4.4 Agency Relationships, Fiduciary Duties, and Disclosure
Key Takeaways
- Fiduciary duties (OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care) are owed to the principal, not to customers.
- A customer is owed honesty, fair dealing, and disclosure of known material defects, but not fiduciary duties.
- Dual agency requires informed written consent of both parties and is illegal in some states; undisclosed dual agency can void the commission.
- Agency disclosure is generally required at first substantive contact, before confidential information is exchanged.
- Disclose material physical defects; stigmatized-property facts (death, prior illness, alleged crime) are generally protected and need not be disclosed.
Agency Is the Heart of Licensing Law
Agency defines who the licensee works for and what duties are owed. It generates 7 to 12 national questions, and the concepts thread through ethics, fair housing, and disclosure. Get the duties and disclosure timing right and you protect a large block of points.
The Parties to Agency
- Principal (client) — the party who hires the agent and to whom fiduciary duties are owed.
- Agent — the broker authorized to act for the principal.
- Customer — a party the agent deals with but does not represent (e.g., a buyer in a seller-agency deal). The customer is owed honesty and fair dealing, but not fiduciary duties.
- Third party — anyone else affected by the transaction.
License law adds two more layers. The broker is the agent of the principal, while a salesperson is the agent of the broker (a subagent), not a direct agent of the seller. This is why commissions and liability flow through the broker. A special agent is hired for one transaction (the usual real estate listing); a general agent (like a property manager) handles ongoing affairs; a universal agent acts under broad power of attorney.
Fiduciary Duties: OLD CAR
The agent owes the principal the fiduciary duties summarized by "OLD CAR":
- Obedience — follow lawful instructions.
- Loyalty — put the client's interests above the agent's own.
- Disclosure — reveal all material facts to the client.
- Confidentiality — protect the client's private information, even after the relationship ends.
- Accounting — handle and report all money and documents properly.
- Reasonable care and diligence — act competently.
The duty owed to a customer is narrower: honesty, fair dealing, and disclosure of known material defects in the property. A seller's agent must disclose a leaking roof to a buyer-customer, but must not reveal that the seller will accept less than asking — that is confidential to the client.
How Agency Is Created and Terminated
Agency is usually created by express agreement (a signed listing or buyer-representation agreement). It can also arise by implication through conduct, by ratification (approving an act after the fact), or by estoppel.
It terminates by completion, expiration, mutual agreement, revocation, renunciation, or by operation of law (death, incapacity, bankruptcy, or destruction of the property).
Types of Agency Representation
| Type | Whom the broker represents | Key risk |
|---|---|---|
| Seller agency | The seller only | Buyer is a customer |
| Buyer agency | The buyer only | Seller is a customer |
| Dual agency | Both parties at once | Conflict of interest; requires informed written consent |
| Designated agency | Two agents in one firm, each one party | Mitigates dual-agency conflict |
| Transactional / non-agency | Neither as a client; facilitator | No fiduciary duties owed |
Dual Agency — The High-Risk Trap
Dual agency occurs when one broker represents both buyer and seller. It is legal in many states only with the informed written consent of both parties, and it is illegal in some states. The dual agent cannot fully advocate for either side and must stay neutral on price and terms. Undisclosed dual agency is a serious license-law violation and can void the commission.
Disclosure Timing and Stigmatized Property
Most states require agency disclosure at first substantive contact or before any confidential information is exchanged. Material physical defects must be disclosed. By contrast, stigmatized property facts (a death, suicide, or alleged haunting on site) generally need not be disclosed, and many states bar disclosing a prior occupant's HIV/AIDS status — those are protected. Never confuse a physical defect (always disclose) with a psychological stigma (often protected).
Scope of Authority and the Agent's Liability
The authority an agent holds determines what acts bind the principal. Actual authority is granted expressly (in the listing) or by reasonable implication. Apparent authority arises when the principal's conduct leads a third party to believe the agent is authorized, even if no actual grant exists — the principal can be held liable for acts within that apparent scope. A wise broker limits apparent authority by spelling out, in writing, exactly what a salesperson may promise.
An agent who exceeds authority, misrepresents a material fact, or breaches a fiduciary duty may face several consequences at once: loss of the commission, civil liability for damages, rescission of the contract, and license discipline. The principal, in turn, can be vicariously liable for the agent's authorized acts under respondeat superior, which is why brokers carry errors-and-omissions (E&O) insurance.
Misrepresentation, Puffing, and the Duty to Investigate
Not every optimistic statement is actionable. Puffing is a non-factual opinion ("this is the best view in town") and is generally permitted. Misrepresentation is a false statement of material fact; it is negligent when the agent should have known better and fraudulent when made knowingly to deceive. Latent defects — hidden conditions a buyer could not discover on a reasonable inspection — must be disclosed even in many "as-is" sales.
- Stating a furnace works when the agent knows it is broken = fraudulent misrepresentation.
- Repeating a seller's square-footage figure without checking, when easily verifiable, = negligent misrepresentation.
- Saying "you will love this neighborhood" = puffing, not actionable.
When an agent does not know an answer, the correct response is to disclose the limit of knowledge and refer the buyer to an inspector or expert — never to guess.
A salesperson tells a buyer that a home's roof is "only two years old" based on the seller's word, without checking the readily available roofing permit, and the roof is actually 15 years old. This is best described as:
A seller's agent learns from the seller that the seller will accept $20,000 below the list price. A buyer-customer asks the agent, 'What is the lowest the seller will take?' What must the agent do?
Which of the following must a seller's agent disclose to a prospective buyer?