Real Estate Agency Duties and Liabilities
Duties of Agents: An agent has duties:
* to the agent’s principal “fiduciary duties”
* to the other person in a transaction who is not a principal
Agent’s Fiduciary Relationship: An agent is held to be a fiduciary:
* Fiduciary relationship imposes the same obligation of utmost good faith on an agent that it imposes on a trustee in favor of his beneficiary
* An agent must act in the highest good faith towards the principal and is precluded from obtaining any advantage over the principal in any transaction by virtue of the agency
Duties Imposed by Fiduciary Relationship: Fiduciary duties owed to the agent’s principal:
* Duty of loyalty
* Duty of full disclosure
* Duty to use care, skill, and diligence
* Duty to account
Duty of Loyalty: Agent has a duty:
* to act solely in the interest of the principal
* not to use or deal with the principal’s property for the agent's own profit “Secret profit”
* not to take part in any transaction in which the agent has an interest adverse to the principal
A transaction between the principal and an agent is presumed to be a violation of the agent's duty of loyalty
Secret Profits
* Secret profit is any benefit the agent receives from the transaction which is not fully disclosed to and approved by the principal
* An agent will not be permitted to retain anything in connection with the transaction unless the agent fully discloses the nature and amount of the benefit and receives the approval of the principal.
- It is totally immaterial that the transaction is otherwise fair to the principal or that the principal receives exactly the price wanted for the property
* Principal is entitled to recover all benefits and advantages acquired by the agent, exclusive of the agent's agreed compensation
* Most common secret profit case involves purchase of the principal’s property by the agent or a related party
Duty to Use Skill, Care, and Diligence:
* The agent must exercise reasonable skill and care in the exercise of the agent's duties
- Standard: skill and diligence that a reasonable real estate licensee would use
- Presumption: licensee has superior knowledge and skills in the real estate field
* Agent must do everything reasonably necessary to accomplish purpose of agency
* to the agent’s principal “fiduciary duties”
* to the other person in a transaction who is not a principal
Agent’s Fiduciary Relationship: An agent is held to be a fiduciary:
* Fiduciary relationship imposes the same obligation of utmost good faith on an agent that it imposes on a trustee in favor of his beneficiary
* An agent must act in the highest good faith towards the principal and is precluded from obtaining any advantage over the principal in any transaction by virtue of the agency
Duties Imposed by Fiduciary Relationship: Fiduciary duties owed to the agent’s principal:
* Duty of loyalty
* Duty of full disclosure
* Duty to use care, skill, and diligence
* Duty to account
Duty of Loyalty: Agent has a duty:
* to act solely in the interest of the principal
* not to use or deal with the principal’s property for the agent's own profit “Secret profit”
* not to take part in any transaction in which the agent has an interest adverse to the principal
A transaction between the principal and an agent is presumed to be a violation of the agent's duty of loyalty
Secret Profits
* Secret profit is any benefit the agent receives from the transaction which is not fully disclosed to and approved by the principal
* An agent will not be permitted to retain anything in connection with the transaction unless the agent fully discloses the nature and amount of the benefit and receives the approval of the principal.
- It is totally immaterial that the transaction is otherwise fair to the principal or that the principal receives exactly the price wanted for the property
* Principal is entitled to recover all benefits and advantages acquired by the agent, exclusive of the agent's agreed compensation
* Most common secret profit case involves purchase of the principal’s property by the agent or a related party
Duty to Use Skill, Care, and Diligence:
* The agent must exercise reasonable skill and care in the exercise of the agent's duties
- Standard: skill and diligence that a reasonable real estate licensee would use
- Presumption: licensee has superior knowledge and skills in the real estate field
* Agent must do everything reasonably necessary to accomplish purpose of agency
Duty to Disclose: Agent must:
* Keep the principal informed
* Make the fullest disclosure of all material facts concerning the transaction that might affect the principal's decision
Scope of Disclose Duty
* Disclosure duty owed by an agent to the principal is broader than the disclosure duty to third persons
* The agent's duty to disclose material information to the principal includes the duty to disclose material information that might reasonably be discovered from research and investigation of public records
* The agent is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal's decision
* A broker has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision
Examples of material facts
* Market value of property
* Acreage
* Title matters
* Identity of buyer
* Buyer’s financial condition
* Dual agency
Special offer disclosure rules
* Listing agent must present all offers to seller
* Offers must continue to present offers even if seller has accepted another offer
Exceptions:
- If seller instructs agent not to present offers
- If agent knows the offer is frivolous
Duty to Account
* The agent must account for all money or other property received from the principal or on behalf of the principal
* The agent has a duty to keep the principal’s property separate from other property
- Requirement of agency law and Real Estate Law and DRE regulations
* Agent must deal with principal’s property in accordance with the principal's directions and instructions
* Agent must render accounting to principal on demand
* Make the fullest disclosure of all material facts concerning the transaction that might affect the principal's decision
Scope of Disclose Duty
* Disclosure duty owed by an agent to the principal is broader than the disclosure duty to third persons
* The agent's duty to disclose material information to the principal includes the duty to disclose material information that might reasonably be discovered from research and investigation of public records
* The agent is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal's decision
* A broker has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision
Examples of material facts
* Market value of property
* Acreage
* Title matters
* Identity of buyer
* Buyer’s financial condition
* Dual agency
Special offer disclosure rules
* Listing agent must present all offers to seller
* Offers must continue to present offers even if seller has accepted another offer
Exceptions:
- If seller instructs agent not to present offers
- If agent knows the offer is frivolous
Duty to Account
* The agent must account for all money or other property received from the principal or on behalf of the principal
* The agent has a duty to keep the principal’s property separate from other property
- Requirement of agency law and Real Estate Law and DRE regulations
* Agent must deal with principal’s property in accordance with the principal's directions and instructions
* Agent must render accounting to principal on demand
Disclosure of Agency Relationships
* Listing agents and selling agents in transactions involving residential and commercial property must disclose to the seller and buyer:
- agency relationships, and - duties owed to the parties in the transaction
* Listing agents and selling agents in transactions involving residential and commercial property must disclose to the seller and buyer:
- agency relationships, and - duties owed to the parties in the transaction
Agency Disclosures
Definitions
* Agent: a broker
* Associate licensee: a salesperson or broker working under the supervision a broker
- An agent of the broker
* Listing agent: broker who obtained listing agreement from the owner
* Selling agent: broker who finds the buyer
Agency Disclosures in Real Estate Transactions: Three step process:
1. Disclose:
* Provide a copy of the Disclosure Regarding Real Estate Agency Relationship form
* Explain possible agency relationships
* Obtain a signed acknowledgement of receipt of disclosure form
2. Elect
* Choose an appropriate agency relationship
3. Confirm
* Obtain written consent of buyer and seller as to the agency relationship
Disclosure Form: Timing
* Listing agent must give disclosure form to seller before seller signs listing
* Selling agent must give disclosure form:
- to buyer before buyer signs purchase offer
- to seller before presenting offer
* Agent: a broker
* Associate licensee: a salesperson or broker working under the supervision a broker
- An agent of the broker
* Listing agent: broker who obtained listing agreement from the owner
* Selling agent: broker who finds the buyer
Agency Disclosures in Real Estate Transactions: Three step process:
1. Disclose:
* Provide a copy of the Disclosure Regarding Real Estate Agency Relationship form
* Explain possible agency relationships
* Obtain a signed acknowledgement of receipt of disclosure form
2. Elect
* Choose an appropriate agency relationship
3. Confirm
* Obtain written consent of buyer and seller as to the agency relationship
Disclosure Form: Timing
* Listing agent must give disclosure form to seller before seller signs listing
* Selling agent must give disclosure form:
- to buyer before buyer signs purchase offer
- to seller before presenting offer
Election of Agency
Relationships by Listing Agent
* A Listing Agent can be: an agent of the seller only
a dual agent
* A Listing Agent cannot be an agent of the buyer only
Election of Agency Relationships by Selling Agent
* A Selling Agent can be:
an agent of the seller only
an agent of the buyer only
a dual agent
* A Listing Agent can be: an agent of the seller only
a dual agent
* A Listing Agent cannot be an agent of the buyer only
Election of Agency Relationships by Selling Agent
* A Selling Agent can be:
an agent of the seller only
an agent of the buyer only
a dual agent
Election and Confirmation of Agency Relationships
* Listing agent must elect and confirm agency relationship with seller “as soon as practical” but no later than when seller signs purchase contract
* Selling agent must elect and confirm agency relationship:
- with buyer “as soon as practical” but no later than when the buyer signs purchase contract
- with seller “as soon as practical” but no later than when the seller signs purchase contract
* Listing agent must elect and confirm agency relationship with seller “as soon as practical” but no later than when seller signs purchase contract
* Selling agent must elect and confirm agency relationship:
- with buyer “as soon as practical” but no later than when the buyer signs purchase contract
- with seller “as soon as practical” but no later than when the seller signs purchase contract
Two Broker Agency Elections
* Typically, when the listing agent and selling agent are two distinct brokers
