4.4 Agency Relationships, Fiduciary Duties, and Disclosure

What Agency Is

Agency is a relationship in which one person, the agent, acts on behalf of and represents another, the principal (also called the client). In real estate the broker is the agent; salespeople act as the broker's subagents.

Agency can be created in three tested ways:

• Express agency - a written or oral agreement (a listing or buyer-agency agreement).
• Ratification - the principal approves acts after the fact.
• Estoppel - the principal's conduct leads a third party to reasonably believe agency exists, and the principal is barred from denying it.

The person an agent represents is the client; the third party the agent deals with honestly but does not represent is the customer. This client-versus-customer line drives most agency exam questions.

Fiduciary Duties - OLD CAR

An agent owes the principal fiduciary duties, the highest standard of care. Memorize them with OLD CAR:

Table: Fiduciary Duties (OLD CAR)

Loyalty and confidentiality survive the transaction. An agent may never disclose to the buyer that the seller would accept a lower price, unless the seller authorizes it. Disclosure of material defects to the customer is required by law and does not violate loyalty.

Client vs. Customer and Material Facts

The duties owed differ sharply by status.

• To a client (principal): the full OLD CAR fiduciary duties.
• To a customer (third party): only honesty, fair dealing, and disclosure of known material defects about the property.

Worked scenario

A seller's agent learns the roof leaks. The agent represents the seller but is still legally required to disclose the leaking roof to the buyer-customer, because it is a material defect. However, the agent must not reveal that the seller is desperate and will take less, that is confidential to the client.

Latent (hidden) material defects must always be disclosed; failing to do so is misrepresentation, even by omission.

Single, Dual, and Designated Agency; Termination

• Single agency - the agent represents only one party (seller or buyer) in the transaction.
• Dual agency - one broker represents both buyer and seller. It is legal only with informed written consent from both. The dual agent becomes a neutral facilitator and may not advocate for either side or share confidential price information. Undisclosed dual agency is illegal and grounds for license revocation.
• Designated agency - the broker assigns different salespeople to represent each party within the same firm.

Agency terminates by: completion of the purpose, expiration of the term, mutual agreement, revocation, renunciation by the agent, death or incapacity of either party, or destruction of the property. Note: a party may have the power to revoke without the right, exposing them to damages.

Agency Disclosure Timing and Misrepresentation

Most states require agents to disclose whom they represent at first substantive contact, in writing, before confidential information changes hands. The disclosure protects the customer from assuming the agent is on their side.

Two terms drive disclosure questions:

• Misrepresentation - a false statement of material fact, whether intentional (fraud) or negligent.
• Puffing - a salesperson's opinion or exaggeration ("best view in town") that a reasonable person would not rely on as fact; legal, unlike misrepresentation.

The line is fact versus opinion. "The roof is new" is a fact that must be true; "this is a charming home" is puffing. Stating a known false material fact, or staying silent about a latent defect, is actionable misrepresentation even by an honest-seeming agent.

Subagency, Facilitators, and Compensation Confusion

Subagency arises when a cooperating broker works on behalf of the listing broker's principal (the seller). The subagent owes fiduciary duties to the seller, not to the buyer the subagent is showing homes - a classic surprise for buyers.

Some states recognize a transaction broker (facilitator), who assists both parties without representing either and owes no fiduciary duties beyond honesty and accounting.

A core exam principle: compensation does not determine agency. A seller may pay a buyer's agent's commission, yet that agent still represents the buyer. Always tie the duty to the agreement and disclosure, never to who signs the commission check.

Designated Agency Worked Scenario and Stigmatized Property

In a single firm, designated agency lets Broker X assign Salesperson A to the seller and Salesperson B to the buyer. Each gives full fiduciary loyalty to their own client, while the broker manages a firewall on confidential information.

Scenario

Buyer and seller both work with the same brokerage. Salesperson A (seller's designated agent) may not tell Salesperson B (buyer's designated agent) the seller's lowest acceptable price. If instead one agent represented both, that agent would be a neutral dual agent and could advocate for neither.

Finally, disclosure of material defects is required, but many states say stigmatizing facts - a death, alleged haunting, or a prior occupant's illness - are not material defects an agent must volunteer. Know your jurisdiction, but on the national portion stigma is generally not a required physical-defect disclosure.