4.4 Agency Relationships, Fiduciary Duties, and Disclosure

Creating agency

Agency is the relationship in which a principal (client) authorizes an agent to act on their behalf in dealings with third parties. In real estate, the broker is the agent and any licensees are subagents of the broker. Agency arises four ways:

• Express — by written or oral agreement (a signed listing or buyer-representation agreement).
• Implied — by the conduct of the parties.
• Ratification — the principal accepts the benefit of acts performed without prior authority.
• Estoppel — a party is prevented from denying an agency that a third person reasonably relied upon.

Most states require representation agreements to be in writing. Note the difference between a client (the principal you represent) and a customer (a third party you assist but do not represent).

Fiduciary duties: OLD CAR

An agent owes the principal heightened fiduciary duties, memorized as OLD CAR:

Loyalty and confidentiality are tested most. An agent may not disclose that their seller-client will accept less than list price, nor profit secretly from the transaction. Confidentiality survives the end of the relationship. By contrast, an agent must always disclose known material defects in the property to the buyer — that duty of honesty overrides loyalty and cannot be hidden behind confidentiality.

Types of agency and disclosure

The represented party determines the agency type.

• Seller agency — agent represents the seller; the buyer is a customer.
• Buyer agency — agent represents the buyer; the seller is a customer.
• Dual agency — one broker represents both parties in the same transaction. It is permitted only with informed written consent of both. Undisclosed dual agency is illegal and breaches the disclosure duty.
• Transaction (facilitator) brokerage — the broker assists both parties without representing either as a fiduciary, providing only honesty and ministerial help.

Duties to a customer

Even without representing the customer, an agent owes honesty, fair dealing, and disclosure of known material defects. The agent does NOT owe the customer loyalty, confidentiality, or advice that undercuts the client. A common trap: a seller's agent may not tell a buyer-customer the lowest price the seller will take, but must tell the buyer about a known leaking roof.

Terminating Agency and Disclosing the Relationship

Agency relationships end in defined ways, and the exam expects you to separate the methods that end the relationship from those that breach it.

Termination by acts of the parties: completion (the sale closes), mutual agreement to cancel, expiration of the term, or one party's renunciation/revocation (which may be a breach if done improperly but still ends the actual authority).

Termination by operation of law: death or incapacity of either principal or agent, bankruptcy of the principal, destruction of the property, or a change in law making the purpose illegal.

A listing is a personal-services contract: the death of the broker or the seller terminates it, and a salesperson cannot carry the listing to a new firm because it belongs to the broker.

Agency disclosure timing: most states require licensees to disclose whom they represent at first substantive contact (before confidential information is exchanged), and to obtain written consent before any dual agency. Worked scenario: a buyer at an open house starts revealing their maximum budget to the seller's agent. The agent must disclose, before that conversation goes further, that they represent the seller, so the buyer understands that anything shared can be used for the seller's benefit. Failing to disclose representation is one of the most common and serious agency violations.

Single Agency, Subagency, and Disclosed Dual Agency Applied

The forms of agency produce a steady stream of who-owes-what questions.

Single agency means the broker represents only one party in the transaction — either the buyer or the seller — and owes that client the full OLD CAR fiduciary duties while owing the other side only honesty and disclosure of known material defects.

Subagency arises when a cooperating broker works on behalf of the listing broker's client (the seller) rather than the buyer they are escorting. A buyer working with a subagent is a customer, not a client, and should be told so — a frequent source of confusion and complaints, which is why buyer agency has largely displaced subagency.

Disclosed dual agency requires informed written consent of both parties; the broker must then remain neutral and cannot advocate price or terms for either side. Undisclosed dual agency is illegal and a breach of the disclosure duty.

Worked scenario: A broker lists a seller's home and also represents a buyer who wants to make an offer on it. To proceed, the broker must obtain written dual-agency consent from both before the offer, then refrain from telling the buyer the seller's lowest acceptable price or telling the seller the buyer's top number. If either party refuses consent, the broker must refer one party to another agent or step back. Acting as a dual agent without that written consent is among the most serious agency violations on the exam.

Terminating Agency and Disclosing the Relationship

Agency relationships end in defined ways, and the exam expects you to separate the methods that end the relationship from those that breach it.

Termination by acts of the parties: completion (the sale closes), mutual agreement to cancel, expiration of the term, or one party's renunciation/revocation (which may be a breach if done improperly but still ends the actual authority).

Termination by operation of law: death or incapacity of either principal or agent, bankruptcy of the principal, destruction of the property, or a change in law making the purpose illegal.

A listing is a personal-services contract: the death of the broker or the seller terminates it, and a salesperson cannot carry the listing to a new firm because it belongs to the broker.

Agency disclosure timing: most states require licensees to disclose whom they represent at first substantive contact (before confidential information is exchanged), and to obtain written consent before any dual agency. Worked scenario: a buyer at an open house starts revealing their maximum budget to the seller's agent. The agent must disclose, before that conversation goes further, that they represent the seller, so the buyer understands that anything shared can be used for the seller's benefit. Failing to disclose representation is one of the most common and serious agency violations.