4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- An agency relationship makes the principal a client owed full fiduciary duties (OLD CAR); a customer is owed only honesty, fair dealing, and disclosure of known material defects.
- Counteroffers terminate the original offer, and real estate sale contracts must be written to be enforceable under the statute of frauds.
- Specific performance is the classic buyer remedy because land is unique; sellers often retain earnest money as liquidated damages.
- An exclusive right to sell pays the broker no matter who finds the buyer; Maine prohibits net listings.
- Disclosed dual agency requires informed written consent and limits duties; undisclosed dual agency is illegal.
Agency law defines whom the licensee works for and what duties are owed. It is one of the most heavily tested national topics because it drives disclosure obligations and liability. An agency relationship arises when a principal (the client) authorizes an agent to act on the principal's behalf in dealings with third parties (customers).
How Agency Is Created and the Parties
Agency can arise by express agreement (a signed listing or buyer-representation agreement), by implied conduct, by ratification (approving an act after the fact), or by estoppel (a principal lets a third party reasonably believe an agency exists).
- Principal / client - the person who hires the agent and is owed fiduciary duties.
- Agent - the broker; the salesperson acts as the broker's subagent or affiliate.
- Customer - the third party the agent deals with but does not represent.
- Subagent - an agent of the agent, owing the same duties to the principal.
- Dual agent - represents both buyer and seller with limited duties and written consent.
Keep the client/customer line sharp: the salesperson works under the broker, so the broker is the agent of record and the salesperson owes the client the same duties the broker does. A buyer wandering through an open house with no agreement is usually a customer, not a client.
Fiduciary Duties (OLD CAR)
An agent owes the client fiduciary duties, commonly memorized as OLD CAR. These are the highest duties recognized in law and the source of most agency exam questions.
| Duty | Meaning |
|---|---|
| Obedience | Follow the client's lawful instructions |
| Loyalty | Put the client's interests above the agent's own |
| Disclosure | Reveal all material facts known to the agent |
| Confidentiality | Protect the client's private information, even after closing |
| Accounting | Account for all money and property handled |
| Reasonable care | Act competently and with diligence |
To customers, the agent still owes honesty, fair dealing, and disclosure of known material defects, but not loyalty or confidentiality. Confusing the customer with the client is a classic exam error: telling a buyer-customer that "the seller is desperate" breaches the loyalty and confidentiality owed to the seller-client, even though the buyer is pleased to hear it.
Single, Dual, and Designated Agency
A single agent represents only one party to a transaction. Dual agency occurs when one brokerage represents both buyer and seller, which reduces the agent to limited or facilitator duties and is legal only with the informed written consent of both parties.
Undisclosed dual agency is illegal and is a frequent fact-pattern answer. Some firms use designated agency, naming different licensees within the same brokerage to represent each side. A transaction broker (or facilitator) assists both parties without representing either as a fiduciary, providing neutral help instead of advocacy.
Agency Disclosure and Termination
Most states require licensees to disclose their agency relationship to consumers, often at first substantive contact or before writing an offer, so a customer does not mistakenly share confidential information with someone who represents the other side.
Agency terminates by completion of the purpose, expiration of the term, mutual agreement, revocation or renunciation (which may create liability for breach), or operation of law such as death, incapacity, bankruptcy, or destruction of the property. Importantly, the duty of confidentiality survives termination, so an agent cannot reveal a former client's secrets after the relationship ends.
Distinguish the agent's duties to the principal from disclosure of property condition. An agent must disclose known material defects to a customer, but stigmatizing facts such as a prior occupant's illness are usually not material in the legal sense, and several states bar disclosing them. Latent (hidden) defects must be disclosed; obvious patent defects the buyer can see generally need not be volunteered.
Agency questions also test compensation versus representation. Who pays the commission does not determine who the agent represents. A buyer's agent can be paid from the seller's proceeds yet still owe full fiduciary duties to the buyer. Read the agreement, not the money trail, to identify the principal, because the exam deliberately uses the payment source as a distractor.
A salesperson tells the buyer-customer, "The seller will take far less than the list price; they're desperate." Which fiduciary duty did the salesperson violate?
Termination of Agency and Common Exam Traps
An agency relationship ends by completion of the purpose, expiration of the term, mutual agreement, revocation by the principal, renunciation by the agent, or operation of law (death, incapacity, or bankruptcy of either party, or destruction of the property).
Two traps recur on the national exam:
- A buyer's agent who is paid from the seller's funds still owes fiduciary duties to the buyer — the source of compensation does not determine who the client is.
- Stigmatizing facts (a death on the property, a prior occupant's illness) are generally not material physical defects that must be disclosed, but a latent material defect the agent knows about must be disclosed even though the agent works for the seller.
Which statement about dual agency is correct?