4.4 Agency Relationships, Fiduciary Duties, and Disclosure

How Agency Is Created

Agency is a relationship in which one person, the agent, acts on behalf of and under the authority of another, the principal (also called the client). The agent owes the principal fiduciary duties, the highest duties recognized in law.

Agency can arise several ways:

• Express agency - by a written or oral agreement, such as a signed listing or buyer-representation agreement.
• Implied agency - by the conduct of the parties, which can accidentally create duties.
• Ratification - the principal accepts the benefits of an act after the fact.
• Estoppel - the principal allows others to believe an agency exists.

In brokerage, the broker is usually the agent of the principal, and the affiliated salesperson is the subagent acting on the broker's authority. The exam often distinguishes the client (the principal who is represented and owed fiduciary duties) from the customer (a non-represented party owed only honesty and fair dealing).

Fiduciary Duties: OLD CAR

Memorize the fiduciary duties with the acronym OLD CAR:

• Obedience - follow the principal's lawful instructions.
• Loyalty - put the principal's interests above the agent's own.
• Disclosure - tell the principal all known material facts that affect the transaction.
• Confidentiality - protect the principal's private information, even after the relationship ends.
• Accounting - account for all money and documents, never commingle trust funds.
• Reasonable care - act with competence and diligence.

Duty Tension Example

A seller's agent learns the seller will accept $290,000 though the list price is $310,000. Confidentiality forbids disclosing that to the buyer. But if the agent discovers the roof leaks, disclosure of that material fact to the buyer is required, because material defects are not protected confidences. Distinguishing protected confidences from material facts is a frequent exam theme.

Table: Client vs. Customer

Single, Dual, and Designated Agency

Single agency - the licensee represents only one party in the transaction, either the buyer or the seller.

Dual agency - the broker represents both buyer and seller in the same transaction. Because the fiduciary duties of loyalty and full disclosure conflict, dual agency is legal only with the informed written consent of both parties. Undisclosed dual agency is illegal and can cost the licensee their license and commission.

Designated agency - the broker assigns different salespeople to represent each side, reducing the conflict within one brokerage. Some states use a transaction broker or facilitator model, where the licensee assists both parties without representing either as a fiduciary.

Agency Disclosure

Most states require agents to give an agency disclosure at first substantive contact, telling the consumer whom the agent represents. This prevents accidental implied agency and customer confusion.

Common Exam Traps

• Owing fiduciary duties to a customer; only honesty and fair dealing are owed.
• Treating the seller's acceptable low price as a material fact; it is confidential.
• Allowing dual agency without written consent from both parties.
• Forgetting confidentiality survives after closing.

How Agency Ends

An agency relationship terminates in two broad ways: by the acts of the parties or by operation of law.

By acts of the parties:

• Completion - the purpose is fulfilled (the property sells and closes).
• Expiration - the listing term ends.
• Mutual agreement - both sides agree to cancel.
• Renunciation - the agent withdraws.
• Revocation - the principal fires the agent (may create liability for breach).

By operation of law:

• Death or incapacity of either party.
• Bankruptcy of the principal.
• Destruction of the property.
• Condemnation through eminent domain.

Exam Trap: Even after the relationship ends, the duty of confidentiality continues indefinitely. An agent may never reveal a former client's confidential bargaining information. Also note a principal can revoke the agency at will, but doing so without cause may make them liable for the broker's earned commission or expenses.

Material Fact vs. Confidential Information: A Scenario

This distinction is one of the most tested ideas in agency, so reason through it carefully.

Scenario. You are the seller's agent. You know two things: (1) the seller is divorcing and will accept far below list price, and (2) the basement floods in heavy rain.

• A buyer customer asks, 'What's the lowest the seller will take?' You must not answer. The seller's motivation and bottom line are confidential information protected by your duty of loyalty and confidentiality.
• The same buyer asks, 'Any water issues?' You must disclose the flooding. A known material defect is owed even to a customer under your duty of honesty, and silence here would be misrepresentation.

The rule: protect the client's negotiating position, but never conceal a known material defect from anyone. A licensee who reverses these - leaking the price or hiding the defect - faces both civil liability and license discipline. The same logic applies in reverse for a buyer's agent: the buyer's willingness to pay more is confidential, but the buyer's agent must still answer the seller honestly about anything that is a true material fact, such as the buyer's known inability to qualify for financing if asked directly.