Successful agents are generally focused on excellent client service. However, this service occasionally extends well beyond that required by the law and can create significant liability for agents, if the agents create an implied agency with a third party. This tip addresses the creation of an implied agency, the risks, and how to avoid creating that relationship.
An implied agency is the creation of an unintentional agent-principal relationship, many times inadvertently. Agents only have fiduciary duties to their clients. However, if agents begin assisting other parties, an agency relationship can be created, which leads to heightened duties owed to that person. Consider the following examples:
SCENARIO NO. 1: Unrepresented buyer writes an offer which seller accepts. Listing agent begins assisting the buyer by providing forms and other advice, such as referrals to inspectors and advice regarding handling of the transaction. Escrow closes and buyer discovers non-disclosures. Buyer then sues agent and brokerage for breach of fiduciary duty.
RESPONSE: By assisting the buyer, the agent has created an implied agency with fiduciary duties owed to the buyer. Depending on the extent of the assistance, the buyer may have a valid argument that the agent breached their fiduciary duties which were created by the agent’s assistance to the buyer. To avoid this situation, the listing agent should not provide advice to the buyer. In addition, the listing agent should ensure that a non-agency disclosure is provided to the buyer (CAR form Buyer Nonagency Agreement – BNA). The listing agent should also ensure that each time a listing agent communicates with the buyer, the listing agent reminds the buyer that the listing agent does not represent the buyer. The agent should always avoid providing recommendations, advice, and/or any other professional assistance or service to the buyer.
SCENARIO NO. 2: Agent is representing a seller, who is single, in the sale of the property. Seller’s partner communicates with the agent, requests information and other services. Agent begins accommodating the partner’s requests. Has an implied agency been created with the partner?
RESPONSE: Arguably yes, the agent has now created an implied agency relationship with the partner. The law states that agents do not have legal duties to any non-parties to a transaction. However, when an agent begins representing a person who is not their client, such as providing advice or other assistance, an implied agency is created leading to owed fiduciary duties. In this circumstance, the agent likely created a fiduciary duty to the partner. Instead of accommodating the partner, the agent should have advised the seller that the seller is the client and the seller needs to communicate with the agent. If the seller wishes to delegate those obligations, the seller would need to sign an effective power of attorney granting decision-making ability to the partner.
SCENARIO NO. 3: Agent is representing a buyer in a transaction. The buyer locates a second buyer and seeks to assign the contract to the second buyer. Second buyer is unrepresented. Agent begins assisting the second buyer. However, agent does not have a buyer representation agreement nor was an agency disclosure provided. Does Buyer No. 1’s agent now have a fiduciary duty to Buyer No. 2? If so, is the agent entitled to a commission?
RESPONSE: Likely, by assisting Buyer No. 2, the agent has created an implied agency with Buyer No. 2. That relationship will include fiduciary obligations and exposure to liability to Buyer No. 2. Unfortunately, unless the agent provides an agency disclosure and has an effective buyer representation agreement with Buyer No. 2, agent is not entitled to earn a commission. This puts the broker and agent in a precarious position; they are exposed to liability without receiving the benefit of a commission. In addition, some errors and omissions insurance policies do not provide coverage if no compensation has been received.
RISK MANAGEMENT TIPS:
- Agents should be cautious in dealing with third parties or non-parties to a contract. Agents should also be cautious in dealing with unrepresented parties such as an unrepresented buyer or dealing with an unrepresented seller (e.g., a FSBO seller).
- If an agent is representing a party and the party on the other side, whether buyer or seller, is an unrepresented party, the agent should use the non-agency agreement (a BNA form for unrepresented buyers, and an SNA form for unrepresented sellers), and each time that agent communicates with the unrepresented party the agent needs to remind the unrepresented party that the agent is not representing them.
- Agents should not provide forms with the agent’s information on those forms (e.g., in the footer of zip forms), as it suggests that the agent is representing the party. That information should be deleted prior to sending to the unrepresented party.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry but rather are intended to suggest good risk management practice.