Can a real estate agent’s “unclean hands” harm their innocent client?  That was the issue in this case where the Arizona Supreme Court addressed whether an agent’s inequitable conduct is chargeable to the client.

The buyer and seller entered into a purchase contract for the sale of 20 acres of land in Tonopah. The contract provided for a purchase price of $150,000, payable $68,000 cash at closing, an $82,000 seller carry-back, and a $1,000 earnest-money deposit. 

Once the contract was executed, the buyer’s broker sent the contract to escrow, but deposited no earnest money into escrow during the following week. The seller and listing agent became concerned about the buyer’s failure to deposit the earnest money and repeatedly tried to reach the buyer’s broker without success.

Finally, on a Friday, the listing broker told the escrow agent that the contract was cancelled. Either that night or the next day, the buyer’s broker learned that the seller had cancelled the contract. On the following Monday morning, the buyer’s broker deposited the earnest money, but the seller refused to perform.

The buyer then sued the seller seeking specific performance of the contract.  Specific performance is a remedy in breach of contract actions involving real estate, but a court may deny a specific performance request due to “unclean hands”.  The “unclean hands” doctrine can be applied against a party in a lawsuit who has engaged in inequitable behavior, such as deceit, bad faith, or fraud. 

After hearing all the evidence, the court determined that the buyer’s broker lied about the source of the earnest money, testifying that it was the buyer’s when in fact it was the buyer’s broker’s money. The court found that the buyer’s broker either made an undisclosed loan to the buyer or commingled his own money with the buyer’s funds.

The court further found that the buyer’s broker’s subterfuge went further when “he printed his name, rather than signing it, on the purchase offer because he did not have the required earnest-money check, failed to return phone calls, and “raced to the escrow agent to deposit the funds,” knowing that [the seller] had cancelled the contract.” Finally, the court determined that the buyer’s broker had not testified truthfully. 

The buyer testified that he was innocent and unaware of the buyer’s broker’s actions.  Thus, the buyer argued that the court should protect him as an innocent principal from the misconduct of the agent he hired. 

The Court rejected the buyer’s arguments and stated:

“[a]s between the principal who has retained an unscrupulous agent and an innocent third party who relies on the agent’s misrepresentation, it is the third party who deserves protection.” 

Therefore, the Court determined that a court may consider a real estate agent’s inequitable conduct in deciding if the agent’s principal is entitled to specific performance of a contract for the sale of real estate and concluded that the agent’s inequitable acts may be imputed to the client whether or not the client knew of the agent’s misconduct.

Thus, the court denied the buyer specific performance.

Case Lessons:

• Always perform your duties expeditiously and return calls as soon as possible.
• Always be honest and tell the truth.
• Always keep your hands clean!

Queiroz v. Harvey, 220 Ariz. 273, 205 P.3d 1120 (2009)

For more great articles by Michelle Lind, check out her blog, HERE.

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book – Arizona Real Estate: A Professional’s Guide to Law and Practice (3rd Ed.) .  For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

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.  12/20/22