rather than a separate fiduciary duty.
  • The duty of loyalty prohibits a divided agency, also known as an undisclosed dual agency, where an agent acts on behalf of an adverse party without the principal’s knowledge or consent.
  • The duty of loyalty requires an agent to disclose an ownership interest in a property offered for sale, and to disclose that he/she has a real estate license if he/she is making an offer on a property for his/her own account.
  • The duty of loyalty prohibits competing with the principal either for another principal or for the agent’s own account in matters relating to the subject of the agency. An example of this prohibited conduct is represented by this example: A real estate agent entered into a listing agreement with an owner of an eight-unit apartment building.  The agent recommended a target sale price based upon a comparative market analysis. Shortly thereafter, the agent expressed an interest in directly acquiring the property and presented a purchase offer.  The agent and the seller agreed on a price after a brief period of negotiations and proceeded to close escrow. The property was never entered into the Multiple Listing Service (MLS), and the agreed sales price was well below its true market value. The agent proceeded to sell it one week later for $87,500 more than what he paid. As a result, By neglecting to place the property into the MLS, the agent did not afford his seller the opportunity to attract the best possible sales price, therefore, failing to put the best interest of his client first.  In this case the seller filed litigation against the agent and his broker alleging, in part, that they purposely suggested an under-market price with the intention of buying and “flipping” it. The brokerage tendered the claim to its real estate Errors & Omissions Insurance company, which subsequently denied coverage since the policy did not afford protection when any individual or entity of the brokerage has a financial interest in the purchase and sale of property. (There are varying provisions in some errors & omissions policies that allow coverage in the sale of certain residential property.)  The agent and the brokerage as a result were liable for the damages suffered by the seller-plaintiff.

The above example is clearly demonstrates that a license should always under the fiduciary duty of loyalty should place the interests of the principal above all others and particularly the agent’s own interests.  Faithfully executing one’s fiduciary duties to a client is crucial to any risk avoidance strategy.

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