By Chris Moles
Brokerage Counsel
Intero Real Estate, Inc.
Most real estate agents know that they owe a fiduciary duty to their clients. And they know the fiduciary duty is “the highest and utmost duty of care and loyalty.”
However, the fiduciary duty is actually a composition of five distinct professional duties. Each is a co-equal and important duty and the failure to meet any of the five can constitute a “breach of fiduciary duty” for DRE and civil court purposes.
The Five Fiduciary Duties
Listed in no particular order, the five duties that make up the fiduciary duty are 1) the Duty of Loyalty, 2) the Duty of Care, 3) the Duty to Communicate, 4) the Duty of Confidentiality, and 5) the Duty of Full and Frank Disclosure. When meeting one’s fiduciary duty, the agent must pay each of these duties to the principle. Scholars have written books on each of the aforementioned duties, and the purpose of this article is to simply introduce them and explain how they are commonly breached.
The Duty of Loyalty
The Duty of Loyalty is incredibly important in real estate practice. It is essentially the duty to remain free of actual or potential conflicts of interests with one’s client. If a professional agent has a personal stake in the transaction that might somehow directly conflict with that of the principle, the agent has already breached his fiduciary duty. For example, if an agent represents himself as buyer’s agent he also acts as listing agent for the seller, the agent can be automatically considered in breach of his duty of loyalty. Even if the seller remains happy with the service, the agent has placed his own personal interest in direct conflict with his client. Real estate agents have great latitude to “double end” transactions and coequally represent adverse parties (which is a breach of fiduciary duty for most other professionals – like lawyers), but some real estate agents overstep that latitude when they actually become the adverse party.
The Duty of Loyalty also manifests itself whenever clients claim that a real estate agent breached his fiduciary duty by convincing the client to enter into a bad deal. The argument is essentially that the agent placed his own interest (taking a commission) before that of his principle.
The Duty of Care
The Duty of Care is the duty to use the skill and care of a reasonable professional under the given circumstances. Fiduciary professionals cannot be careless. At all points during the representation a fiduciary agent must take those actions that other professionals might reasonably take in similar situations. For real estate agents, the Duty of Care is often alleged to be breached in situations where the principle elected to release contingencies prematurely or the principle waived his right to order inspections or something. While this is certainly the principle’s right and the agent must do as the principle directs, an agent has a duty to advise the principle in a careful and professional manner. In hindsight, many clients claim that they made a bad decision because their agent failed to adequately help them evaluate and weigh the risks. These are technically Duty of Care attacks. Keeping email strings and advising principles to get professional advice is a great way to defeat these attacks.
The Duty to Communicate
The Duty to Communicate is a duty that can survive after the transaction and it is a very common way that real estate brokerages are attacked. Simply put, the fiduciary duty includes a duty to correspond with your client. Obviously, this includes the duty to share details and return calls. Agents are representatives, and so they need to be accessible to their principles.
This is a huge problem in times where agents and brokers find themselves in disputes with clients. The natural tendency is to say “go pound sand” and then not return a phone call. However, this can be improper under certain circumstances. Even though there is never a duty to “settle” disputes or to “give into” a client’s demand, there is always a duty to communicate. Sometimes this means sitting with the client and saying “I disagree and I am not in a position to do as you ask, but you can seek legal counsel and/or forward any grievance to the local trade union if you deem it necessary.” Regardless of whether or not an agent owes some form of remuneration to his client, all governing authorities will consider how responsive an agent was to his client’s concerns when determining a fiduciary duty issue.
The Duty of Confidentiality
The Duty of Confidentiality is a big deal for real estate agents. Real estate agents are trusted with very sensitive personal information about the client’s job, finances, income, and family. This information can indicate the leverage that the client has or lacks during contract negotiations and its unauthorized disclosure can have negative consequences. The fiduciary duty includes a duty to properly use and protect the client’s information.
The Duty of Confidentiality is limited to the client, and it is NEVER owed to the property. If the property has a defect or if the property has a cloud on title that will materially alter the adverse party’s evaluation (like it is overleveraged and it will be a short sale), agents must reveal that information. Serious dilemmas occur when the client objects to making a material disclosure. This situation is never easy. However, the answer is always the same. Strongly advise that the client make the disclosure and, if the client refuses to act properly, discontinue the representation. The fiduciary duty does not include a duty to aid a client’s fraud.
Duty of Disclosure
The Duty of Full and Frank Disclosure is the all encompassing duty. An agent has to give the client all the information the client needs. All five fiduciary duties overlap, but elements of the Duty of Disclosure are found in each of the other fiduciary duties – making it extremely important. Clients have a right to know what you know. In real estate, unique exceptions are made for the confidential information of the adverse party in instances of duel agency. However, the Duty of Disclosure burdens agents to reveal all known information that might be desirable to the client.
Of course, the most common cases for Breach of Disclosure are cases where the agent does not give information, like certain purchase offers or adverse information, to his client. While these infractions clearly overlap with the duties of loyalty and care, they are most clearly violations of the fiduciary duty to disclose.
