4.4 Agency Relationships, Fiduciary Duties, and Disclosure

Agency Relationships, Fiduciary Duties, and Disclosure

Agency law governs the relationship between a real estate licensee and the people in a transaction. Getting agency wrong is one of the most common causes of license discipline, so exams test it heavily.

Key parties

• Principal (client): The person who hires the agent and to whom fiduciary duties are owed.
• Agent: The broker authorized to act on the principal's behalf; salespersons are usually subagents of their broker.
• Customer: A party the agent works with but does not represent (e.g., a buyer in a seller-agency transaction). Owed honesty and fair dealing only.
• Third party: Anyone else affected by the transaction.

How agency is created

Agency is not created merely by paying a commission — a buyer's agent may be paid from the seller's proceeds yet still represent the buyer. Source of compensation does not determine who the agent represents.

Fiduciary duties — OLD CAR

An agent owes the client these duties, commonly memorized as OLD CAR:

A classic trap: a seller's agent learns the buyer will pay more than the offered price. Loyalty and disclosure to the seller require revealing this to the seller (the client) — it is the buyer's own agent who must keep the buyer's maximum price confidential.

Customers vs. clients, and dual agency

A customer is owed honesty, fair dealing, and disclosure of known material defects — but not the OLD CAR fiduciary duties. A seller's agent must answer a buyer's direct questions truthfully but does not negotiate on the buyer's behalf.

Dual agency occurs when one agent (or brokerage) represents both buyer and seller in the same transaction. Because full loyalty to both is impossible, dual agency is legal only with informed written consent from both parties, and the agent's duties become limited — the agent cannot disclose one party's confidential price strategy to the other. Undisclosed dual agency is a serious violation and can void the transaction and cost the license.

Material-fact disclosure

Agents must disclose known material facts about the property — facts that could affect a reasonable buyer's decision or the value (a leaking roof, a failing septic, prior flooding). This duty is owed to customers as well as clients. However:

• Property condition = disclose (material defects).
• Client confidential information (motivation, lowest acceptable price) = keep private from the other side.
• Stigmas (deaths, etc.): treatment varies by state; never misrepresent if directly asked.

Single agency, designated agency, and facilitators

Beyond dual agency, exams test other representation models. In single agency the brokerage represents only one side. In designated (appointed) agency, the broker assigns one licensee to the buyer and a different licensee to the seller within the same firm, so each client keeps a loyal agent while the broker manages the conflict. A transaction broker / facilitator (recognized in some states) helps both parties complete the deal without representing either as a fiduciary, owing honesty and competence but not loyalty.

Match the model to the fact pattern: if both clients have their own in-house licensee, that is designated agency, not classic dual agency. If the licensee assists but advocates for neither, that is a facilitator.

Subagency and the source-of-pay trap

A salesperson acts as the agent of their broker, and historically a cooperating broker could be a subagent of the seller through the MLS. The repeated exam trap is assuming the party who pays the commission is the client. A buyer's agent paid from the seller's proceeds still owes OLD CAR duties to the buyer. Determine representation from the agency agreement and disclosures, never from who writes the check.

Termination of agency

Agency ends by: completion (closing), expiration of the term, mutual agreement, revocation by the principal, renunciation by the agent, or by operation of law (death, incapacity, bankruptcy, or destruction of the property). Confidentiality, however, survives termination.

California Agency Disclosure: The Mandatory AD Form and Its Timing

California codifies agency disclosure in Civil Code 2079.13 through 2079.24, and the DRE tests the procedure precisely.

The Three-Step Disclose-Elect-Confirm Sequence

Every residential sale of one-to-four units (and now, since 2019, certain leases over one year) requires the Disclosure Regarding Real Estate Agency Relationships (the "AD" form), which walks the consumer through the three representation options. The statute imposes a strict timeline:

The listing agent must deliver the AD form before the seller signs the listing; the selling (buyer's) agent must deliver it before the buyer signs the offer. Missing this disclosure is one of the most common DRE discipline triggers.

Dual Agency, California-Style

California permits dual agency only with the informed written consent of both parties. Critically, Civil Code 2079.21 bars a dual agent from disclosing to the buyer that the seller will accept less than the listing price, or to the seller that the buyer will pay more than the offered price, without express written permission. So even where dual agency is consented to, the agent must wall off each side's price strategy.

A Worked Disclosure Trap

A seller's agent, before any AD form is signed, tells a buyer's agent that her seller "is desperate and will take $30,000 under list." This breaches loyalty and confidentiality to the seller-client and exposes the agent to discipline and a damages claim — confidential client information may never be volunteered to the other side. Contrast: if a buyer directly asks the seller's agent whether the roof leaks, the agent must answer truthfully, because material property defects are owed even to a customer.

Trap: Source of payment never determines representation. A buyer's agent paid entirely from the seller's proceeds still owes the buyer the full OLD CAR fiduciary duties; the agency agreement and the confirmed AD election control, not who signs the commission check.