5.2 Agency Relationships and Fiduciary Duties

What Agency Is and How It Is Created

Agency is a relationship in which one person (the agent) is authorized to represent and act on behalf of another (the principal or client) in dealings with third parties. In real estate, the broker is the agent and the seller or buyer is the principal. Agency law governs the loyalties and disclosures an agent owes, so it is one of the most heavily tested topics on the national exam.

Agency can be created in four ways:

• Express agency — created by a written or oral agreement, such as a signed listing agreement or buyer-representation agreement. This is the clearest and preferred form.
• Implied agency — created by the conduct of the parties even without a stated agreement; for example, an agent who behaves like the buyer's representative and a buyer who relies on that advice.
• Ratification — agency created after the fact when the principal accepts the benefits of an act the agent already performed without prior authority.
• Estoppel — agency a court imposes because a principal allowed a third party to reasonably believe an agency existed; the principal is then "estopped" (prevented) from denying it.

Note that payment of a commission does not create agency. An agent can owe fiduciary duties to one party while being paid by another, so "who pays" never determines "who is represented."

Types of Agents and the Scope of Authority

The exam distinguishes three classes of agent by how much authority the principal grants:

Most real estate brokers act as special agents — they are authorized to find a buyer or a property, but they are not authorized to sign a binding contract for the principal unless given specific written power.

Clients vs. Customers

A crucial distinction: the client (principal) is the party the agent represents and to whom full fiduciary duties are owed. A customer is a third party the agent deals with but does not represent. To the customer, the agent owes only honesty, fairness, and the disclosure of known material facts — not loyalty or confidentiality. A listing agent's seller is the client; the buyer who walks in unrepresented is a customer.

The Six Fiduciary Duties: OLD CAR

An agent owes the principal the duties of a fiduciary — a position of trust and confidence. The classic mnemonic is OLD CAR:

1. Obedience — follow the principal's lawful instructions. The agent need NOT (and must not) obey unlawful instructions, such as a request to discriminate or conceal a known defect.
2. Loyalty — place the principal's interests above the agent's own and above all others. Self-dealing, such as secretly buying the client's property, breaches loyalty.
3. Disclosure — reveal to the principal all known material facts that could affect the transaction, including a higher competing offer or the agent's own interest.
4. Confidentiality — protect the principal's private information, such as motivation or the lowest price they will accept, even after the agency ends.
5. Accounting — accurately account for all money and property entrusted to the agent, keeping client funds in a separate trust/escrow account (never commingled with the broker's own funds).
6. Reasonable care — act competently and with diligence, using the skill expected of a real estate professional.

Single, Dual, and Subagency

Single agency means representing only one side — either the seller (seller/listing agency) or the buyer (buyer agency) — in a transaction. This is the cleanest relationship because there is no conflict of loyalties.

Dual agency occurs when one agent or brokerage represents both the buyer and the seller in the same transaction. Because the agent cannot fully serve two opposing interests, dual agency is permitted only with the informed, written consent of both parties, and the agent must remain neutral on price and terms. Undisclosed dual agency is illegal and a serious breach of fiduciary duty that can void the transaction and cost the agent their license.

Subagency arises when the listing broker extends the offer of agency to cooperating brokers, who then also represent the seller rather than the buyer they are working with. Subagency has declined sharply because it can surprise buyers who assume their agent works for them.

Agency disclosure laws require agents to tell the parties, in writing and usually at first substantive contact, whom they represent so that no customer mistakenly believes they are a represented client.

Why Disclosed vs. Undisclosed Matters

The single most tested point in agency is the difference between disclosed and undisclosed representation. When an agent's role is properly disclosed, all parties make decisions knowing whose interests the agent serves; consent is informed and the relationship is lawful. When representation is undisclosed — for example, an agent secretly representing the buyer while the seller believes the agent is a subagent working for them — the hidden conflict deprives a party of loyalty they were entitled to rely on.

Undisclosed dual agency is therefore not merely a paperwork error; courts treat it as fraud that can rescind the sale, forfeit the commission, and trigger license discipline. Memorize the rule: dual agency requires the prior, informed, written consent of both parties, and the agent must then stay neutral on price and terms.