Ch. 7 - Brokerage Relationships: Law and Practice Part 2

let's revisit some common conflicts of interest that, if undisclosed, would breach an agent's duty to his or her principal or to third parties:

A broker represents both parties in a real estate transaction without the consent of both (undisclosed dual agency). A broker sells property that he personally owns. A broker's relative, close friend, or colleague is the prospective buyer for a property he has listed. The listing broker is also being compensated by the buyer for closing a deal quickly. The broker has an ownership interest in a title or mortgage company to whom a buyer may be referred

What if you knew that your buyer client lost his job two days after making an offer on a property? Is that a material fact, and should you share that with the seller's agent? Do you let the seller continue to believe that the deal is pending and, perhaps, turn down other offers that may be much more likely to close?

That is a material fact

Sometimes, a serious breach of duty is a crime such as

(e.g., acting as a real estate agent without a license). / Remember that criminal penalties, which can include fines and even jail sentences, may be imposed in addition to, not instead of, civil liability. Also, it's important to remember that the North Carolina Real Estate Commission has no authority to impose criminal penalties.

The following are among the types of relationships that an agent should disclose to his or her clients:

Business Relationship. Any arrangement whereby a licensee and a party have or had a mutual financial ongoing interest in any company, corporation, or other income-producing venture, including any prior representation by the licensee for the party's purchase or sale of real estate, but does not include the current real estate transaction. Personal Relationship. A platonic or nonplatonic friendship between a licensee and a To be safe, even casual friendships should be disclosed. Family Relationship. Any known familial relationship between a licensee and party regardless of the distance of the relationship.

A person being represented by a licensee. Also called: Principal.

Client

Illegally mixing personal funds with money held in trust on behalf of a client.

Commingling

___________ is the illegal mixing of money that is held in trust on behalf of a client or other party with business or personal funds. Commingling is specifically prohibited under the section of North Carolina Real Estate License Law referenced above.

Commingling

_________ is so intertwined with the duty of loyalty it can even be considered to be an extension of that duty.

Confidentiality

A person or entity seeking or receiving licensed activities.

Consumer

An agent's fiduciary obligation to reveal certain points or facts.

Disclosure

__________ alerts the client and customer to a possible conflict of interest

Disclosure

The principal, like the agent, has an ethical role to fill in the agency relationship. This includes:

Providing truthful information about the property. Acting in good faith (i.e., cooperating) in fulfilling the terms of the agency contract. Paying the agreed-upon Unless otherwise agreed, the traditional consensus is that a listing broker is entitled to a commission when a ready, willing, and able buyer is found, and a meeting of the minds occurs between the buyer and the seller on all terms

A breach of the standards of reasonable conduct imposed by law (as opposed to a duty voluntarily taken on in a contract) that causes harm to another person, giving the injured person the right to sue the one who breached the duty.

Tort

An agent found liable for breach of duty may have to pay compensatory damages, compensating the injured party for any monetary loss resulting from the breach. If the injured party was a client, the agent may be required to pay back the commission.

True

Another thing that has evened the playing field between buyer and seller is the requirement in most states for sellers of residential property to disclose specific material facts and defects about the property to prospective buyers. Failure to do so can result in civil liability.

True

Bankruptcy may be a confidential matter; however, it is a material fact that must be disclosed since control of the property has been turned over to the court system. This is material only if it is the bankruptcy of the principal or the broker. The bankruptcy of the agent has no bearing on the transaction.

True

Broker Skip is holding an open house for his seller client. Anna, a prospective buyer, comes into the house and looks around. She tells Skip she's interested in making an offer on the property. Buyer Anna is NOT Skip's client.

True

Confidentiality is a "forever" duty. Unless you obtain a written release from someone who is—or was—your client, you cannot release confidential information about them, even if the agency relationship is terminated!

True

If a principal breaches any of these duties, the agent may file a civil lawsuit, usually for payment of any agreed to compensation. It's possible that a principal could also face criminal liability, particularly if fraud was involved.

True

In addition to compensatory damages, a court may award punitive damages; these punish the wrongdoer and attempt to deter others from similar acts. Generally, punitive damages are awarded only when the act was intentional or malicious.

True

It's important to realize that a principal can be held civilly liable for the conduct of his or her real estate agent. Recall that a principal has vicarious liability for the actions of an agent who is performing services under the terms of an agency contract.

True

Lolly's sellers, Abe and Betty, accept Kelly's offer and delivers a signed contract to Kelly's agent Brad. Brad must deliver a copy of the signed contract to Kelly within three days.

