4.4 Agency Relationships, Fiduciary Duties, and Disclosure

4.4 Agency Relationships, Fiduciary Duties, and Disclosure

Agency law governs the relationship between a principal (client) and an agent (broker) who acts on the principal's behalf. The salesperson is usually a sub-agent of the broker. The exam tests how agency forms, the duties it creates, and the disclosures it requires.

How Agency Is Created and Terminated

Agency is created by:

• Express agreement — a written or oral listing/buyer-representation agreement.
• Ratification — the principal approves acts done on their behalf after the fact.
• Estoppel — the principal's conduct leads a third party to reasonably believe agency exists.

Agency terminates by performance (the deal closes), expiration of the term, mutual agreement, revocation, renunciation, death or incapacity of either party, or destruction of the property.

Fiduciary Duties: OLD CAR

An agent owes the principal the highest duties in law. Memorize the acronym OLD CAR:

Trap: Confidentiality survives the end of the agency. An agent may never reveal the seller's bottom-line price to a buyer, even after closing.

Single, Dual, and Designated Agency

• Single agency — the agent represents only one party (seller OR buyer). Cleanest fiduciary picture.
• Dual agency — one brokerage represents both buyer and seller in the same transaction. Legal only with informed written consent from both. The dual agent becomes a neutral facilitator and cannot advocate price terms for either side or disclose confidential information learned from one to the other.
• Designated agency — the broker assigns one agent to the buyer and a different agent to the seller within the same firm, each acting as a single agent.

Trap: Undisclosed dual agency is a serious violation and can result in license loss and forfeiture of commission, even if the agent acted in good faith.

Clients vs. Customers

The principal/client is owed full fiduciary duties (OLD CAR). A customer (a third party, such as the buyer in a seller-agency transaction) is owed only honesty, fair dealing, and disclosure of known material defects — not fiduciary loyalty.

Worked scenario. A listing agent (seller's agent) shows the home to an unrepresented buyer. The buyer says, "I'd pay up to $390,000, but offer $370,000." The agent:

• Must disclose to the seller that the buyer would pay $390,000 (duty of disclosure and loyalty to the seller).
• Must not mislead the buyer about known material defects (duty of honesty to the customer).

The buyer mistakenly treated the seller's agent as their own. This is why agency disclosure at first substantive contact exists: it tells the buyer the agent works for the seller.

Material Facts, Latent Defects, and the Limits of Confidentiality

The duty of confidentiality to a principal never overrides the duty to disclose material facts about the property to all parties. An agent must reveal a latent (hidden) defect — a structural, safety, or title problem not reasonably discoverable on inspection — even if the seller-principal would rather conceal it. Loyalty protects the principal's negotiating position (motivation, bottom-line price), not the agent's silence about a leaking foundation.

Distinguish three categories the exam blurs:

• Confidential — the seller's lowest acceptable price, financial distress, reasons for moving. Protected.
• Material property facts — defects affecting value, safety, or use. Must be disclosed.
• Personal characteristics of occupants — protected-class status, HIV/AIDS, prior occupants' deaths in many states. Usually must NOT be disclosed (fair-housing and privacy limits).

Misrepresenting or concealing a known material defect exposes the agent to license discipline and civil liability regardless of who the agent represents.

Misrepresentation, Puffing, and Agent Liability

Not every optimistic statement is actionable. Puffing is non-factual sales opinion ('this is a charming, sunny home') and is permitted. A statement crosses into misrepresentation when it asserts a false material fact ('the roof is two years old' when it is twenty). Misrepresentation can be:

• Negligent — the agent should have known the statement was false.
• Fraudulent — the agent knowingly lied or recklessly disregarded the truth.

Worked scenario. A listing agent tells a buyer the basement 'has never flooded' while holding a prior insurance claim showing it had. This is fraudulent misrepresentation: the buyer may rescind and seek damages, and the agent faces discipline. Contrast 'this is the best-built home on the block,' which is puffing.

The safe practice is to disclose known facts, decline to vouch for matters outside the agent's knowledge, and recommend professional inspections rather than offer guarantees about condition.

Subagency, Buyer Agency, and Compensation Confusion

A persistent exam theme is that who pays the agent does not determine whom the agent represents. A buyer's agent may be compensated through the listing-side commission split yet still owes fiduciary duties to the buyer, not the seller. Historically, a cooperating broker who showed a listing was treated as a subagent of the seller through the MLS, which created accidental dual-loyalty problems; modern practice instead defaults the cooperating broker to buyer agency unless otherwise agreed.

• Subagent — owes fiduciary duties to the listing broker's principal (the seller).
• Buyer's agent — owes fiduciary duties to the buyer regardless of the commission source.
• Designated agent — one agent for each side within a single firm; the broker manages the firm-level conflict.

The takeaway for a salesperson: clarify and document the representation in writing early, and never let a buyer assume you represent them simply because you are showing homes or because the seller is paying the fee.