- the listing agent will elect to act as an agent of the seller exclusively, and
- The selling agent will elect to act as an agent of the buyer exclusively
* This election is generally in line with the expectations of the buyer and seller
One Broker Agency Elections
* Agency election and confirmation becomes more complicated when the same broker is the listing agent and the selling agent
- Remember, all associate licensees are agents of the broker, not agents of the buyer or seller
In-House Sale Broker Agency Elections
* Only the employing broker can be a listing agent or a selling agent
- Agency disclosures are at the broker level, not the individual licensee level
* When a buyer and seller are working with two salespersons of a single broker, the broker is representing both principals
- The salespersons are agents of the broker
* The broker can elect to be the seller’s exclusive agent or to be a dual agent
- no licensee can be an agent of the buyer only
Dual Agency in Real Estate
* Dual agent has two principals and owes fiduciary duties to both principals
* Agent acting as dual agent must:
- Make full disclosure to both principals
- Get informed consent of both principals
* Failure to disclose and get informed consent of both parties makes broker an undisclosed dual agent
- DRE calls this “divided agency”
Penalties for acting as an undisclosed dual agent
* No commission from either principal
* Either principal can rescind contract
* Liable for damages to both principals
* Subject to DRE discipline
Dual Agency in Real Estate
* A dual agent can not disclose:
- To the buyer: that the seller is willing to sell the property at a price less than the listing price
- To the seller, that the buyer is willing to pay a price greater than the offering price
* Dual agent has duty to both principals not to disclose confidential information (but, duty to both principals to disclose material information other than price)
* Typically, when the listing agent and selling agent are two distinct brokers
- the listing agent will elect to act as an agent of the seller exclusively, and
- The selling agent will elect to act as an agent of the buyer exclusively
* This election is generally in line with the expectations of the buyer and seller
One Broker Agency Elections
* Agency election and confirmation becomes more complicated when the same broker is the listing agent and the selling agent
- Remember, all associate licensees are agents of the broker, not agents of the buyer or seller
In-House Sale Broker Agency Elections
* Only the employing broker can be a listing agent or a selling agent
- Agency disclosures are at the broker level, not the individual licensee level
* When a buyer and seller are working with two salespersons of a single broker, the broker is representing both principals
- The salespersons are agents of the broker
* The broker can elect to be the seller’s exclusive agent or to be a dual agent
- no licensee can be an agent of the buyer only
Dual Agency in Real Estate
* Dual agent has two principals and owes fiduciary duties to both principals
* Agent acting as dual agent must:
- Make full disclosure to both principals
- Get informed consent of both principals
* Failure to disclose and get informed consent of both parties makes broker an undisclosed dual agent
- DRE calls this “divided agency”
Penalties for acting as an undisclosed dual agent
* No commission from either principal
* Either principal can rescind contract
* Liable for damages to both principals
* Subject to DRE discipline
Dual Agency in Real Estate
* A dual agent can not disclose:
- To the buyer: that the seller is willing to sell the property at a price less than the listing price
- To the seller, that the buyer is willing to pay a price greater than the offering price
* Dual agent has duty to both principals not to disclose confidential information (but, duty to both principals to disclose material information other than price)
Duties and
Liabilities of Agents to Persons who are not Principals
Property
Disclosures:
Common Law Duties
* Sellers of real property have a duty to disclose to the buyer known facts which may affect the value or desirability of the property
- Failing to disclose known defects, concealing defects, or giving misinformation to conceal known defects is fraud
* Real estate licensees also have a duty to disclose known defects
* Common law disclosure duty applies to all types of property
Common Law Duty Expanded
* Easton v. Strassburger
- Background:
-- Ms. Easton purchased home from the Strassburgers
-- After purchase, landslide on property destroys home
- The lawsuit:
- Ms. Easton sues Stassburgers, her real estate agent, and the listing agent (Valley Realty)
-- Jury finds all parties negligent and awards damages for loss of value
-- Valley Realty appeal
Common Law Duties
* Sellers of real property have a duty to disclose to the buyer known facts which may affect the value or desirability of the property
- Failing to disclose known defects, concealing defects, or giving misinformation to conceal known defects is fraud
* Real estate licensees also have a duty to disclose known defects
* Common law disclosure duty applies to all types of property
Common Law Duty Expanded
* Easton v. Strassburger
- Background:
-- Ms. Easton purchased home from the Strassburgers
-- After purchase, landslide on property destroys home
- The lawsuit:
- Ms. Easton sues Stassburgers, her real estate agent, and the listing agent (Valley Realty)
-- Jury finds all parties negligent and awards damages for loss of value
-- Valley Realty appeal
After Easton: Seller Disclosures