True

Profiting in any way from someone else involved in the transaction without the client's permissionwould violate a broker's duty of loyalty to his or her client.

True

While information about the property would be given to the buyer, an agent may not disclose confidential information about the client/principal that could damage the sale, unless it would affect that principal's ability to close on the transaction as agreed.

True

a broker is not required to disclose how compensation is distributed by the employing broker.

True

if a buyer provides earnest money to accompany an offer to purchase, the broker must maintain the client's money in a separate escrow or trust account so as not to commingle the client funds with those of the brokerage. Failure to do so breaches the agency relationship, which could result in legal liability and loss of license.

True

in real estate terms, material facts generally refer to the condition of the property. In its broadest definition, however, a material fact could also be considered any truth that would affect the individual's actions if it were known.

True

Without the principal's authorization, an agent cannot disclose to third parties confidential or privileged information that hurts the principal's bargaining position.

True - For example, a client's reason for selling his property is certainly confidential information that an agent is obligated to keep to himself.

A broker who shows a prospective buyer client a house without indicating that it's his listing could be considered an undisclosed dual agent.

True - If the agent is showing a listed property to a buyer client without telling the buyer he's the listing agent, he is involved in an undisclosed dual agency.

Agents also have a duty to disclose the following to any client:

True Property Value / All Offers to Purchase / Any Information about the Other Party If Known

Karen hired you to list her property for sale. Another broker at your brokerage firm is interested in buying the property for his mother. Should you disclose your co-worker's status to Karen?

Yes

Listing agent Rebecca is buying the property for her mother and herself to live in but fails to disclose that information to her seller client. Do you think this could be cause for legal action?

Yes

Star Realty's listing for a property at 3521 Oak Street expired. A week later, Star's buyer client, Harriet, wants to see the 3521 Oak Street property. Do you think that there is a conflict of interest here?

Yes

What if Jackie looks in the public court records and sees that Sam and Martha have finalized their divorce even though they have not sold their property? Do you think she could share that fact with her new buyer client?

Yes

An __________ transaction is one in which the transaction occurs between relative strangers where both parties are acting in their own best interests.

arm's-length

Errors and omissions (E&O) insurance is professional liability insurance that protects __________

licensees from mistakes or negligence.

_________ generally refers to conduct that is not in accordance with accepted rules or standards, especially of morality or honesty.

"Improper"

The rule of caveat emptor, which in Latin means _____________ says that a buyer is expected to examine property carefully, instead of relying on a seller to point out problems.

"let the buyer beware,"

As you work with your clients, sometimes your best strategy for offering skill, care, and diligence is to be the ___________________ of information.

"source of the source"

Civil liability of the agent and of the principal

A real estate agent may be sued by a client or customer for breach of duty. Such breaches are generally considered a tort,

Any Information about the Other Party If Known.

A seller's agent must tell the seller all facts known about a buyer's motivations or financial position, for example, assets, income, or credit rating, as well as the source of down payment (e.g., a loan from friends rather than savings), or the form of earnest money deposit. This is especially important if a contract is contingent on the buyer's ability to obtain financing. Similarly, if a buyer's agent has information about the seller's motivations or personal situation, again, assuming no dual agency situation, the buyer's agent must disclose that information to the buyer.

In an agency relationship, the agent's fiduciary duty to account to the principal, related both to financial accounting and responsiveness.

Accounting

A relationship of trust created when one person (the principal) gives another person (the agent) the right to represent the principal in dealings with third parties.

Agency

A person licensed to represent another (the principal) in a real estate transaction; a person authorized to represent the principal in dealings with third parties (clients or customers).

Agent

The Commission provides clarity and detail to the vague concept of "a reasonable time" in Commission rule A .0106, which indicates that every broker must deliver a copy of the following instruments to their customer or client within three days of the broker's receipt of these executed documents:

Any written agency agreement Contract Offer Lease Rental agreement Option Other related transaction documents

Tupper gets a listing contract to sell Martha's property. She is an elderly woman eager to get out of the house and move into an apartment in a senior community. He knows her property is worth much more than the list price she wants to set, and he tells her so. Nonetheless, she just wants to get out of that property, as it has been a burden to her. To protect the best interests of his client, Tupper lists the property for $15,000 more than what she indicated. He gets two full-price offers immediately. Martha and Tupper both walk away with more money in their pockets. What fiduciary duties do you think Tupper has MOST LIKELY violated?

