4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- Agency can be created by express agreement, implied conduct, ratification, or estoppel.
- An agent owes the principal fiduciary duties summarized by OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care.
- To customers (third parties) the agent owes honesty, fair dealing, and disclosure of material facts — but not fiduciary loyalty.
- Dual agency must be disclosed and consented to in writing; undisclosed dual agency is illegal.
- Agency terminates by completion, expiration, mutual agreement, revocation, renunciation, or death/incapacity of either party.
Agency Relationships, Fiduciary Duties, and Disclosure
Agency is the legal relationship in which a principal (client) authorizes an agent to act on their behalf with a fiduciary (highest) duty. The person the agent works with but not for is the customer.
How agency is created
| Method | How it arises |
|---|---|
| Express agreement | A written or oral listing or buyer-agency agreement |
| Implied | Created by the conduct of the parties |
| Ratification | Principal accepts the benefit of an act done without prior authority |
| Estoppel | Principal lets a third party reasonably believe agency exists |
Categories of agents
- Special agent — limited to a specific task (a listing broker hired to sell one property). Most real estate agents are special agents.
- General agent — handles a range of matters (a property manager).
- Universal agent — broad authority to act in all matters (power of attorney).
Fiduciary duties to the principal — OLD CAR
The agent owes the client the highest duties of trust, summarized by the acronym OLD CAR:
| Duty | Meaning | Exam trap |
|---|---|---|
| Obedience | Follow lawful instructions | Must NOT obey unlawful orders (e.g., discriminate) |
| Loyalty | Put client's interests first | Cannot profit secretly at client's expense |
| Disclosure | Tell client all material facts | Includes a better offer or buyer's true motivation |
| Confidentiality | Protect client's secrets | Survives even after the relationship ends |
| Accounting | Account for all money/documents | Earnest money in trust, never commingled |
| Reasonable care | Use skill and diligence | Negligence breaches this duty |
Duties to the customer
To third parties an agent owes honesty, fair dealing, and disclosure of known material facts — but not loyalty or confidentiality. A listing agent must answer a buyer's questions honestly even though the agent works for the seller.
Worked example: A seller (client) tells the listing agent the lowest price they would accept is $280,000. A buyer asks the agent what the seller will take. The agent must keep the $280,000 confidential (duty to client) but must NOT lie about a known material defect like a leaking roof (duty to customer).
Single, dual, and designated agency
- Single agency — the firm represents only one party (seller or buyer) in a transaction.
- Dual agency — the firm represents both buyer and seller in the same transaction. This is legal only with informed written consent of both parties; undisclosed dual agency is illegal and can void the commission and license.
- Designated agency — the broker appoints different licensees within the firm to represent buyer and seller separately, reducing conflict.
In dual agency the agent's duties of full disclosure and undivided loyalty are necessarily limited, because the agent cannot fully advocate for both sides. That limitation is exactly why written consent is required.
Disclosure of material facts
Agents must disclose material facts — anything that could affect a reasonable party's decision or the property's value (structural defects, environmental hazards, known title problems). Whether stigmatizing facts (a death on the property) must be disclosed varies by state law, but physical and environmental defects generally must be disclosed everywhere.
How agency terminates
| By acts of parties | By operation of law |
|---|---|
| Completion/performance | Expiration of the listing term |
| Mutual agreement | Death or incapacity of either party |
| Revocation by principal | Destruction of the property |
| Renunciation by agent | Bankruptcy |
Note: a principal can usually revoke agency, but wrongful revocation may create liability for damages or commission.
Client vs. customer and the agency disclosure
The single most-tested distinction is client (principal) versus customer (third party). You represent the client; you treat the customer honestly. Most states require an agency disclosure at first substantive contact so consumers know whom the agent represents before they reveal confidential information.
Worked example: A buyer walks into an open house and tells the listing agent, "I love it — I'll pay full price if I have to." If the agent has disclosed they represent the seller, that statement is a material fact the agent must relay to the seller-client. The buyer mistakenly treated a seller's agent as their own advocate. The disclosure rule exists precisely to prevent that confusion.
Subagency, buyer agency, and transaction brokerage
| Relationship | Who is represented |
|---|---|
| Seller agency (listing) | The seller is the client |
| Subagency | A cooperating broker also works for the seller |
| Buyer agency | The buyer is the client |
| Transaction broker (facilitator) | Neither party as a fiduciary; assists both neutrally |
A transaction broker (or facilitator) is a nonagency relationship recognized in many states: the licensee helps the deal close without owing fiduciary loyalty to either side — a different concept from dual agency, which does owe limited fiduciary duties to both.
Vicarious liability and the broker's responsibility
A principal can be liable for the authorized acts of an agent (vicarious liability), and a broker is responsible for supervising affiliated licensees. If a salesperson makes a fraudulent misrepresentation, the broker may share liability. This is why broker supervision and accurate agency disclosure are tested together.
Misrepresentation vs. puffing
Puffing is non-factual sales opinion ("the best view in town") and is generally allowed. Misrepresentation is a false statement of material fact and is actionable. Stating square footage incorrectly is misrepresentation; calling a kitchen "gorgeous" is puffing. The exam tests whether a statement is verifiable fact or mere opinion.
A listing agent learns the seller will secretly accept far less than the list price, and separately knows the basement floods. A buyer asks the agent about both. What must the agent do?
A broker wants to represent both the buyer and the seller in the same sale. Under common law agency rules, what makes this permissible?