QUESTION: Our brokerage has two current listings that concern me because I do not know what needs to be disclosed or what are the best practices when there is a sale. One of our Agents is listing her own home for sale and she is willing to compensate a Cooperating Broker, but she is conducting her own open houses and wants to represent the Buyer to avoid paying any commission. Another Agent is listing his parents’ home and, like the Agent listing her own home, wants to represent the Buyer to avoid paying any commission.
In addition to providing us with the correct verbiage for any required disclosure, are there any risks in either of these scenarios if the Listing Agent also represents the Buyer? How can we minimize those risks?
ANSWER: Yes, there are required ethical and legal disclosures for both of the situations described in your question and there are serious risks for the Agent/Brokerage if that Agent also represents the Buyer.
BOTTOM LINE: If an Agent is a principal or is related to a principal and/or has a financial interest in the Property, that Agent should not serve as a Dual Agent. It is difficult enough to wear two hats in a transaction (Seller’s Agent and Buyer’s Agent); it is virtually impossible to wear three hats when the Dual Agent also is a principal or is related to a principal and/or has a financial interest in the Property.
- REQUIRED NAR CODE OF ETHICS DISCLOSURES
The NAR Code of Ethics requires that an Agent’s direct or indirect interest in the Property and/or their familial relationships must be disclosed in writing to the Parties of a real estate transaction. Specifically:
ARTICLE 4: REALTORS® shall not acquire an interest in or buy or present offers from themselves, any member of their immediate families, their firms or any member thereof, or any entities in which they have any ownership interest, any real property without making their true position known to the owner or the owner’s agent or broker. In selling property they own, or in which they have any interest, REALTORS® shall reveal their ownership or interest in writing to the purchaser or the purchaser’s representative. (Amended 1/00)
Standard of Practice 4-1 specifies that the disclosures required by Article 4 must be in writing and provided prior to the signing of any contract.
ARTICLE 5: REALTORS® shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties.
- REQUIRED LEGAL DISCLOSURES
AGENT ACTING AS PRINCIPAL:
In addition to the NAR Ethics disclosure obligations, California law requires real estate Agents to disclose their license status if they are acting as a principal whether or not the Agent will be receiving a commission. This disclosure needs to be in writing at the outset of the transaction and differs from Agency Confirmation. The best way to handle this disclosure is to include the following language in the Purchase Agreement (in the Offer, a Counteroffer or Addendum) with the relevant information inserted into the blank lines:
The Parties understand and acknowledge that [Name of Agent] is licensed by the State of California as [state either a Real Estate Broker or Real Estate Salesperson] and is affiliated with [Name of Brokerage] under the terms of an Independent Contractor Agreement; [Name of Sales Associate] is engaged in this transaction solely for his/her own account.
AGENT RELATED TO PRINCIPAL:
The NAR Ethics Code and California law require real estate Agents to disclose their relationship (by blood or marriage) to a principal. The best way to handle this disclosure is to include the following language in the Purchase Agreement (in the Offer, a Counteroffer or Addendum) with the relevant information inserted into the blank lines:
The Parties understand and acknowledge that [Name of Agent] is related by blood/marriage to [Name of Principal] .
AGENT’S DIRECT OR INDIRECT OWNERSHIP INTEREST IN THE PROPERTY:
The NAR Ethics Code and California law require real estate Agents to disclose their direct or indirect interest in the Property (other than receiving a commission). The best way to handle this disclosure is to include the following language in the Purchase Agreement (in the Offer, a Counteroffer or Addendum) with the relevant information inserted into the blank lines:
The Parties understand and acknowledge that [Name of Agent] has the following direct or indirect ownership interest in the Property: [e.g., A 10% interest in company that owns the Property or Is a beneficiary on a deed of trust secured by the Property] .
California Business & Professions Code Section 10177(o) provides that failure to make this required disclosure is a basis for license suspension or revocation.
BUYER’S AGENT’S SPECIAL RELATIONSHIP TO SELLER
Business & Professions Code Section 10177(o) also provides that the Buyer’s Agent’s license can be suspended or revoked if that Agent fails to disclose to the Buyer any “special relationship” that the Agent has or had with the Seller. Unfortunately, that statute does not define what constitutes a “special relationship” so the broadest list of potential “special relationships” should be used when including the following language in the Purchase Agreement (in the Offer, a Counteroffer or Addendum); inserting the relevant information into the blanks:
The Parties understand and acknowledge that [name of Buyer’s Agent] has (or had) a special relationship with the Seller in that [e.g., they belong to the same church; they worked at the same company, the Agent represented the Seller in a prior transaction] .
- MEETING THE FIDUCIARY DUTY
DEFINITION AND SCOPE:
The statutory Agency Disclosure form states that the Agent owes its Client (whether representing the Seller, the Buyer or both) the following Fiduciary duty:
“A Fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with” the Client.
General principles of Agency law describe the Agent’s duty of loyalty as follows:
“A person’s duty not to engage in self-dealing or otherwise use his or her position to further personal interests rather than those of the beneficiary.”
Juries are commonly told that this aspect of the Fiduciary duty means that the Agent must have undivided loyalty to the Client, such that the Client’s interests must come first; the Agent’s personal, family and/or financial interests cannot be at odds with the Client’s interests.
Although common law strongly disfavors an Agent representing both Principals in any type of transaction, it is legal in California for the Agent to represent both Buyer and Seller in a real estate transaction when all proper disclosures have been made in a timely fashion. Even though dual agency is legal, it is often very difficult to prove that the Agent acted impartially and that the Agent did not favor one Principal over the other.
However, when a Dual Agent is also acting as a Principal, or is related to a Principal, or has a direct or indirect ownership interest in the Property, it is extremely difficult, if not impossible, for a judge, jury or arbitrator to believe that the Agent was acting with utmost care, integrity, honesty and loyalty to both clients because, as a matter of fact and law, the Agent clearly favors one side of the transaction over the other.
Arguments that the Agent was “bending over backwards to be fair” to the other Principal ring hollow in the ears of anyone who is deciding the case because the Agent is seen as having “divided loyalties.”
BEST PRACTICE TIPS:
- If an Agent is a principal, or is related to a principal and/or has a financial interest in the Property, that status should be disclosed in writing in the Purchase Agreement using the appropriate language specified above.
- If an Agent is a principal or is related to a principal and/or has a financial interest in the Property, that Agent should not serve as a Dual Agent. The Agent’s desire to save money on commission should not impact how the transaction is conducted for the protection of both clients.
- When an Agent is listing their own Property or Property owned by a close family member, to avoid even the possibility of the Agent creating a dual agency relationship with a Buyer, the Seller’s Agent should not personally conduct any open houses or be the contact person for showing the Property to prospective buyers.
- If an Agent is a principal or is related to a principal and/or has a financial interest in the Property, and that Agent is asked to write up an Offer for a Buyer (regardless of how the Buyer was procured), that request needs to be rejected and the client should be referred to another Agent, preferably in another brokerage but, at the very least, an Agent who is not related to or on the same team as the Seller’s Agent.
- If an Agent desires to make an Offer on their own Listing, the Broker/Branch Manager should step in to represent the Seller in considering the Agent’s Offer and the Seller should be advised to make the purchase contingent upon the Seller receiving an Appraisal report from an independent appraiser (not one who is used by the Buyer’s Lender or that routinely works with the Agent/Broker) to assure the Seller that the Seller is receiving fair market value. If the Seller agrees to sell to the Agent, the Broker/Branch Manager or someone else in the brokerage should take over the further representation of the Seller.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is 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. 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 practices.
© Copyright Broker Risk Management 2019 09/06/19