4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- Agency is created by express agreement, implication, ratification, or estoppel; commission payment alone does not create agency.
- Fiduciary duties to a client are remembered as OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care.
- A customer (third party) is owed honesty and disclosure of material/latent defects, but not the full fiduciary package.
- Dual agency requires informed written consent of both parties; without it, it is undisclosed and illegal.
- Agency terminates by completion, expiration, mutual agreement, revocation, renunciation, or operation of law (death, incapacity, destruction).
Agency Relationships
Agency is the relationship in which one party (the principal/client) authorizes another (the agent) to act on their behalf in dealings with third parties (customers). In real estate, the broker is the agent; affiliated salespersons are typically the broker's agents (subagents to the client).
How agency is created
- Express agreement: a written or oral listing or buyer-representation agreement (the normal route).
- Implied: created by the conduct of the parties.
- Ratification: the principal accepts/approves acts after the fact.
- Estoppel: the principal lets a third party reasonably believe agency exists.
A critical trap: who pays the commission does not determine agency. A listing broker can compensate a buyer's broker without making that buyer's broker the seller's agent. Source of compensation ≠ agency relationship.
Fiduciary duties to the client — "OLD CAR"
An agent owes the principal full fiduciary duties:
| Letter | Duty | Plain meaning |
|---|---|---|
| O | Obedience | Follow all lawful instructions |
| L | Loyalty | Put the client's interest above the agent's own |
| D | Disclosure | Reveal all known material facts to the client |
| C | Confidentiality | Protect the client's private information (price flexibility, motivation)—survives the relationship |
| A | Accounting | Account for all money and documents (trust funds) |
| R | Reasonable care | Use skill and diligence; avoid negligence |
Customer-level duties
A customer is a third party the agent does not represent. To customers, the agent owes honesty, fair dealing, and disclosure of known material and latent defects, but not loyalty or confidentiality. The exam contrasts the two constantly: the agent must keep the client's motivation confidential while still being honest with the customer about the property's condition.
Trap: A buyer asks the listing agent, "Will the seller take less?" The agent must not reveal the seller's bottom line (confidentiality to the client) but also must not lie about the property's physical condition (honesty to the customer).
Single, dual, and designated agency
- Single agency: the broker represents only one side (seller or buyer) in a transaction.
- Dual agency: the broker represents both buyer and seller. It is legal only with the informed written consent of both parties; the agent then cannot fully advocate for either and must stay neutral on price/terms. Undisclosed dual agency is illegal and a breach of fiduciary duty.
- Designated (appointed) agency: the broker appoints one salesperson to the buyer and another to the seller, allowing fuller representation within one firm.
Disclosure timing
Agency disclosure must be made early—commonly at first substantive contact or before any confidential information is shared, and confirmed before a contract is signed. Disclosing dual agency after the offer is too late.
How agency terminates
- Completion/performance of the purpose,
- Expiration of the term,
- Mutual agreement,
- Revocation by the principal or renunciation by the agent (possibly with damages),
- Operation of law: death or incapacity of either party, bankruptcy, or destruction of the property.
Note that a listing is a personal-services contract; if the broker dies, it ends. The death of an affiliated salesperson does not end the listing because the listing belongs to the broker, not the salesperson.
Universal, general, and special agents
The scope of an agent's authority defines the agency type, a frequent classification question.
| Agent type | Scope | Real estate example |
|---|---|---|
| Universal | Authority to act in all matters | Holder of a full power of attorney |
| General | Authority over a continuous range of matters | A property manager running a portfolio |
| Special | Authority for one specific task | A listing broker hired to sell one home |
A listing broker is a special agent — hired for the single task of marketing one property. A property manager is usually a general agent because the role is continuous and broad.
Trap: A special agent who exceeds the narrow authority granted (for example, a listing broker who signs a contract the seller never authorized) does not bind the principal, and may be personally liable to the third party for acting without authority.
Misrepresentation, latent defects, and stigmatized property
The agent's duty of honesty to the customer turns on material facts. A latent defect — a hidden, not-readily-observable problem like a cracked foundation behind drywall — must be disclosed to buyers in nearly every state. A patent defect is open and obvious, and the buyer is expected to see it.
- Misrepresentation is a false statement of material fact; it can be negligent or fraudulent and exposes the agent to liability even if the principal said it first.
- Puffing ("the best block in town") is non-factual opinion and is allowed.
- A stigmatized property (a death, alleged haunting, or former crime occurred there) is often not a required physical disclosure, and many states bar agents from disclosing certain stigmas (such as a prior occupant's illness) under fair-housing or privacy law.
Worked scenario: A seller's agent knows the basement floods every spring (latent, material). She must disclose it to buyers even though her loyalty runs to the seller — the duty of honesty about material defects overrides the seller's wish to stay silent, and concealing it is actionable fraud.
While showing a listing, a buyer asks the seller's agent, 'How low will the seller really go?' What must the agent do?
A broker wants to represent both the buyer and the seller in the same transaction. What makes this lawful?