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Agency and Fiduciary Duty

Posted May 15th, 2008 under say what?, smart buying, smart selling.

When you hire a Realtor to represent you, either as your buying agent or as your listing agent, you are entering into an agency relationship. You are the client (also called the principal), and the Realtor is your agent. An agency relationship can be created by signing a contract, or through a verbal agreement, or simply by working with a specific Realtor.

Your agent has many responsibilities toward you. One of the most important is their "fiduciary duty", which includes six key responsibilities:

Accounting

The brokerage (the agent's office) must keep full records of all moneys that are part of a transaction. For example, when a buyer pays a deposit for a property, the brokerage must have a paper trail that shows which trust account holds the deposit, how much interest is paid (if any), who received the deposit when the deal was done, and so forth.

Competence

The agent must be knowledgeable and skilled, and must exercise a degree of care when performing his duties.

For example, say a listing agent is listing a property, and notices that the driveway sits between the property and a neighbouring property. The agent neglects to ask the owner which property the driveway belongs to. Instead, he assumes that it is part of the property he is listing, and writes “private drive” in the description.

Now, say a buyer acquires the property, thinking the driveway belongs to him. His buyer agent has seen “private drive” in the listing and has assumed it is correct. Only later will the buyer discover that the driveway is a mutual drive, shared with his neighbour.

In this case, the competence and care of both the listing agent and buyer agent would be in question, and legal action could follow. Both agents should have checked to see if the driveway belonged to the property instead of making an assumption.

Confidentiality

An agent must not use any of his client's personal information in a way that could cause his client harm or interfere with his client's business. (Note: This does not relieve the agent of his obligation to disclose material facts about a property, or his obligation to obey the law.)

For example, imagine a seller tells his listing agent that the property must sell within a month, or the bank will enforce power-of-sale, because the seller is behind on his payments. The seller also tells the agent about a leak in the basement, but asks the agent not to tell anyone, because the seller has hidden it behind some old furniture.

In this case, the agent may not use the imminent bank takeover as leverage to entice a prospective buyer into making an offer quickly. This would be breaking the duty of confidentiality. However, the agent must reveal the leak if he is asked about the basement, because his duty to disclose all facts about the house overrides his duty of confidentiality.

Full Disclosure

Full disclosure means that an agent must tell his client any facts the agent can discover which may affect the value or desirability of a property in any way.

For example, say a buying agent is ready to complete a deal for a property. At the last moment, the listing agent mentions off-hand that the city is considering a nearby site for a landfill in the next two years. The buying agent does not want to jeapordize the deal, so he keeps this from his client.

In this case, both agents have failed to perform full disclosure. The listing agent waited until the last minute to disclose an important fact, hoping it would slip through, and the buying agent did not pass the vital information on to his client.

Loyalty

An agent must place the interest of the client above all others, including his own. (The only exception is the law, which supersedes even the client's interests.) The agent must inform his client if there is a conflict between the agent's own interests and that of the client.

An example: say an agent has listed a property that is backing onto some open space. He hears from a friend that a builder has applied to the city for a plaza to be built on the open space, but the public notice has not yet been posted. In this situation, the listed property may become valuable to the builders, because they can buy it to expand the area of the plaza. However, the agent does not pass this information on to the seller. Instead, the agent contacts an investor friend, and asks if the two can buy the property together, with the agent as a silent partner. The agent is hoping to turn around and sell the property to the plaza builder for an increased price.

This agent has failed in his duty of loyalty, because he has placed his own interests ahead of his client, instead of allowing his client to profit from the increased value of the property.

Obedience

The agent has a duty to follow his client's lawful instructions, whether he agrees with the client or not.

Imagine that an agent lists a property for sale, with instructions from the client to pursue all offers. A conditional offer comes in and is accepted by the client. A day later, another agent calls and says he may have an offer. The listing agent tells him not to bother, as he expects the existing offer will go through shortly with all conditions met.

In this case, the agent did not follow his clients instructions to pursue all offers. Instead, he placed his own judgement ahead of the client by assuming that the first offer would go through.

Summary

When you enter an agency relationship with your Realtor, they owe you a fiduciary duty. They must keep full accounting records, perform their duties with skill and care, keep your private information confidential, act with honest intentions, disclose all relevant facts about a property, place your interests first, and follow your lawful instructions at all times.

Do you have a question about fiduciary duty and how it affects you? Just ask me, I'll be happy to help.