4.4 Agency Relationships, Fiduciary Duties, and Disclosure

Agency law defines whom the licensee represents and what duties that representation creates. The national exam tests how agency forms, the fiduciary duties owed to a principal, the lower duties owed to third parties, and the disclosures that keep dual or designated agency lawful.

Parties in an Agency Relationship

The principal (client) hires the agent and is owed fiduciary duties. The agent is the broker who represents the principal; salespersons act as subagents of their broker. A customer is a third party the agent deals with but does not represent. Knowing who is the client versus the customer drives most agency questions.

How Agency Is Created and Ended

Agency usually arises by express agreement (a signed listing or buyer-representation agreement) but can form by implication through conduct, or by ratification when a principal later approves acts done on their behalf. Agency ends by completion, expiration, mutual agreement, revocation, renunciation, or operation of law (death, incapacity).

Fiduciary Duties (OLD CAR)

The duties an agent owes the principal are commonly memorized as OLD CAR:

• Obedience to lawful instructions
• Loyalty, placing the client's interests first
• Disclosure of material facts to the client
• Confidentiality of the client's private information
• Accounting for all money and documents
• Reasonable care and diligence

Duties to Clients vs. Customers

Even toward a customer, the agent owes honesty and disclosure of known material defects. Loyalty and confidentiality, however, run only to the client. Telling a customer-buyer that your seller-client "will take less" breaches loyalty and confidentiality to the seller.

Types of Agency

• Single agency — the firm represents only one side (buyer or seller).
• Dual agency — the firm represents both parties in the same transaction; lawful only with informed written consent from both, and the agent becomes a neutral facilitator.
• Designated agency — the broker assigns different salespeople to each side within one firm.
• Transaction brokerage — a non-agency role providing services without full fiduciary loyalty (where state law allows).

Disclosed Versus Undisclosed Dual Agency

Disclosed dual agency with written consent is permitted in many states. Undisclosed dual agency is illegal everywhere and is a serious license-law violation, because the agent secretly owes loyalty to opposing parties. When in doubt on the exam, undisclosed dual agency is always the wrong, prohibited answer.

Disclosure Timing and Material Facts

Agency disclosure must occur early, typically at first substantive contact, before confidential information is exchanged. A material fact is anything that could affect a reasonable party's decision or the property's value. Latent (hidden) defects must be disclosed even when the buyer is a customer, not a client.

Scope of Authority: Special, General, and Universal Agents

The exam classifies agents by how much authority the principal grants. A special agent is hired for one narrow task with limited authority — a real estate broker representing a seller in one transaction is a special agent and cannot bind the principal beyond the listing. A general agent can conduct a range of activities for the principal, such as a property manager handling all aspects of a rental building. A universal agent has broad power to act in all matters, typically under a power of attorney.

Because a listing broker is only a special agent, the broker cannot, for example, sign the deed for the seller or accept an offer on the seller's behalf without specific authority.

Agent's Liability for Acts and Misrepresentation

A principal is generally bound by the acts an agent performs within the scope of authority, and a principal may be liable for an agent's misrepresentations made in the course of the agency. A licensee who innocently passes along false information the seller supplied can still face liability; the safer practice is to verify material facts or attribute statements to their source. Errors-and-omissions (E&O) insurance covers negligent mistakes but not intentional fraud.

When a question describes an agent repeating a seller's false square-footage claim, the tested point is that the agent should not blindly relay unverified material facts — a measured "the seller represents" is safer than an unqualified assertion.

Termination of the Agency Relationship

An agency ends by performance (the task is complete and the deal closes), expiration of the stated term, mutual agreement to cancel, revocation by the principal, or renunciation by the agent. It also ends by operation of law through the death, incapacity, or bankruptcy of either party, or the destruction of the property. A principal generally has the power to revoke an agency at any time, but doing so before the term expires may create liability for damages or an earned commission if the agent already performed.

The exception is an agency coupled with an interest, where the agent has an ownership stake in the subject matter; that agency cannot be unilaterally revoked by the principal.

Common Exam Traps

• Believing an agent owes no duties to a customer; honesty and defect disclosure still apply.
• Treating undisclosed dual agency as merely risky; it is illegal.
• Confusing confidentiality (a fiduciary duty to clients) with required disclosure of material defects.
• Forgetting that a salesperson is a subagent of the broker, not an independent agent of the client.

Key Takeaways