4.4 Agency Relationships, Fiduciary Duties, and Disclosure

Agency is the legal relationship in which one person, the agent, acts on behalf of another, the principal, in dealings with third parties. In brokerage the principal is the client; a customer is a party the licensee deals with but does not represent.

How Agency Is Created

• Express agency - by a written or oral agreement, such as a signed listing or buyer-broker agreement. This is the normal and preferred method.
• Implied agency - inferred from the parties' conduct, which can create an unintended relationship if a licensee starts advising a customer like a client.
• Ratification - the principal approves an act after the fact, adopting it as authorized.

Authority may be actual (granted expressly or impliedly) or apparent (the principal's conduct leads a third party reasonably to believe authority exists).

Client vs. Customer

Table: Who is owed what

The core exam idea: full fiduciary duties flow only to the client, but every party - including a customer - is entitled to honesty and disclosure of known material defects.

Fiduciary Duties: OLD CAR

The agent owes the client the highest duties known in law. The common mnemonic is OLD CAR:

• Obedience - follow the client's lawful instructions.
• Loyalty - put the client's interests above the agent's own.
• Disclosure - tell the client all material facts affecting the transaction.
• Confidentiality - protect the client's private information, such as the lowest price the seller will accept; this duty survives the relationship.
• Accountability - account for all money and documents, including prompt handling of trust funds.
• Reasonable care and diligence - perform competently and skillfully.

A breach of these duties can expose the agent to license discipline and civil liability.

Types of Agency Representation

• Single agency - the firm represents only one side, the buyer or the seller.
• Subagency - a cooperating broker represents the listing broker's client; less common today.
• Dual agency - one firm or agent represents both buyer and seller in the same deal. Loyalty is necessarily divided, so it is lawful only with the informed written consent of both parties, and some states forbid it.
• Designated agency - the broker assigns different agents within the firm to each side, isolating confidential information.

Disclosure Obligations

Disclosure runs in two directions. To the client, the agent must reveal everything material, including any conflict of interest. To a customer, the licensee still owes honesty and must disclose known material facts about the property - defects that affect value or desirability. Active concealment or misrepresentation of a known defect is prohibited regardless of who the licensee represents.

Most states also require a written agency disclosure to be delivered early - typically at first substantive contact - so consumers know whether the licensee represents them, the other side, or both.

Worked example: divided loyalty

A listing agent learns the seller will accept $290,000 but is asking $310,000. A buyer the same agent now wants to represent asks what the seller will take. As a seller's agent, the confidentiality duty forbids revealing the $290,000 floor. The agent cannot quietly switch to represent both sides; doing so requires informed written consent from both seller and buyer. Without that consent, advising the buyer on price would breach loyalty and confidentiality owed to the seller.

How Agency Terminates

Agency ends by:

1. Completion - the purpose is accomplished (the sale closes).
2. Expiration - the term stated in the agreement ends.
3. Mutual agreement - both parties cancel.
4. Revocation or renunciation - the principal fires the agent or the agent quits (possibly with liability for breach).
5. Operation of law - death or incapacity of either party, bankruptcy, or destruction of the property.

Common Exam Traps

• Believing a customer is owed full fiduciary duties - a customer is owed honesty and material-fact disclosure, not loyalty.
• Thinking dual agency is automatically illegal - it is permitted in many states with informed written consent of both sides.
• Assuming the confidentiality duty ends at closing - it survives termination.
• Confusing designated agency (separate agents inside one firm) with dual agency (one agent for both sides).
• Forgetting that a known material defect must be disclosed even when representing the seller.

The fiduciary duties, in detail

An agent owes the principal six core fiduciary duties, often remembered as OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable care. Obedience means following the principal's lawful instructions, but never unlawful ones, such as a request to discriminate. Loyalty requires the agent to put the principal's interests ahead of the agent's own, which is why an agent buying the client's listing must disclose the agent's interest and get consent.

Disclosure requires telling the principal all material facts the agent knows that affect the transaction. Confidentiality protects the principal's private information, such as the lowest price a seller will accept, even after the relationship ends. Accounting requires the agent to track and promptly report all money and property entrusted, never commingling client funds with the agent's own. Reasonable care and diligence requires competent, skillful service.

These duties run to the principal, not to third parties. To a customer or third party, the agent still owes honesty and the duty to disclose known material defects, but not loyalty or confidentiality. Separating duties owed to the principal from duties owed to everyone else is the key distinction the exam draws.