Agency Dilemmas

Posted on April 4, 2011 by Michelle Lind

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Most people are aware that a real estate broker or salesperson (“Broker”) is an agent with fiduciary duties to the party that the Broker represents. This agency relationship is most often created by express agreement; however, an agency relationship can be legally implied by the parties’ actions. Regardless of whether the agency relationship is express or implied, the agency relationship imposes on a Broker the fiduciary duties of loyalty, obedience, disclosure, confidentiality, and accounting.

Unfortunately, there are times when a Broker’s agency relationship or duties may be unclear. The following is a discussion of several of these agency dilemmas, along with some possible solutions. As you will see, these situations can generally be avoided if the Broker defines his or her relationship with a buyer or seller as soon as possible and educates the buyer and seller about the scope of the Broker’s duties.

Information Obtained During a Listing Presentation

During a listing presentation, the seller divulges what could be considered confidential information to the Broker. The seller does not enter into a listing agreement with the Broker, but lists the property with another brokerage firm. Is an implied agency created?
The concept of agency is one of law. Its existence depends upon factual elements that enable a determination, as to whether an agency relationship existed, to be made from all the peculiar circumstances of the particular case. No one fact, seized from its setting, should be regarded as conclusive or controlling under any and all circumstances. Busk v. Hoard, 396 P.2d 171 (1964 Wash. 1964).

In Hayward v. Graham, 104 Ariz. 103, 449 P.2d 31 (1968), the court stated:

An implied agency must be based on facts…such as to imply an intention to create the agency, and the implication must arise from a natural and reasonable, and not from a forced, strained, or distorted, construction of them. They must lead to the reasonable conclusion that mutual assent exists, and be such as naturally lead another to believe in and to rely on the agency. (Emphasis in original)

See also, Walter v. Moore, 700 P.2d 1219 (Wyo. 1985). Generally, a listing presentation alone does not include the intent to create an agency relationship. Further, the mutual assent necessary to create an agency relationship would generally not occur until the seller agreed to list the property with the Broker and an express agency relationship was entered into. Thus, an implied agency is not created in a listing presentation, unless the Broker implies an intention to create an agency relationship and the seller consents. To avoid this situation, and any implied agency, a Broker could explain to the seller early in the listing presentation that no agency relationship will exist until the seller enters into a listing agreement with the Broker.

Agent Representing Seller Only Should Not be Obligated to Disclose Comparable Sales Information to Buyer

The Seller has insisted on listing the property at a list price that is above the listing agent’s comparable price opinion because the seller believes that the property is worth the price. Is a listing Broker violating a duty to the seller by providing the buyer information that is public knowledge or is a matter of public record, such as comparables, when that information is detrimental to the seller’s interest?

A listing Broker is an agent with fiduciary duties to the seller. E.g., Haymes v. Rogers, 70 Ariz. 257, 219 P.2d 339 (1950) (a real estate broker employed to sell property owes the duty of utmost good faith and loyalty to his principal and a fiduciary relationship exists). This broker-client agency relationship imposes on a Broker the fiduciary duties of “utmost good faith, integrity, honesty, and loyalty in her transactions with the principal…” Musselman v. Southwinds Realty, Inc., 146 Ariz. 173, 175, 704 P.2d 814, 816 (App. 1985)
A listing Broker is obligated to exercise reasonable care to effect a sale to the best advantage of the seller: i.e., secure the best terms at the best price obtainable. See, e.g., Vivian Arnold Realty Co. v. McCormick, 19 Ariz. App. 289, 506 P.2d 1074 (1976) (broker has duty to effect a sale for seller on best terms possible); Meerdink v. Krieger, 550 P.2d 42 (Wash. App. 1976) (broker has a duty to exercise reasonable care, skill, and judgment in securing best bargain possible).

Despite this fiduciary duty to the seller, the listing Broker is obligated to disclose known information to the buyer that materially and adversely affects the consideration to be paid for the property. See Lombardo v. Albu, 199 Ariz. 97, 14 P.3d 288 (2000) (the agent’s disclosure obligations are consistent with the disclosure obligations of the client); see also A.A.C. R4-28-1101(B). However, public information such as comparable price information should not be the type of material and adverse information that the listing Broker is legally obligated to disclose to the buyer. See, e.g., Buffington v. Haas, 124 Ariz. 36, 601 P.2d 1320 (1979) (absent an agency relationship a broker has no obligation to advise a non-client as to the advisability of the contract terms). [Note: other types of public information could be of the type that would require disclosure, despite its public nature: for example, an impending zoning change].
Therefore, the listing Broker should not be legally obligated to disclose the comparables to the buyer. Further, if the disclosure would prevent the listing Broker from effecting a sale to the best advantage of the seller, the listing Broker would breach a duty to the seller by disclosing the information, unless, of course, the Broker obtains the seller’s consent.

