4.4 Agency Relationships, Fiduciary Duties, and Disclosure

What Agency Means

Agency is the legal relationship in which a principal (the client) authorizes an agent (the broker, and by extension the salesperson) to act on their behalf in dealings with third parties. The party the agent does not represent is the customer.

Special agency is the norm in brokerage: the agent has limited authority to perform a specific task, such as finding a buyer, and cannot bind the principal to a contract without separate authorization.

How Agency Is Created

• Express agency - a written or oral agreement, such as a signed listing or a buyer-representation agreement. Written is best.
• Implied agency - created by conduct that leads a party to reasonably believe representation exists. This is a common trap: an agent who acts like a buyer's advocate can accidentally create implied agency.
• Ratification - the principal approves an act after the fact.
• Estoppel - the principal allows a third party to believe agency exists and is then barred from denying it.

How Agency Terminates

Agency ends by completion of the purpose, expiration of the term, mutual agreement, or revocation. It also terminates by operation of law on the death or incapacity of either party, destruction of the property, or bankruptcy.

Fiduciary Duties to the Principal: OLD CAR

An agent owes the principal the highest level of duty. A reliable memory aid is OLD CAR:

• Obedience - follow the principal's lawful instructions.
• Loyalty - put the principal's interests above the agent's own.
• Disclosure - tell the principal everything relevant to the transaction.
• Confidentiality - protect the principal's private information, even after the relationship ends.
• Accounting - account for all money and documents (earnest money goes into a trust account).
• Reasonable care and diligence - act with the skill expected of a professional.

Worked example: a listing agent learns the buyer is willing to pay $20,000 above the offered price. The duty of disclosure to the seller-principal requires telling the seller, because that information helps the principal.

Duties to the Customer

To a customer, the agent owes only honesty, fair dealing, and disclosure of known material facts. The agent must not lie, but is not required to advocate for the customer or keep the customer's negotiating secrets.

Table: Client vs. Customer Duties

Single, Dual, and Designated Agency

Single agency - the firm represents only one side of the transaction.

Dual agency - one brokerage represents both buyer and seller in the same deal. Because full loyalty to both is impossible, dual agency is legal only with informed written consent from both parties and is prohibited in some states.

Designated agency - within one firm, the broker assigns different agents to represent the buyer and the seller separately, reducing the conflict that pure dual agency creates.

Disclosure of Material Facts

A material fact is any fact that could affect a reasonable party's decision or the property's value, such as a leaking roof, a failed septic system, or known structural damage. The agent must disclose known material facts to all parties, even when doing so weakens their own principal's bargaining position. This duty cannot be waived by the principal.

Many states require a written agency disclosure at first substantive contact so consumers know whom the agent represents.

Exam Traps

• Confusing duties owed to a customer (honesty only) with those owed to a principal (full fiduciary).
• Believing dual agency is automatically illegal; it is allowed with informed written consent where permitted.
• Thinking confidentiality lets an agent hide a property defect; material-fact disclosure overrides confidentiality.
• Assuming agency requires a signed form; it can arise by implication or conduct.

The Broker, the Salesperson, and the Subagent

The broker is the actual agent of the principal; a salesperson is the broker's representative and owes the principal the same duties through the broker. A subagent is an agent of the broker who also represents the principal, common in older cooperative MLS arrangements where the selling office worked for the seller. Modern practice favors buyer-agency over subagency to reduce undisclosed conflicts.

Transaction Brokerage (Facilitator)

Some states allow a transaction broker (also called a facilitator), who helps both parties complete a deal without representing either as a fiduciary. The transaction broker owes honesty, accounting, and disclosure of material facts, but not loyalty or confidentiality. This is a middle ground between full agency and pure customer treatment.

Stigmatized Property and Limits on Disclosure

A material fact is generally a physical or legal condition affecting value. Many states treat stigmatized facts (a death on the property, a prior occupant's illness) as non-material and even bar disclosure under fair housing or privacy law. The exam tests the line: defects that affect the property itself must be disclosed; certain personal stigmas often must not be.

Worked example: an agent who knows the basement floods after heavy rain must disclose it as a material defect, even though the seller-principal would prefer silence, because the disclosure duty to all parties overrides confidentiality.

Agency Disclosure Timing

Most states require a written agency disclosure at first substantive contact, so a consumer knows whether the agent represents them, the other side, or neither, before sharing confidential negotiating information.