4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- Agency is created by express agreement, ratification, or estoppel; the principal (client) is owed fiduciary duties.
- The fiduciary duties spell OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable care.
- A customer is not a client; an agent owes a customer honesty and fair dealing but not full fiduciary duties.
- Dual agency requires informed written consent from both parties and limits the agent's ability to advocate for either.
What agency is
Agency is a relationship in which one person, the agent, acts on behalf of another, the principal (or client), in dealings with third parties. The principal grants authority; the agent owes loyalty. In real estate, the broker is the agent of the client, and salespersons act as the broker's representatives.
How agency is created
- Express agreement: a written or oral contract, such as a listing or buyer-representation agreement. This is the normal method.
- Ratification: the principal accepts the benefits of an act performed without prior authority, adopting it after the fact.
- Estoppel: a principal's conduct leads a third party to reasonably believe an agency exists, and the principal is barred from denying it.
Agency is not created merely by paying a commission; who pays does not determine who the agent represents.
The fiduciary duties: OLD CAR
An agent owes a client the highest standard of care, summarized by the mnemonic OLD CAR.
| Duty | Meaning | Exam trap |
|---|---|---|
| Obedience | Follow lawful instructions of the client | Must refuse unlawful instructions (e.g., to discriminate) |
| Loyalty | Put the client's interests first | Cannot profit secretly at client's expense |
| Disclosure | Reveal all material facts to the client | Includes offers, defects, buyer's financial strength |
| Confidentiality | Protect client's private information | Survives the end of the relationship |
| Accounting | Account for all money and documents | Earnest money kept in trust, never commingled |
| Reasonable care | Act with competence and diligence | Negligence breaches even with good intent |
Disclosure of material defects to third parties is also required by honesty rules, but full fiduciary disclosure runs to the client.
A seller's agent learns the seller will accept $290,000 even though the home is listed at $310,000. A buyer's agent representing the buyer asks the listing agent about the lowest price the seller will take. What must the listing agent do?
Client vs. customer
The client (principal) is the party the agent represents and to whom fiduciary duties are owed. A customer is a third party the agent works with but does not represent. To a customer, the agent owes honesty, fair dealing, and disclosure of known material defects, but not loyalty, confidentiality, or advocacy.
Example: a listing agent's client is the seller. A buyer who is unrepresented and works with that listing agent is a customer. The agent must answer the buyer's questions honestly and disclose known defects, but works to get the best terms for the seller.
Single, dual, and designated agency
Single agency
The broker represents only one side, either the seller or the buyer, in a given transaction. Duties are clear and undivided.
Dual agency
Dual agency occurs when one broker represents both the buyer and the seller in the same transaction. It is legal only with informed written consent from both parties. The dual agent cannot fully advocate for either side and must remain neutral on price and terms. Undisclosed dual agency is a serious violation that can void the transaction and forfeit commission.
Designated agency
In designated (appointed) agency, the broker assigns one salesperson to the buyer and a different salesperson to the seller, preserving fuller representation within one brokerage.
Disclosure timing and termination
Agency disclosure must be made early, typically at first substantive contact, so consumers know whom the agent represents before sharing confidential information. Many states require a written agency-disclosure form.
Agency can terminate by:
- Completion of the purpose (closing)
- Expiration of the term
- Mutual agreement to cancel
- Revocation or renunciation (either party ends it, possibly with liability)
- Operation of law: death, incapacity, or bankruptcy of either party, or destruction of the property
The duty of confidentiality survives termination; an agent may not later reveal a former client's secrets.
Customer-Level Duties and the Misrepresentation Trap
Even though fiduciary duties run only to the client (principal), an agent still owes the customer honesty, fair dealing, and disclosure of known material facts about the property. The agent may not lie, conceal a known defect, or pass along the seller's false statements.
The most-tested distinction is puffing vs. misrepresentation. Calling a home 'the best buy in town' is non-actionable puffing (opinion). Stating 'the roof is two years old' when the agent knows it is fifteen is misrepresentation, actionable even if the agent merely repeated the seller's claim without checking. Negligent misrepresentation (a careless false statement the agent should have verified) and fraud (a knowing lie that induces reliance and causes harm) both expose the agent to liability and discipline. When unsure of a fact, the safe answer is always to verify or to refer the customer to an expert, not to guess.
Buyer Agency and Disclosed Dual Agency Mechanics
Modern practice routinely involves buyer agency, where the agent's fiduciary duties run to the buyer, and the buyer-representation agreement defines compensation, which may be paid by the buyer, shared from the listing-side commission, or a combination. The exam tests that a buyer's agent owes the buyer the full OLD CAR duties and must disclose known material defects to the buyer while keeping the buyer's negotiating position confidential from the seller.
Disclosed dual agency arises when one firm represents both sides. It is legal only with the informed written consent of both parties, and the dual agent's duties shrink: the agent may not advocate one side's price or terms over the other, may not disclose either party's confidential motivations or bottom line, and must remain neutral. Undisclosed dual agency is a serious violation that can void the transaction and trigger discipline. Designated agency, where the broker assigns different licensees to each client, is the common workaround that preserves fuller representation for both sides.
A single broker wants to represent both the buyer and the seller in the same deal. Under standard agency law, this dual agency is permissible only when: