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The
Fiduciary Duties of Real Estate Agents
Real estate agents who
assume the role of principal or buyer in a transaction with a client should be wary of the
potential for problems relating to their duty to disclose. In Roberts v. Lomanto, the court held that the
real estate agent and buyer, Patricia Lomanto, was liable for breach of fiduciary duty when she
failed to disclose the amount of an assignment fee she was receiving in the transaction, which
the court said amounted to a “secret profit.” Real
estate agents should take all reasonable steps to ensure that their clients are informed of all
material facts to a transaction. Material facts are
defined as those facts that a reasonable person would want to consider in making a decision to
purchase or sell.
Money paid to an agent
during a purchase or sale may always be seen as a material fact that could affect the
principal’s decision and thus would be required to be disclosed. When determining which facts are material, it is best to
remember: “When in doubt, disclose.” Agents should
put themselves in the place of the buyer, and ask themselves, if they were the buyer, would this
information influence their decision to buy? If the
answer is yes, it should be disclosed. Profits from
a real estate transaction belong to the principal, not the agent, unless the principal knows of
and consents to the agent’s retention of profit. An
assignment fee paid to the buyer is a form of compensation that must be disclosed to the
principal prior to completion of the sale. Failure
to disclose the amount of the assignment fee would be considered a secret profit. Agents are not allowed to retain secret profits, and courts
will disgorge any secret profits garnered in the transaction, as well as impose any other
remedies that may be available. Agents should
obtain a client’s informed consent in order to retain an assignment fee by disclosing the amount
of the fee before the escrow closes.
Averting a Secret-Profit
Problem
One way to avoid the
problem of retention of secret profits is to close escrow on the transaction with the principal,
and then resell the property. Any profits garnered
would not amount to a secret profit. The duty to
disclose would have been fulfilled upon completion of the transaction. However, agents should beware that they can still be guilty of
violating their fiduciary duty to their clients if they represent the value of the property as
less than what they are able to realize immediately upon resale of the property, if they have
knowledge prior to the close of escrow that they can resell it for more. If there is an offer from a buyer, the agent may be subject to
claims of misrepresenting the true value of the property if he or she offers an opinion of its
value. If the agent is aware before the purchase
closes that there is a potential buyer offering more than the contracted purchase price, the
agent has a fiduciary duty to the principal to disclose this information and allow the principal
to reap the benefit. This is true of known offers,
not potential ones.
Real estate agents owe
fiduciary duties to clients. These duties are
imposed on agents because a principal has reposed trust and confidence in the integrity and
fidelity of the agent. A fiduciary duty under
common law constitutes the highest good faith and undivided service and loyalty. Real estate agents should not take advantage of their
positions by acting on opportunities that would have benefitted their principals, if the
opportunities are learned of while acting in the capacity of a fiduciary. A real estate agent has the same obligations of undivided
service to a principal as a trustee has to a beneficiary. When agents become principals in transactions, their fiduciary
duties to clients do not end. Instead, agency
terminates by expiration of the term contained in the contract, revocation by the principal,
death of either party, extinction of the subject matter, incapacity of the agent to perform, or
renunciation by the agent.
A fiduciary relationship
between a principal and an agent not only imposes upon the agent the duty of acting in the
highest good faith toward the principal but also precludes the agent from obtaining any
advantage over the principal in any transaction gained by virtue of the agency. The agent has a duty to disclose to the principal all
information in the agent’s possession that is relevant and material to the agency and would
affect the principal’s decision. One court has
summarized a real estate agent’s fiduciary responsibility broadly: The agent cannot compete with
the principal on matters connected with the agency, nor can the agent take part in any
transaction in which the agent has an interest adverse to the principal, nor undertake any other
agency responsibilities adverse to the interests of the principal.
When an agent learns of
facts as a result of his or her agency that give the agent an advantage over a client, he or she
may not act on those facts to his or her advantage and to the detriment of the
client. An agent’s fiduciary duty requires that the
agent tell the client the facts so that the client can decide to take advantage of the
information or not. If the agent (or a relative or
associate of the agent) purchases the property, the agent’s fiduciary duties continue even
though he or she may be a principal in the transaction. Disclosure of these family or business relationships are
necessary, as the agent owes a fiduciary duty to the principal that comes before other
considerations.
If a principal discovers
that an agent may realize a “hidden” profit from a transaction, he or she should consider
completing the transaction. The principal is
obligated to consider the consequences of proceeding or not proceeding. Parties to a lawsuit are required to mitigate their
damages. A party who is aggrieved cannot sit back
and do nothing, allowing the damages to escalate, if it is possible for the party to take action
to stop them. The fact that a seller chooses to
close a sale with the knowledge that the agent is going to resell the property to a third party
and receive some sort of assignment fee does not mean that it is acceptable for an agent to
withhold the amount of the fee being paid.
The Lomanto court
agreed that the seller would have had to close escrow even if he had known about the amount of
the assignment fee and disagreed with it.
Completing the transaction was the only appropriate thing to do under the
circumstances. Disgorgement of the assignment fee
could then be discussed after the transaction. In
some cases, it is better to allow the transaction to proceed and argue over the differences
later than to stop the escrow midstream, which would cause the accrual of significantly higher
damages. In order to avoid the impropriety of
information learned while acting as a fiduciary, how long must the agent wait before reselling
the property for a profit? The general consensus is
that there is no specific time. This is especially
true in sellers’ markets, in which real estate values quickly increase. If an agent is not aware of any offers to purchase for a
higher price before the escrow closes, he or she should be able to immediately place the
property back on the market. However, agents should
beware that the seller may make a claim of misrepresentation if the property is quickly resold
for a greater price and if it can be shown that the seller had actual knowledge of a higher
value of the property during his or her term of agency, for example because he or she was in
receipt of a written offer to purchase.
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