3.1 Agency Relationships & Fiduciary Duties in Texas

Agency Relationships & Fiduciary Duties in Texas

In Texas real estate practice, agency is a consensual, fiduciary relationship in which one party—the agent (the sponsoring broker)—acts on behalf of and represents another party—the principal (the client)—in business transactions with third parties (customers). The legal foundation of agency derives from Texas common law and the statutory mandates of the Texas Real Estate License Act (TRELA), codified in Chapter 1101 of the Texas Occupations Code, alongside the administrative rules promulgated by the Texas Real Estate Commission (TREC) under Title 22 of the Texas Administrative Code (22 TAC).

For the Texas Broker Examination, candidates must master the strict legal boundaries separating client representation from customer service, the mechanics of agency creation, the full scope of fiduciary obligations, and the civil liabilities arising from unauthorized or negligent acts.

---

1. Creation of Agency Relationships

An agency relationship is formed when the principal manifests consent that the agent shall act on the principal's behalf and subject to the principal's control, and the agent consents so to act. In Texas, agency can be created through three primary mechanisms:

                    ┌──────────────────────────────────────────────┐
                    │         CREATION OF AGENCY IN TEXAS          │
                    └──────────────────────┬───────────────────────┘
                                           │
         ┌─────────────────────────────────┼─────────────────────────────────┐
         ▼                                 ▼                                 ▼
┌─────────────────┐               ┌─────────────────┐               ┌─────────────────┐
│ Express Written │               │  Express Oral   │               │ Implied Agency  │
│    Agreement    │               │    Agreement    │               │  (By Conduct)   │
├─────────────────┤               ├─────────────────┤               ├─────────────────┤
│ • Listing / BRA │               │ • Verbal assent │               │ • Action-based  │
│ • Enforceable   │               │ • Fiduciary     │               │ • High broker   │
│   for commission│               │   duties attach │               │   liability     │
│   in TX courts  │               │ • CANNOT sue    │               │ • Unintended    │
│ • TRELA         │               │   for commission│               │   representation│
│   § 1101.806(c) │               │   in court      │               │ • DTPA exposure │
└─────────────────┘               └─────────────────┘               └─────────────────┘

Express Written Agency

An express written agency is established through a formal, signed written contract—such as an Exclusive Right to Sell Listing Agreement or a Residential Buyer/Tenant Representation Agreement. This agreement explicitly delineates the agent's authority, duties, compensation structure, and a definite expiration date.

Critical Exam Rule (TRELA § 1101.806(c)): Under Texas law, a broker cannot maintain an action in a Texas court to recover a commission for real estate services unless the agreement on which the action is brought is in writing and signed by the party to be charged (or by a person lawfully authorized by the party). Furthermore, the broker must advise the buyer in writing before closing to obtain a title policy or have an abstract examined by an attorney.

Express Oral Agency

An express oral agency occurs when the broker and principal verbally agree to an agency relationship without executing a written document. While an oral agreement creates a fully binding fiduciary relationship—imposing all fiduciary duties upon the broker—it is legally hazardous because the broker cannot enforce payment of a commission in court under TRELA § 1101.806(c).

Implied Agency (Agency by Conduct / Ostensible Agency)

Implied agency arises not from an explicit verbal or written agreement, but from the actions, conduct, and representations of the licensee that lead a reasonable consumer to believe the licensee is representing them.

• Example: A sales agent tells a buyer customer, "Let me see how low I can get the seller to come down for you on this price." This advice implies client-level advocacy.
• Legal Hazard: If an agent inadvertently creates an implied agency with a customer while representing the seller, the agent creates an illegal undisclosed dual agency under Texas common law and exposes the brokerage to severe liability under the Texas Deceptive Trade Practices Act (DTPA) and disciplinary action under TRELA § 1101.652.

Agency by Ratification

Agency by ratification occurs when a broker performs an unauthorized act on behalf of a principal without prior authority, and the principal subsequently accepts, approves, or retains the benefits of that act with full knowledge of the material facts.

---

2. Core Fiduciary Duties to Clients (The OLD CAR Framework)

When an agency relationship is established, the broker becomes a fiduciary—a position of the highest trust and confidence recognized under Texas law. The broker's associated sales agents and associate brokers act as subagents of the broker, owing the exact same fiduciary duties to the broker's principal.

These fiduciary duties are universally memorized using the acronym OLD CAR:

Deep Dive: Confidentiality and the PTM Rule

The fiduciary duty of confidentiality is unique because it never expires. Long after a listing expires or a transaction closes, the licensee is legally prohibited from disclosing:

1. Price: The lowest price a seller will accept, or the highest price a buyer will pay.
2. Terms: Favorable financing terms or concessions a party is willing to grant.
3. Motivation: Personal circumstances driving the transaction (e.g., divorce, pending foreclosure, corporate relocation, job loss).

Exceptions to Confidentiality: An agent may disclose confidential information only if:

• The principal authorizes the disclosure in writing;
• The disclosure is required by court subpoena or statutory law; or
• The information has been made publicly available through an independent source.

