4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- Fiduciary duties to the client are Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable care (OLD CAR).
- Customers are owed honesty, fair dealing, and disclosure of known material defects - but not loyalty or confidentiality.
- Dual agency requires informed written consent from both parties and limits the agent's advocacy; it is illegal in some states.
- Confidentiality survives the end of the agency relationship.
- Agency status must be disclosed, typically in writing and early in the relationship.
Agency Relationships, Fiduciary Duties, and Disclosure
Agency law governs the relationship between a broker (agent) and the client (principal). The agent owes the client fiduciary duties - the highest standard of care in the law. The exam tests the types of agency, the specific fiduciary duties, and the disclosure rules that protect consumers.
How Agency Is Created
- Express agency - a written or oral agreement (a listing or buyer-broker agreement).
- Implied agency - created by conduct, where actions suggest representation. Dangerous because it can arise accidentally.
- Ostensible/apparent agency - the principal's conduct leads a third party to believe agency exists.
The person who employs the agent is the principal/client. A customer is a third party the agent deals with but does not represent (e.g., the buyer in a seller-listing relationship).
The Fiduciary Duties (OLD CAR)
Memorize the duties an agent owes the principal with the mnemonic OLD CAR:
| Duty | Meaning |
|---|---|
| Obedience | Follow the client's lawful instructions |
| Loyalty | Put the client's interests above your own |
| Disclosure | Tell the client all material facts you know |
| Confidentiality | Keep the client's secrets (survives the relationship) |
| Accounting | Account for all money and documents |
| Reasonable care/diligence | Act competently and protect the client |
Duties to customers and third parties are narrower: honesty, fair dealing, and disclosure of known material defects in the property. You owe a customer honesty, but not loyalty.
A listing agent learns that their seller-client will accept far less than the asking price because of a divorce. A buyer (a customer) asks the agent how low the seller will go. What must the agent do?
Types of Agency Representation
- Single agency - the brokerage represents only one party (buyer OR seller) in a transaction.
- Dual agency - the brokerage represents both buyer and seller. Legal only with the informed written consent of both; the agent cannot fully advocate for either, so confidential information must be protected. Illegal in some states.
- Designated agency - within one brokerage, different agents are assigned to represent the buyer and the seller separately.
- Transaction broker / facilitator - a non-agency role: the broker assists both parties without representing either and owes no fiduciary loyalty.
Disclosure Requirements
Agents must disclose their agency status to the parties, usually in writing and early in the relationship. Sellers and agents must disclose known material defects (latent defects not readily visible). Stigmatized-property and certain psychological facts are handled under state law and are excluded from this national chapter.
A brokerage wants to represent both the buyer and the seller in the same transaction. Which statement is correct?
Termination of Agency
An agency relationship can end by:
- Completion of the purpose (the sale closes).
- Expiration of the term stated in the agreement.
- Mutual agreement to cancel.
- Revocation by the principal or renunciation by the agent (which may create liability for breach).
- Operation of law - death or incapacity of either party, destruction of the property, or bankruptcy.
Note a key trap: the duty of confidentiality survives the termination of the relationship. An agent cannot reveal a former client's confidential information after the listing expires. Also, a principal who revokes an agency without cause may still owe the agent compensation under the contract.
Agent vs. Subagent vs. Customer Liability
Understand who is responsible to whom:
| Party | Owes the client | Owes the customer |
|---|---|---|
| Listing agent | Full fiduciary duties (OLD CAR) | Honesty, fair dealing, disclosure of known material defects |
| Buyer's agent | Full fiduciary duties to the buyer | Honesty to the seller |
| Transaction broker | No fiduciary loyalty to either | Honesty and fair dealing to both |
A latent defect is a hidden problem the seller knows about that a reasonable inspection would not reveal; it must be disclosed. A patent defect is obvious and generally need not be pointed out. Misrepresenting or concealing a known material defect exposes the agent and seller to liability even toward a customer they do not represent.
Misrepresentation, Puffing, and Fraud
The exam draws fine lines among three concepts:
- Puffing is non-factual sales talk ('best view in town'). It is opinion and generally not actionable.
- Negligent misrepresentation is a false statement of fact made carelessly, even without intent to deceive. The agent can be liable.
- Fraud is an intentional misstatement or concealment of a material fact that another relies on to their detriment. It can void the contract and create liability.
Silence can be fraud when there is a duty to speak - for example, hiding a known foundation crack. An agent's safest path is to disclose known material facts, verify statements before repeating them, and refer technical questions (structural, legal, tax) to qualified experts rather than guessing.
The Fiduciary Duties Owed to a Principal
An agent owes the client a defined set of fiduciary duties, captured by the acronym OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable care and diligence.
- Loyalty forbids the agent from putting personal interest ahead of the client's - for example, an agent may not secretly buy the client's listing through a relative.
- Confidentiality survives the end of the relationship; an agent may never reveal that the seller would accept less than list price.
- Disclosure to the principal covers all material facts the agent knows, including offers and the buyer's financial strength.
- Accounting requires prompt handling of all money and documents, which ties directly to trust-account rules.
To customers (non-clients) the agent owes honesty and fair dealing and must disclose known material defects, but not the fiduciary duties. The exam distinguishes what is owed to the client (full fiduciary duties) versus the customer (honesty and material-defect disclosure).