Use of Comparable Sales Information in a Dual Agency Situation

The Broker is acting as a dual agent in a transaction. The buyer and the seller have executed an AAR Limited Dual Representation Agreement. Does the dual agent have a duty to disclose comparable sales information to the buyer? Does the dual agent breach a duty to the seller by disclosing such information to the buyer?
Many courts acknowledge that comparable sales information is the preferred manner to compute the market value of a property. See, e.g., State v. Sonnier, 503 So.2d 1144 (La. App 1987). But research revealed no case law specifically stating that a buyer’s broker has a fiduciary duty to obtain comparable sales information on behalf of a buyer client. Therefore, for the purposes of this discussion, we will assume that the Broker possesses the comparable sales information.
A broker, as an agent, has a duty to disclose to the client all information possessed by the broker that relates to the transaction. See, Jennings v. Lee, 105 Ariz. 167, 461 P.2d 161 (1969). Therefore, if the Broker had information on comparable sales and represented only the buyer, the Broker would have a duty to disclose the information to the buyer, which would violate no duty to the seller.
There are no easy answers when it comes to dual agency. When a Broker acts as a dual agent, the Broker attempts to serve two clients with conflicting interests. This inherent conflict is why dual agents are required to obtain the informed written consent of the parties. See R4-28-1101(F). This informed written consent may be obtained with AAR’s Limited Dual Representation Agreement (“Agreement”). The Agreement acknowledges that there will be conflicts in the duties of loyalty, obedience, disclosure, and confidentiality. Therefore, the Agreement limits the duties the Broker owes to the buyer and seller as follows:

  1. The Broker will not, without written authorization, disclose to the buyer that the seller will accept the price or terms other than stated in the listing.
  2. The Broker will not, without written authorization, disclose to the seller that the buyer will accept a price or terms other than offered.
  3. The Broker will not disclose confidential information without written authorization.

Comparable sales information should not be considered confidential information and therefore should not fall within any of the above limitations on the Broker’s duties.

The Agreement also obligates the Broker to:

  1. Exercise reasonable skill and care in the performance of the Broker’s duties.
  2. Deal honestly and fairly with all parties.

Arguably, the failure to disclose known non-confidential comparable sales information to the buyer in a dual agency relationship could violate these obligations.
For the foregoing reasons, a Broker acting as a dual agent under the terms of the Limited Dual Representation Agreement has a duty to the buyer to disclose known non-confidential comparable sales information. Further, because the comparable sales information is not confidential information and does not disclose that the seller will accept a price or terms other than stated in the listing, the disclosure of such information by a dual agent to the buyer should breach no duty to the seller. However, if the Broker anticipates that the comparables are going to be an issue, the best course would be to address the issue in the Dual Representation Agreement.

Limiting the Scope of Agency Representation Based on Compensation

The Broker is representing the buyer and the buyer has executed the Real Estate Agency Disclosure and Election (“READE”) form, electing that the Broker represent the buyer as a buyer’s broker. The Broker and the buyer have not entered into a Buyer-Broker Exclusive Agreement. The Broker has not discussed compensation or limited the Broker’s representation to those properties in the MLS offering a certain amount of compensation. Does the Broker breach the Broker’s fiduciary duty to the buyer by failing to show a property to the buyer because of insufficient compensation offered by the listing agent or because the property is a FSBO?

A Broker has a right to set the terms of the Broker’s compensation and has no duty to represent a client if the client does not agree to those terms. Further, a Broker has no duty to reduce the agreed upon compensation to assist a buyer or seller in putting a transaction together.

However, in the above factual scenario, although the Broker and the buyer have not agreed upon the Broker’s compensation or limited the properties to be shown, the Broker has undertaken the “fiduciary duties of loyalty, obedience, disclosure, confidentiality, and accounting in dealings with the buyer.” See, READE form, line 11. Further, the buyer’s Broker has not disclosed that the Broker will not show the buyer certain properties based on compensation. Therefore, the terms of the buyer-broker relationship are ambiguous.
Research revealed no case law specifically addressing this issue. However, clearly, an agency agreement may exist without a compensation agreement. See, e.g., Foremost Ins. Co. v. Parham, 693 So.2d 409 (Ala. 1997). In other words, an agent, like the Broker in the above factual scenario, can undertake fiduciary duties with no guarantee of compensation.