---

3. Statutory Minimum Services Under TRELA § 1101.557

Common-law fiduciary duty is the ceiling of what a Texas broker owes a client; § 1101.557 sets the statutory floor, and the state outline tests it by name under Agency & Brokerage ("Duties to Client, including Minimum Services"). Section 1101.557(a) establishes the status: a broker who represents a party in a transaction, or who lists real estate for sale under an exclusive agreement for a party, is that party's agent. A broker cannot contract out of agency status while holding an exclusive listing.

Subsection (b) then fixes the minimum duties that agent owes:

Why this matters at the broker level. These duties travel with the broker, not the sales agent, so a listing agreement that purports to waive them exposes the sponsoring broker to an administrative penalty under § 1101.701 even if the seller signed it willingly. The duties also survive an intermediary arrangement: under § 1101.559–.561 the intermediary's obligations replace the undivided loyalty duty, but the § 1101.557(b) minimums — answering questions, presenting offers, and passing on material information — continue to run to both parties. A broker running a discount or flat-fee model must therefore build the answer-questions and present-all-offers functions into the service package, because Texas has no "MLS-entry-only" exemption from § 1101.557.

4. Duties Owed to Customers (Third Parties)

A customer is a third party to a real estate transaction who has not engaged the broker as an agent. While a broker does not owe fiduciary duties to a customer, Texas common law, TRELA § 1101.652, and TREC Rule 531.1 impose three non-negotiable affirmative obligations:

┌────────────────────────────────────────────────────────────────────────┐
│                     DUTIES OWED TO THIRD-PARTY CUSTOMERS               │
├──────────────────────────────────┬─────────────────────────────────────┤
│ 1. Honesty & Integrity           │ Truthful representations at all     │
│                                  │ times; no misleading half-truths.   │
├──────────────────────────────────┼─────────────────────────────────────┤
│ 2. Fair Dealing & Good Faith     │ Accurate handling of paperwork,     │
│                                  │ strict adherence to escrow rules.   │
├──────────────────────────────────┼─────────────────────────────────────┤
│ 3. Disclosure of Latent Defects  │ Mandatory affirmative disclosure of │
│                                  │ known material structural defects.  │
└──────────────────────────────────┴─────────────────────────────────────┘

Material Latent Structural Defects

A licensee representing a seller has an affirmative duty to disclose to prospective buyer customers all known material latent defects affecting the physical condition of the property.

• Latent Defect Definition: A hidden, non-obvious physical flaw that could not be discovered through ordinary, reasonable visual inspection (e.g., foundation failure concealed by fresh drywall, unpermitted electrical wiring inside walls, active slab leaks).
• Seller Instructions to Conceal: If a seller instructs the listing broker to conceal a known foundation crack or active roof leak, the broker must refuse. Under TRELA § 1101.652(b)(3) and the Texas DTPA, concealing known material defects constitutes fraudulent misrepresentation and grounds for license revocation and treble civil damages.

Client vs. Customer Duties Comparison Matrix

---

5. Termination of Agency Relationships

Agency relationships in Texas are terminated either by the voluntary acts of the parties or through the operation of law.

                   ┌──────────────────────────────────────────────┐
                   │      TERMINATION OF AGENCY IN TEXAS          │
                   └──────────────────────┬───────────────────────┘
                                          │
         ┌────────────────────────────────┴────────────────────────────────┐
         ▼                                                                 ▼
┌─────────────────────────────────┐               ┌─────────────────────────────────┐
│       ACTS OF THE PARTIES       │               │        OPERATION OF LAW         │
├─────────────────────────────────┤               ├─────────────────────────────────┤
│ • Full Performance (Closing)    │               │ • Death of Broker or Client     │
│ • Expiration of Agreed Term     │               │ • Incapacity of Broker / Client │
│ • Mutual Rescission / Agreement │               │ • Bankruptcy of Broker / Client │
│ • Revocation by Client          │               │ • Destruction / Condemnation    │
│ • Renunciation by Broker        │               │ • Change in Applicable Law      │
└─────────────────────────────────┘               └─────────────────────────────────┘

Acts of the Parties

1. Full Performance (Fulfillment of Purpose): The transaction closes and funds; the contractual purpose is achieved.
2. Expiration of Stated Term: The listing or buyer representation contract reaches its specified end date without renewal.
3. Mutual Agreement (Rescission): Both broker and principal execute a written termination release.
4. Revocation by Principal: The client revokes the agent's authority. (If revoked without legal cause, the client may be liable for contractual damages or marketing expenses).
5. Renunciation by Broker: The broker withdraws from representation. (If abandoned without cause, the broker may face breach of contract liability).

Operation of Law

1. Death or Legal Incapacity: The death or judicial incapacity of the sponsoring broker or the principal immediately terminates the agency by operation of law. Exam Warning: The death of a sales agent does not terminate the listing, because the listing agreement is the property of the sponsoring broker.
2. Bankruptcy: Bankruptcy of the broker or principal dissolves the agency if it impacts the property or fiduciary capacity.
3. Destruction of Subject Property: Total destruction by fire, flood, tornado, or government condemnation (eminent domain).
4. Supervening Illegality: A change in zoning or state law making the intended transaction illegal.