DUTIES OWED BY CALIFORNIA REAL ESTATE BROKERS

Duties Owed by California Real Estate Brokers

 California has recognized a number of fiduciary duties owed by a real estate agent or broker to a residential real estate buyer or seller. It is important for agents, brokers, buyers, and sellers to all know their respective rights and obligations going into a real estate transaction.

Genesis of Fiduciary Duties

At the outset, it is important to understand that an agent or broker’s duties arise from two separate and distinct sources: those imposed by statute and those arising from the general law of agency. Practically, this creates potential liability to the principal through a civil action for damages and exposes the offending agent or broker to disciplinary proceedings with the California Department of Real Estate. Importantly, this setup presents two separate and distinct areas of exposure for an agent or broker, and two separate and distinct areas of recourse for a buyer or seller.  

Types of Duties Owed

The term “fiduciary duty” is comprised of several duties that an agent or broker owes to their principal. Fiduciary duties of an agent or broker include:

·         A duty to exercise skill, care, and diligence, which has been interpreted to mean that the agent has a duty to obey the instructions of the principal and use reasonable care, diligence, and skill in performance of the agency.

·         A duty to not act adversely toward the principal, which means that the agent must perform the agency solely for the benefit of the principal in matters connected with the agency. As will be discussed more below, this can be tricky in certain circumstances.

·         A duty to avoid commingling funds, property, or business interests with the principal. An agent found to be in violation of this duty may be required to surrender the entire fund to the principal.

·         A duty to explain the legal effect of documents and other matters, which may include referral to an attorney for legal advice.

·         A duty to disclose to the principal all information in the agent’s possession that is relevant and material to the subject matter of the agency that would affect the decision of the principal, which in the context of real estate may include known defects with the property.

·         A duty to avoid disclosure of confidential information, either provided to the agent by the principal or acquired by the agent during the course of the relationship.

The foregoing constitutes duties owed by an agent or broker to their principal; i.e., their buyer or seller. In the context of a real estate purchase and sale, the agent also owes duties to third parties. The primary difference is that while an agent is a fiduciary to its principal, the agent is not a fiduciary to third parties. Such duties include honesty, fairness, and full disclosure. The most common duty owed to third parties is specific to the area of disclosure.

Dual Agency

One common potential pitfall is a dual agency scenario where the same agent and/or broker represents both the buyer and the seller. An agent for two parties in the same transaction is inherently at risk of violating its fiduciary duties to act solely for the benefit of the principal or, in the case of dual agency, principals. Importantly, an agent must disclose to both principals that it is asking as a dual agent in the transaction. Even so, disclosure of the dual agency does not necessarily resolve the other issues involving an agent’s inherent conflict of interest in a dual agency relationship.

The dual agent owes to both seller and buyer the following duties:

·         An obligation to exercise the fiduciary duty of utmost care, integrity, honesty, and loyalty.

·         An obligation to diligently exercise reasonable skill and care in the performance of the agent’s duties.

·         A duty of honesty, fair dealing, and good faith.

·         A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the parties.

·         A duty of loyalty, which requires the agent to make a full and complete disclosure of all material facts to both parties regarding any matter that would affect either principal’s decision to buy.

While a dual agency could be a boon for an agent or broker, it also comes rife with risks as a buyer and seller are often in two very different positions.

Conclusion

It is important for an agent or broker, particularly one entering into a dual agency, to be aware of their duties to their principal(s). Likewise, as a buyer or seller of real estate, your agent and broker owe you certain fiduciary duties during the course of the transaction. It is important for brokers, agents, buyers, and sellers to consult with an attorney knowledgeable and experienced in his area should there be any questions.