The lack of compensation does not lessen the agent’s duties. Once an agency agreement is established, the agent has a duty to give the client all relevant information. “An agent who acquires information relevant to matters within his province and of which he should know the principal would want to know, has a duty to reveal it, unless it was received confidentially.”Musselman v. Southwinds Realty, Inc., 146 Ariz. 173, 704 P.2d 814 (1985), citing W. Seavey, Law of Agency, § 143, p.238 (1964). “It is the duty of the agent to give his principal reasonable and timely notice of every fact relating to the subject-matter of the agency, coming to the knowledge of the agent while acting as such, and which it may fairly be deemed material for the principal to know for the protection or preservation of his interests.” Id. citing F. Mechem, 1 Law of Agency § 1353, pp. 993-94 (2d ed. 1914).

Therefore, an argument could be made that, unless the buyer’s broker clarifies the terms of the agency agreement by disclosing that the Broker will represent the buyer only in regards to listed properties offering a certain amount of compensation, the Broker has a duty to inform the buyer of the availability of all property of which the buyer would want to know. The Broker may have this duty even if the Broker would not actually show the buyer the property, participate in the transaction, or be entitled to compensation.

However, Musselman Court also states: “[t]o require the agent to give the principal notice of any conceivable information which might possibly influence the principal would create an oppressive burden on the agent.” Id. Thus, a buyer’s broker could argue that it would create an oppressive burden on the Broker to give a buyer information on a property for which the Broker would not be compensated. Further, the Broker could argue that a certain amount of compensation for the Broker’s services were implied. Therefore, a contrary argument could be made that the failure to give the buyer notice of the property would not be a breach of fiduciary duty.
The solution to the dilemma presented above is for the buyer’s broker to define the terms of the broker’s representation and address compensation for the broker’s services by using the Buyer-Broker Exclusive Employment Agreement or other written agreement. In the alternative, the buyer’s broker could disclose to the buyer, in writing, that the agency agreement extends only to properties for which the broker would receive a certain amount of compensation. Such a disclosure would inform the buyer what to expect of the agent and, more importantly, the limitations in the agency relationship.

Confidential Information Remains Confidential After Termination of Agency Relationship

The Broker listed a property for the seller, but was unable to sell the property. When the Broker’s listing expired, the seller re-listed the property with another brokerage firm. The Broker possesses confidential information about the seller, which was acquired while the Broker represented the seller. May the Broker disclose the confidential information about the seller?

Arizona courts generally follow the Restatement of Law if its view “is logical, furthers the interests of justice, is consistent with Arizona law and policy, and has been generally acknowledged elsewhere.” Ramirez v. Health Partners of Southern Arizona, 193 Ariz. 325, 972 P.2d 658 (App. 1998). Pursuant to the Restatement (Second) of Agency:

§396 Using Confidential Information After Termination of Agency
Unless otherwise agreed, after the termination of the agency, the agent:

(b) has a duty to the principal not to use or to disclose to third persons, on his own account or on account of others, in competition with the principal or to his injury, trade secrets, written lists of names, or other similar confidential matters given to him only for the principal’s use or acquired by the agent in violation of duty. The agent is entitled to use general information concerning the method of business of the principal and the names of the customers retained in his memory, if not acquired in violation of his duty as agent;
(d) has a duty to the principal not to take advantage of a still subsisting confidential relation created during the prior agency relation. (Emphasis added).

The Comment on subsection (d) of § 396 also states in pertinent part that “one who customarily buys or sells property through a broker can properly assume that the broker will keep confidential information given him in matters connected with dealings in such property, although not in connection with a transaction in which he is employed.” Therefore, the Broker’s duty of confidentiality to the seller would preclude the Broker from disclosing the confidential information about the seller even after termination of the agency relationship, unless the Broker obtains the seller’s consent.

Michelle Lind

Bio:

AAR Chief Executive Officer Michelle Lind is a State Bar of Arizona board-certified real estate specialist and the author of Arizona Real Estate: A Professional’s Guide to Law & Practice. This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

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