* Sellers of residential property (1-4 units and mobilehomes) must give buyer a Transfer Disclosure Statement
- Form dictated by Civil Code § 1102.6
-- text pages 204-206
* Exceptions exist for:
- Transfers between co-owners
- Transfers between spouses
- Transfers in foreclosures and other court proceedings
- Etc. (see text pages 203, 207, CC § 1102.2)
After Easton: Agent Duties
* Both the listing agent and selling agent have a statutory duty to conduct reasonably diligent visual inspection and disclose material defects that such an inspection would reveal
* Agents have no duty to inspect:
- reasonably inaccessible areas
- areas off-site
- public records and permits
* Remember buyer’s agent may have duty
Statutory Limitations on Disclosure Duties
* Sellers and their agents are not required to disclose:
- that current or prior occupant had HIV or AIDS or died from HIV or AIDS
- that someone died on the property if the death occurred more than 3 years ago
* Exception: If buyer asks about AIDS or deaths on property, seller and agent must answer honestly
Limitations on Disclosure Duties
Under State Law:
- No duty to disclose that prior occupant had AIDS or died from AIDS
- No duty to disclose that someone died on the property if the death occurred more than 3 years ago
Exception: If buyer asks about AIDS or deaths on property, seller and agent must answer honestly
TDS Delivery Requirements
* Selling broker must deliver TDS to buyer “as soon as possible before transfer of title”
* If TDS is hand delivered after buyer signs offer to purchase, buyer has 3 days after TDS is delivered to cancel sale and get deposit back
- If TDS is mailed, buyer can cancel up to 5 days from date TDS was mailed
* Brokers must keep records showing delivery of TDS
Fraud
Five elements of fraud:
1. A false representation
2. Known to be false or without knowledge of whether it is true or false
3. Made to induce a third party to make a change in position
4. Justifiably relied upon by the third party
5. With damage to the third party
35. Types of False Representations
* Statements known to be false
* Asserting, as a fact, of something that is not true, with no reasonable ground for believing that it is true
* Concealing facts
* Giving partial information or misinformation to disguise true facts
* Remaining silent when there is a duty to speak
Breach of Duties: Penalties
* An agent’s breach of fiduciary duties to a principal or an agent’s breach of statutory duties to a third person can result in:
- Civil liability for damages
- Discipline by the DRE
- Criminal liability
- Discipline by a professional association
Discipline of Real Estate Licensees
Real Estate Commissioner has power to:
* Suspend a license
- Temporary for a specified period
* Revoke a license
- Permanent
* Impose fines up to $10,000
* Sellers of residential property (1-4 units and mobilehomes) must give buyer a Transfer Disclosure Statement
- Form dictated by Civil Code § 1102.6
-- text pages 204-206
* Exceptions exist for:
- Transfers between co-owners
- Transfers between spouses
- Transfers in foreclosures and other court proceedings
- Etc. (see text pages 203, 207, CC § 1102.2)
After Easton: Agent Duties
* Both the listing agent and selling agent have a statutory duty to conduct reasonably diligent visual inspection and disclose material defects that such an inspection would reveal
* Agents have no duty to inspect:
- reasonably inaccessible areas
- areas off-site
- public records and permits
* Remember buyer’s agent may have duty
Statutory Limitations on Disclosure Duties
* Sellers and their agents are not required to disclose:
- that current or prior occupant had HIV or AIDS or died from HIV or AIDS
- that someone died on the property if the death occurred more than 3 years ago
* Exception: If buyer asks about AIDS or deaths on property, seller and agent must answer honestly
Limitations on Disclosure Duties
Under State Law:
- No duty to disclose that prior occupant had AIDS or died from AIDS
- No duty to disclose that someone died on the property if the death occurred more than 3 years ago
Exception: If buyer asks about AIDS or deaths on property, seller and agent must answer honestly
TDS Delivery Requirements
* Selling broker must deliver TDS to buyer “as soon as possible before transfer of title”
* If TDS is hand delivered after buyer signs offer to purchase, buyer has 3 days after TDS is delivered to cancel sale and get deposit back
- If TDS is mailed, buyer can cancel up to 5 days from date TDS was mailed
* Brokers must keep records showing delivery of TDS
Fraud
Five elements of fraud:
1. A false representation
2. Known to be false or without knowledge of whether it is true or false
3. Made to induce a third party to make a change in position
4. Justifiably relied upon by the third party
5. With damage to the third party
35. Types of False Representations
* Statements known to be false
* Asserting, as a fact, of something that is not true, with no reasonable ground for believing that it is true
* Concealing facts
* Giving partial information or misinformation to disguise true facts
* Remaining silent when there is a duty to speak
Breach of Duties: Penalties
* An agent’s breach of fiduciary duties to a principal or an agent’s breach of statutory duties to a third person can result in:
- Civil liability for damages
- Discipline by the DRE
- Criminal liability
- Discipline by a professional association
Discipline of Real Estate Licensees
Real Estate Commissioner has power to:
* Suspend a license
- Temporary for a specified period
* Revoke a license
- Permanent
* Impose fines up to $10,000