4.4 Agency Relationships, Fiduciary Duties, and Disclosure

What agency is

Agency is a legal relationship in which one party (the agent) acts on behalf of another (the principal or client) with the principal's consent. In brokerage, the broker is the agent and salespeople are subagents of the broker. The person the agent does not represent — the other side of the deal — is the customer.

How agency is created and ended

Agency can arise three ways:

• Express — a signed listing or buyer-representation agreement.
• Implied — created by conduct, even unintentionally (a buyer reasonably relying on a salesperson's advice).
• Ratification — the principal later approves acts done on their behalf.

Agency terminates by completion of the purpose, expiration, mutual agreement, revocation/renunciation, or by operation of law (death, incapacity, bankruptcy, or destruction of the property). A common trap: an agent gives unrepresented "customers" detailed loyalty-style advice and accidentally creates implied agency.

Fiduciary duties — OLD CAR

The agent owes the client the following fiduciary duties. Memorize the acronym OLD CAR.

The duties of confidentiality and disclosure can collide. The agent must disclose material facts and known defects about the property to the other party, but must not reveal the principal's confidential motivations (for example, that the seller will accept far less than list price). Disclosure is about facts; confidentiality protects negotiating position.

Client vs. customer, and types of agency

The client (principal) receives full fiduciary duties. The customer receives only honesty, fair dealing, and disclosure of known material defects — not loyalty or confidentiality.

Dual agency trap

In dual agency the broker cannot fully advocate for either side, so the law requires informed written consent from both buyer and seller. An undisclosed dual agency is a serious violation: it breaches loyalty and can make the agency agreement voidable and expose the agent to discipline and forfeited commission.

Material facts worked example

A seller privately tells the listing agent, "I'll take $360,000, but list it at $399,000." The agent also learns the basement floods every spring.

• The flooding is a known material defect — the agent must disclose it to buyers.
• The seller's $360,000 walk-away figure is confidential — the agent must not reveal it.

Mixing these up is the classic exam error: disclose defects, protect the principal's negotiating limits.

The Fiduciary Duties: OLD CAR

An agent owes the principal six common-law fiduciary duties, remembered as OLD CAR:

• Obedience - follow the principal's lawful instructions.
• Loyalty - put the principal's interests first; no secret profit or self-dealing.
• Disclosure - tell the principal all material facts you know.
• Confidentiality - protect the principal's secrets (motivation, lowest acceptable price), surviving even after the agency ends.
• Accounting - account for all money and documents.
• Reasonable care and diligence - act with competence.

Duties to Third Parties (Customers)

To non-client customers an agent owes honesty, fair dealing, and disclosure of known material defects - but not loyalty or confidentiality. A seller's agent must still tell a buyer about a cracked foundation; they must not tell the buyer the seller will accept less than list price.

How Agency Is Created and Ended

Agency arises by express agreement (a signed listing or buyer-agency contract), implication (conduct that leads a customer to reasonably believe they are represented), ratification (after-the-fact approval), or estoppel. It terminates by completion, expiration, mutual agreement, revocation, renunciation, or operation of law (death, incapacity, bankruptcy, or destruction of the property). Trap: giving an unrepresented customer loyalty-style advice can accidentally create implied (undisclosed) agency - a violation in disclosure-required states like Nebraska.

Single, Dual, and Designated Agency

The form of representation controls which duties run to whom:

• Single agency - the agent represents only one party (seller or buyer) and owes that party the full OLD CAR duties.
• Dual agency - one agent (or firm) represents both sides. Loyalty and full disclosure necessarily shrink, so dual agency is lawful only with the informed written consent of both parties and is prohibited in some states.
• Designated agency - within one brokerage, the broker assigns one licensee to the seller and a different licensee to the buyer, preserving fuller representation for each.

Disclosure vs. confidentiality, restated with numbers: a seller's agent who learns of a leaking roof (a material defect) must disclose it to the buyer; the same agent who knows the seller will accept $290,000 against a $310,000 list price must not reveal that confidential negotiating limit. Disclose facts about the property; protect the principal's bargaining position. Confusing the two is the single most common agency error on the exam.