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THE FIDUCIARY DUTY THE REAL ESTATE AGENT OWES A CLIENT
Introduction:
The highest duty one person can owe another under the law is the
“fiduciary duty.” It is the duty a parent owes the child, the lawyer a
client, the Trustee a beneficiary, etc. It imposes upon the fiduciary
the highest degree of loyalty and obligation to the person enjoying the
benefit of the duty. No conflict of interest, failure to disclose, or
activity that is not to the benefit of the fiduciary is allowed. And the
Court will impose personal liability on the fiduciary who breaches the
high level of duty of care imposed.
This article shall outline the essential elements of the fiduciary duty
a real estate agent owes the client. The reader is advised to
first read the article
Real Estate Transactions
in California. It shall be presumed that the reader is
familiar with the contents of that article.
Basic Fiduciary Duty of
a Real Estate Agent:
Black's Law Dictionary, 5th Edition, at page 563, defines a fiduciary as
":...a person holding the character of a trustee...in respect to the
trust and confidence involved in it and the scrupulous good faith and
candor which it requires. A person having duty, created by his
undertaking, to act primarily for another's benefit in matters connected
with such undertaking."
An agent is a fiduciary. Michelson v. Hamada (1994) 29 Cal. App.
4th 1566. The law imposes on a real estate agent the same
obligation of undivided service and loyalty to a client that it imposes
on a trustee in favor of the beneficiary. Rattray v. Scudder
(1946) 28 Cal. 2d 214.
These duties include the duties of trustees set forth in Probate Code
section 16002 (duty of loyalty), 16004 (duty to avoid conflict of
interest), 16005 (duty not to undertake adverse trust) and 16009 (duty
to keep trust property separate and identified. (Civ. Code section 2322
(c))
The broker has the duty to do the following (Loughlin v. Dora
Realty Co. (1968) 259 Cal. App. 2d 619):
●
treat the principal’s affairs with the same standard of care as that of
a trustee, which has a duty to administer the trust solely in the
interest of the beneficiary (Probate Code 16002(a)
●
make to the principal the fullest disclosure of all material facts
concerning the transaction that might affect the principal’s decision
●
disclose to the principal all offers to buy the property in addition to
the offer accepted
●
refrain
from dual representation in a sale transaction without full disclosure
to both principals and their knowledge and consent
A real estate agent has a fiduciary duty of utmost care, integrity,
honesty, and loyalty in dealings with the client (Civ. Code section
2079.16 (agency disclosure form)). This relationship not only imposes on
the agent the duty of acting in the highest good towards the principal
but also precludes the agent from obtaining any advantage over the
principal by virtue of the agency. Batson v. Strehlow (1968) 68
Cal. 2d 662.
Practicalities:
While most people consider real estate brokers as well paid and earning
massive fees for very little work (A commission of $50,000.00 on the
sale of a one million dollar home is standard) in reality it is a
demanding and difficult profession. There are no guaranties of any
payment and a declining market can destroy a livelihood in a matter of
months. Weekends and nights are the usual time in which clients can be
contacted and homes shown and the competition among realtors is intense
and never ending. The boom market of the last fifteen years hides the
fact that over the last half century the average real estate broker has
had to work long hours in unpleasant conditions for relatively little
compensation.
The collapse of the real estate market in 2007 ended a boom time for
realtors and brought the market back to more typical conditions in which
long hours result in good but not great compensation.
But it is vital to note some economic facts of life about the role of
the realtor:
They do not get paid for deals that do not culminate. To expect a
realtor to advise when to abandon a deal is to expect a realtor to
advise against his or her own economic interest. That does happen but
can not be relied upon.
Realtors have to keep homes and commercial real estate moving in
transactions or earn nothing. Thus an active market is all important to
them and advice to remain out of the market is unlikely to occur.
Realtors are paid more if the price is higher. Sellers like that, of
course, but for a buyer to rely on a realtor’s advice as to appropriate
pricing is, again, to assume a lack of self interest and objectivity
that is unlikely to exist in most realtors.
The above economic factors are, in the typical situation, far more
pervasive than outright fraud or self dealing. Put simply, unless you
wish to buy or sell at the highest price possible, your economic
interest is not in conformity with that of the broker. That criteria
does work for the Seller so long as the Seller realizes that the broker
earns nothing if there is no consummation of the deal and may advise
selling no matter what. The above criteria seldom works for the Buyer.
The broker thus is placed inevitably in a situation in which his or her
advice faces strong economic personal motivation that may not conform to
that of the Buyer or Seller.
Additionally, if a broker can represent both the Buyer and Seller, the
commission doubles. Clearly such a situation is an inherent conflict of
interest…and the standard listing agreement has precise and carefully
worded provisions warning both the Buyer and the Seller that this
conflict can only exist if the Buyer and Seller both waive their rights
to object. But…why should anyone do that? Unless the broker is willing
to lower the fee, you are paying twice as much for half the advice. Yet,
studies show that a large percentage of the Buyers and Sellers go along
with the oddity of hiring an agent who represents the party on the other
side. This can seldom be recommended.
As for outright conflicts of interest, such as self dealing, failing to
disclose relevant facts, such as business connections with the other
party, those create liability that may be personal for the broker and
can lead to valid complaints before the Department of Real Estate which
licenses brokers.
CONCLUSION:
The law imposes powerful duties upon the broker both in terms of self
dealing and full disclosure and personal liability applies if this duty
is violated. Brokers, who are usually well meaning and honest normally
conform to the requirements but the intelligent Buyer or Seller should
carefully monitor all actions of the real estate agent and realize that
the economic basis of their relationship must almost always put them at
odds in advising as to the benefits or detriments of a sale. They may
have local knowledge of the locale and have good basic knowledge of the
mechanics of the transaction: but as to whether it makes good economic
sense to buy or sell a particular property, be sure to understand that
their own economic self interest may color their advice, consciously or
unconsciously. |