Brokerage Counsel
Intero Real Estate, Inc.
Most real estate agents know that they owe a fiduciary duty to their clients. And they know the fiduciary duty is “the highest and utmost duty of care and loyalty.”
However, the fiduciary duty is actually a composition of five distinct professional duties. Each is a co-equal and important duty and the failure to meet any of the five can constitute a “breach of fiduciary duty” for DRE and civil court purposes.
The Five Fiduciary Duties
Listed in no particular order, the five duties that make up the fiduciary duty are 1) the Duty of Loyalty, 2) the Duty of Care, 3) the Duty to Communicate, 4) the Duty of Confidentiality, and 5) the Duty of Full and Frank Disclosure. When meeting one’s fiduciary duty, the agent must pay each of these duties to the principle. Scholars have written books on each of the aforementioned duties, and the purpose of this article is to simply introduce them and explain how they are commonly breached.
The Duty of Loyalty
The Duty of Loyalty is incredibly important in real estate practice. It is essentially the duty to remain free of actual or potential conflicts of interests with one’s client. If a professional agent has a personal stake in the transaction that might somehow directly conflict with that of the principle, the agent has already breached his fiduciary duty. For example, if an agent represents himself as buyer’s agent he also acts as listing agent for the seller, the agent can be automatically considered in breach of his duty of loyalty. Even if the seller remains happy with the service, the agent has placed his own personal interest in direct conflict with his client. Real estate agents have great latitude to “double end” transactions and coequally represent adverse parties (which is a breach of fiduciary duty for most other professionals – like lawyers), but some real estate agents overstep that latitude when they actually become the adverse party.
The Duty of Loyalty also manifests itself whenever clients claim that a real estate agent breached his fiduciary duty by convincing the client to enter into a bad deal. The argument is essentially that the agent placed his own interest (taking a commission) before that of his principle.
The Duty of Care
The Duty of Care is the duty to use the skill and care of a reasonable professional under the given circumstances. Fiduciary professionals cannot be careless. At all points during the representation a fiduciary agent must take those actions that other professionals might reasonably take in similar situations. For real estate agents, the Duty of Care is often alleged to be breached in situations where the principle elected to release contingencies prematurely or the principle waived his right to order inspections or something. While this is certainly the principle’s right and the agent must do as the principle directs, an agent has a duty to advise the principle in a careful and professional manner. In hindsight, many clients claim that they made a bad decision because their agent failed to adequately help them evaluate and weigh the risks. These are technically Duty of Care attacks. Keeping email strings and advising principles to get professional advice is a great way to defeat these attacks.
The Duty to Communicate
The Duty to Communicate is a duty that can survive after the transaction and it is a very common way that real estate brokerages are attacked. Simply put, the fiduciary duty includes a duty to correspond with your client. Obviously, this includes the duty to share details and return calls. Agents are representatives, and so they need to be accessible to their principles.
This is a huge problem in times where agents and brokers find themselves in disputes with clients. The natural tendency is to say “go pound sand” and then not return a phone call. However, this can be improper under certain circumstances. Even though there is never a duty to “settle” disputes or to “give into” a client’s demand, there is always a duty to communicate. Sometimes this means sitting with the client and saying “I disagree and I am not in a position to do as you ask, but you can seek legal counsel and/or forward any grievance to the local trade union if you deem it necessary.” Regardless of whether or not an agent owes some form of remuneration to his client, all governing authorities will consider how responsive an agent was to his client’s concerns when determining a fiduciary duty issue.
The Duty of Confidentiality
The Duty of Confidentiality is a big deal for real estate agents. Real estate agents are trusted with very sensitive personal information about the client’s job, finances, income, and family. This information can indicate the leverage that the client has or lacks during contract negotiations and its unauthorized disclosure can have negative consequences. The fiduciary duty includes a duty to properly use and protect the client’s information.
The Duty of Confidentiality is limited to the client, and it is NEVER owed to the property. If the property has a defect or if the property has a cloud on title that will materially alter the adverse party’s evaluation (like it is overleveraged and it will be a short sale), agents must reveal that information. Serious dilemmas occur when the client objects to making a material disclosure. This situation is never easy. However, the answer is always the same. Strongly advise that the client make the disclosure and, if the client refuses to act properly, discontinue the representation. The fiduciary duty does not include a duty to aid a client’s fraud.
Duty of Disclosure
The Duty of Full and Frank Disclosure is the all encompassing duty. An agent has to give the client all the information the client needs. All five fiduciary duties overlap, but elements of the Duty of Disclosure are found in each of the other fiduciary duties – making it extremely important. Clients have a right to know what you know. In real estate, unique exceptions are made for the confidential information of the adverse party in instances of duel agency. However, the Duty of Disclosure burdens agents to reveal all known information that might be desirable to the client.
Of course, the most common cases for Breach of Disclosure are cases where the agent does not give information, like certain purchase offers or adverse information, to his client. While these infractions clearly overlap with the duties of loyalty and care, they are most clearly violations of the fiduciary duty to disclose.
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