4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- Agency is created by express agreement, ratification, or estoppel — never by accident of friendliness alone.
- Fiduciary duties (OLD CAR): Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care.
- A client (principal) receives full fiduciary duties; a customer receives honesty and fair dealing only.
- Material facts about property condition must be disclosed to all parties; confidential client information must not.
- Dual agency requires informed written consent from both parties and reduces full representation to limited/facilitator duties.
Agency Relationships, Fiduciary Duties, and Disclosure
Agency law governs the relationship between a licensee (agent) and the person they represent (the principal or client). It controls whose interests the licensee must protect, what they must disclose, and what they must keep confidential. This is one of the most heavily tested national topics.
How agency is created
| Method | How it forms | Example |
|---|---|---|
| Express agreement | Written or oral contract | A signed listing or buyer-agency agreement |
| Ratification | Principal accepts a previously unauthorized act | Owner approves an offer the agent solicited without authority |
| Estoppel | Principal's conduct leads a third party to reasonably believe agency exists | Owner lets a person act as agent and a buyer relies on it |
Agency is not created merely because a buyer feels friendly toward a licensee. The licensee who shows a buyer a home without a representation agreement is typically the seller's subagent or simply a transaction facilitator, not the buyer's agent.
The six fiduciary duties (OLD CAR)
A fiduciary owes the principal these duties. Memorize the acronym OLD CAR:
- O — Obedience: follow the principal's lawful instructions.
- L — Loyalty: put the principal's interests above the agent's own and above third parties.
- D — Disclosure: tell the principal all material facts affecting the transaction.
- C — Confidentiality: never reveal the principal's confidential information (motivation, lowest acceptable price), even after the relationship ends.
- A — Accounting: account for all money and documents (trust funds, deposits).
- R — Reasonable care and diligence: act with the skill of a competent professional.
Trap: Loyalty does not require obeying an unlawful instruction. If a seller-principal tells the agent to refuse showings to a protected class, obedience yields to the law — the agent must refuse.
Client vs customer
The distinction controls the level of duty owed.
- A client (principal) has hired the agent and receives all six fiduciary duties.
- A customer is a third party the agent deals with but does not represent. The agent owes a customer only honesty, fair dealing, and disclosure of material facts — not loyalty or confidentiality.
Worked scenario: A listing agent represents the seller (client). A buyer with no representation tours the home (customer). The agent must answer the buyer's questions about the property honestly and disclose known material defects, but must not reveal that the seller will accept far less than the asking price — that is confidential client information.
Material-fact disclosure vs confidentiality
These two duties pull in opposite directions, and the exam tests the line between them.
| Type of information | Disclose to all parties? | Keep confidential? |
|---|---|---|
| Known structural/physical defect | Yes — material fact | No |
| Environmental hazard (e.g., lead, known contamination) | Yes — material fact | No |
| Seller's lowest acceptable price | No | Yes — to seller-client |
| Buyer's maximum budget (if buyer is the client) | No | Yes — to buyer-client |
| A party's motivation (divorce, job loss) | No | Yes |
Material facts about the property are disclosed to everyone; confidential facts about the client's position are protected. Stigma-type or non-material facts are governed by state law and are not covered here.
Dual agency and termination
Dual agency occurs when one agent (or brokerage) represents both buyer and seller in the same transaction. It is permitted only with informed written consent from both parties, and it reduces the agent to limited or facilitator duties — full loyalty to both is impossible, so confidential price and motivation information cannot be shared between sides. Undisclosed dual agency is a serious violation that can void the agent's right to a commission.
Agency relationships terminate by: completion (the sale closes), expiration of the term, mutual agreement, revocation or renunciation, or operation of law (death, incapacity, bankruptcy of either party, or destruction of the property). Note that revoking an agency may still expose the revoking party to damages for breach of the agency contract.
Subagency, single agency, and designated agency
Beyond the client/customer line, the exam tests how brokerages structure representation:
| Arrangement | Who represents whom |
|---|---|
| Single agency | The brokerage represents only one side (buyer or seller) in a transaction |
| Subagency | A cooperating broker works for the listing broker's seller-client, owing the seller fiduciary duties |
| Designated agency | The broker assigns one licensee to the buyer and another to the seller; each owes full duties to their assigned client |
| Dual agency | One licensee/brokerage represents both sides — requires informed written consent |
Subagency has faded because it can unintentionally make a "buyer's" agent legally loyal to the seller, surprising the buyer. Designated agency is the modern fix for in-house deals: it preserves full single-agency duties on each side while the brokerage handles both.
Stigmatized property and the limit of disclosure
Agency disclosure covers material facts about the property's condition — physical defects, environmental hazards, title problems. It does not require disclosing non-material stigmas (a death, alleged haunting, or a former occupant's illness), which many states expressly shield, and federal law bars disclosing that a prior occupant had HIV/AIDS. The duty is to disclose material physical/legal facts while protecting client confidentiality and respecting these stigma limits.
Worked scenario: disclosure vs. confidentiality
A listing agent (seller's client) is touring the home with an unrepresented buyer (customer). The agent knows (1) the basement flooded twice and (2) the seller will accept $40,000 under list. The duties pull in opposite directions:
- The basement flooding is a material physical fact — the agent must disclose it to the buyer-customer (honesty + material-fact disclosure are owed even to customers).
- The seller's bottom-line price is confidential client information — the agent must not reveal it; doing so breaches loyalty and confidentiality to the seller.
The single correct exam answer discloses the defect and protects the price. Answers that flip this (hide the flood, leak the price) are designed traps.
Confidentiality survives termination of the agency: an agent may not reveal a former client's motivation or bottom line even after the deal closes or the listing expires.
A listing agent represents the seller. An unrepresented buyer touring the home asks whether the basement has ever flooded; the agent knows it has. The agent also knows the seller will accept $40,000 below asking. What must the agent do?
A seller instructs the listing agent to decline showing the home to buyers of a particular national origin. Under the fiduciary duty of obedience, what should the agent do?