BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
All agents and brokers know that we have a “fiduciary duty” to our clients, but few know exactly what that means. At a seminar before the Board of Realtors, we asked the question, “what is the definition of fiduciary duty?” and unfortunately, no one could answer the question.
According to the law, a broker’s fiduciary duties to the client include the obligation of utmost loyalty, good faith, trust and confidence, putting the client’s interests ahead of the broker’s. The duties of loyalty and good faith include duties of honesty and full disclosure. The broker must exercise reasonable skill and care for the benefit of their client, and avoid any conflicts of interest.
- WHAT DOES THIS MEAN ON A DAILY BASIS?
- CONFIDENTIALITY: The broker is required to treat the client’s information as confidential. It would be a violation of that duty to disclose confidential information learned from the client without their consent. For example, if a listing agent learns from their sellers that they are in financial trouble, it would be a violation of the fiduciary duty to disclose that information to other brokers, agents or buyers without the consent of the sellers. This duty of Confidentiality continues after the agency relationship with the client ends.
NOTE: The expanded duties of confidentiality in a dual agency are covered in Part 3
- PUTTING THE CLIENT’S INTERESTS FIRST: Many times, agents are so focused on closing the transaction (and receiving the commission), they lose sight of the fact that it may not be in the client’s best interest to continue to pursue the sale. If an agent is pushing a client to close a sale or purchase when the best course may be to send the client to an attorney to discuss how to best cancel the transaction, there may be a breach of the fiduciary duty to the client.
Further, a listing agent may push a seller to accept an offer when the seller clearly does not want to do so. Again, the agent may have lost sight of what is in the client’s best interests, if they are thinking about the commission they will not receive.
Telling a client that they do not have to disclose a fact because the agent wants the transaction to close is also a breach of fiduciary duty. Remember, if you or your seller have information about the property, it must be provided to the buyer.
Putting the client’s interests first also requires an agent to remember that they are the AGENT – and the SELLER and/or BUYER is the Principal. Agents ADVISE, and Sellers and Buyers DECIDE. How often have you heard an agent say, “I won’t allow that.” Or “I won’t let my client do that.” Or “We aren’t going to agree to that.” That agent has forgotten that he/she is the agent – but is acting like the principal.
In the 2016 California Supreme Court decision in Horiike vs Coldwell Banker, the court said this about the obligations of a real estate license in a dual agency:
The primary difference between the disclosure obligations of an exclusive representative of a seller and a dual agent representing the seller and the buyer is the dual agent’s duty to learn and disclose facts material to the property’s price or desirability, including those facts that might reasonably be discovered by the buyer.
The Horiike decision did not discuss what steps agents must take to “learn” material facts, which might affect value or desirability. But we have some guidance on that question from the existing Jury Instruction used in California on the duty of disclosure by a real estate broker:
The facts that a broker must learn, and the advice and counsel required of the broker, depend on the facts of each transaction, the knowledge and the experience of the client, the questions asked by the client, the nature of the property and the terms of sale. The broker must place himself or herself in the position of the client and consider the type of information required for the client to make a well-informed decision. (CACI 4107) (Emphasis added)
- HONESTY AND FULL DISCLOSURE: In all of the dealings with the client, the agent must be honest. This means, of course, giving a truthful response to a question; but it also means affirmatively giving information to the client that will, or might, affect their decisions or best interests.
This is true also of full disclosure. The agent must, at all times, take affirmative steps to keep the client apprised of what is occurring. That means promptly passing along information that is or might be material to them. Agents get into trouble when they think they know what the client wants, without giving the client the opportunity to evaluate the information and respond. Remember, clients have the right to change their minds.
- LOYALTY: Often an agent will get frustrated with a client whom they deem to be stubborn, unreasonable, or even downright nasty. It is easy for that agent to forget that this is a client to whom they still have a fiduciary duty of loyalty. While it may be easy to start complaining about your client to the other agent or third parties, or to do things without the client’s approval, remember that this could be deemed to be a breach of the duty of loyalty.
- AVOIDING CONFLICT OF INTEREST: When agents from the same brokerage represent both seller and buyer, the potential for being in a conflict situation is high. This is particularly true when a dispute develops between seller and buyer. In that case, neither agent can take a position against, or advocate for an advantage in favor of, either client to the detriment of the other client.
That does not mean that the dual agent cannot do anything when there is a dispute. They can, of course, facilitate communication and try to resolve issues. However, that agent is like “Switzerland” – neutral. Remind the clients of the dual agency role that the agent may not take an advocacy position in favor of one, or against the other.
NOTE: Dual agency issues when there is a dispute between parties is covered in Part 4.
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. 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