4.4 Agency Relationships, Fiduciary Duties, and Disclosure

What agency is

Agency is a fiduciary relationship in which one party, the agent, is authorized to act on behalf of another, the principal (also called the client), in dealings with third parties. In real estate the broker is typically the agent, and licensees affiliated with the broker act as the broker's representatives.

Key vocabulary:

• Principal / client — the person the agent represents and owes fiduciary duties to.
• Customer — a third party the agent works with but does not represent.
• Fiduciary — one who acts in a position of trust for another's benefit.

Distinguishing client from customer is the foundation of the entire section: the duties owed differ sharply between the two.

Fiduciary duties: OLD CAR

An agent owes a client six fiduciary duties, easily remembered as OLD CAR:

• Obedience — follow the client's lawful instructions.
• Loyalty — put the client's interests above the agent's own and above third parties.
• Disclosure — reveal all material facts the agent knows that affect the client.
• Confidentiality — never reveal the client's confidential information, even after the relationship ends.
• Accountability — account for all money and documents (e.g., earnest money in trust).
• Reasonable care and diligence — act competently and skillfully.

Duties owed to a customer

To a customer (a non-client), the agent owes a narrower set: honesty, fair dealing, and disclosure of known material defects. The agent must not actively misrepresent, but is not required to advance the customer's bargaining position.

Creating and ending agency

Creation

Agency arises three ways:

• Express agency — a written or oral agreement (a signed listing or buyer-representation agreement).
• Ratification — the principal approves an act 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.

Important: agency is not created merely by paying compensation. Who pays the commission does not determine who the agent represents.

Termination

Agency ends by: completion of the purpose, mutual agreement, expiration of the term, revocation by the principal, renunciation by the agent, or operation of law (death, incapacity, bankruptcy, or destruction of the property).

Trap: A listing does not automatically renew. When the term expires, the agency ends—even if the home has not sold.

Dual agency, designated agency, and disclosure

Single vs. dual agency

A single agent represents only one side. Dual agency is representing both buyer and seller in the same transaction. Because full loyalty to both is impossible, dual agency requires informed written consent from both parties and is illegal in some states.

Many brokerages use designated (appointed) agency: the broker assigns one licensee to the buyer and another to the seller, so each consumer has a dedicated advocate while the brokerage manages the conflict.

A related role is the transaction broker (or facilitator), recognized in some states, who assists both parties without representing either as a fiduciary client. The transaction broker owes honesty and competent service but not loyalty or confidentiality of negotiating positions. Know which limited model your state authorizes; the wrong exam answer often labels a facilitator a fiduciary.

Disclosure duties

Worked scenario: A seller's agent learns the buyer would pay $315,000 but offered $300,000. The agent must not tell the seller's competing dynamics that breach the buyer-customer's confidence improperly—but more importantly, an agent must never reveal their own client's confidential limits to the other side. Disclose material defects; protect confidential financial position.

Agency disclosure timing and stigmatized property

Most states require a written agency disclosure at or before the first substantive contact or the first showing, so consumers know whom the licensee represents. A licensee who fails to disclose their role can face discipline even if no harm results.

A material fact is anything that would affect a reasonable buyer's decision or the property's value—a leaking roof, a failed septic system, or flood history. By contrast, stigmatized-property facts (a death or rumored haunting) are treated differently by state law and are frequently not required to be disclosed; never volunteer information about a prior occupant's protected status, which would risk a fair-housing violation.

Types of Agents by Scope of Authority

The scope of an agent's authority defines what acts bind the principal.

• Universal agent - broad power to act in all matters (rare; e.g., a full power of attorney).
• General agent - authority to handle a range of acts in an ongoing relationship; a property manager is a general agent for the owner.
• Special (limited) agent - authority for one specific task; a listing broker is a special agent hired to find a buyer for one property.

Most real estate licensees act as special agents, which is why a listing broker generally cannot bind the seller to accept an offer without the seller's approval.

Subagency and the Source of Compensation

Subagency arises when a cooperating broker works on behalf of the listing broker's client (the seller) rather than the buyer. A buyer using a cooperating broker who is a subagent of the seller has no fiduciary representation, a frequent consumer-protection concern. The key rule worth memorizing: the source of the commission does not determine who is represented. A seller can pay a commission that compensates the buyer's broker without making that broker the seller's agent.

Table: Agent Roles and Loyalty

Vicarious Liability and Imputed Knowledge

A principal can face vicarious liability for an agent's authorized acts, and an agent's knowledge is imputed to the principal. If a seller's agent knows of a hidden defect, the law treats the seller as knowing it too, which is why nondisclosure by an agent can expose both the agent and the principal to liability.