As long as he didn't tell prospective buyers Martha's motivation for selling, he has not violated the duty of confidentiality. And since he disclosed the true value of the property to his client, he did not violate the duty of disclosure. The duty of accounting is not relevant in this situation. However, he did violate the duty of obedience by ignoring Martha's lawful instructions to list the property at the price she desired. Let's consider something else. Did he violate the duty of loyalty? After all, didn't he get more for the property than Martha expected? She wanted a quick sale; didn't he get that for her? He did. So that is a little trickier. But he still violated the duty of loyalty because he disregarded her motivations.

George is a licensee for Top Realty, where broker Elaine has a listing on Ash Street. George's sister sees the property and makes a low offer. Which of the following statements best describes Elaine's responsibilities?

Elaine has to tell her client that the customer is related to George. - Elaine must disclose any interest she may have in the property, even if it's a relative of one of her licensees who is making the offer.

Insurance that protects real estate licensees from liability due to mistakes or negligence. It does not cover claims related to fraud or discrimination.

Errors and Omissions Insurance (E&O)

All Offers to Purchase.

Even if an offer seems unacceptable, the agent must present it to the principal. The principal, not the agent, decides if an offer is acceptable. The agent must present an offer to the principal even if its acceptance would mean a smaller commission because the agent's first loyalty is to the principal. Similarly, a buyer's agent is obligated to present all counteroffers from the seller.

Abe and Betty are getting a divorce and want to sell their property quickly. They live in a wealthy enclave with nosey neighbors, so they tell listing agent Lolly that they do not want a yard sign on the property and they do not want to hold an open house. As Lolly is obligated to use her skill and judgment to get the property sold quickly, she can use whatever strategy necessary to achieve this primary goal.

False

Kelly is interested in Abe and Betty's property. Her agent, Brad, presents Kelly's offer to listing agent Lolly. If Lolly thinks Kelly's offer is too low, she can hang on to it until a better offer comes in.

False

Since Sam and Martha are no longer her clients, Jackie can share with her new buyer client the circumstances of the pending divorce and the minimum price Sam or Martha would accept to sell.

False

Before Anna submits an offer, Skip tells her that the furnace does not work and will need to be replaced before winter. Skip breached his duty of loyalty to his seller client by disclosing this information to customer Anna.

False - This is not a breach of loyalty. Remember that one of the duties that an agent has to clients and third parties is to avoid misrepresentation. A broker must disclose material facts to clients as well as customers and other third parties.

Licensee Mark obtains a buyer's agency agreement from investor Anna, who wants to buy a warehouse. If Mark is unfamiliar with the structural appropriateness of any properties he shows, he is obligated to investigate so that he can properly advise her.

False - While Mark should perform his duties as though he were buying the property himself, if he cannot provide expert advice about the suitability of a property given client Anna's needs, he must be prepared to refer her to another licensed professional, such as an engineer, to get the information she needs to make an informed decision.

you, as a competent real estate professional, are expected to understand and keep abreast of the following:

Federal, state, and local laws and court decisions that affect real estate Financing options, costs, and underwriting procedures Economic trends and market activity Environmental issues Contracts, negotiating tactics, and customer service Settlement costs and procedures Construction materials and techniques

Licensee Ken has worked long hours with buyer client Patrick to negotiate an agreement to buy Jordan's property. A day before closing, Patrick tells Ken that he just lost his job, and he's sure that the mortgage won't close. However, he doesn't want to abandon the deal yet, "just in case." What should Ken do?

He must disclose this information as it is a material fact. wrong answers: He cannot disclose this information without breaching his fiduciary duty of confidentiality. / He must follow his client's lawful orders and let things stand for the time being. / Ask his employing broker to terminate the agency agreement with Patrick.

Mike and Jan have a two-story house to sell because they have fallen behind in their mortgage payments and are trying to avoid foreclosure. They have a listing contract with agent Mark to place the property on the market at market value. They tell Mark that they intend to get the property sold quickly even if he has to sell the property for a lesser amount than the market will bear, although they want to keep their financial situation a secret from the neighbors. A couple enters the home at an open house and expresses an interest in the property. To encourage the prospective buyers to purchase the property, Mark informs them that the owners will be willing to take a lesser purchase amount due to a pending foreclosure. He believes he was serving his clients' best interests to get the property sold as quickly as possible. Thinking about this scenario, how many common law fiduciary duties that Mark may have violated can you list?

If he offers this material information to the customers without prior seller consent, you could certainly make a case that Mark's actions violated a number of his fiduciary responsibilities to his clients. For certain, he has violated the duties of obedience and confidentiality when he disclosed their financial troubles against their express consent. You could make a case that he has also violated the duty of loyalty, even though he thinks he's doing the best thing for Mike and Jan because he has likely reduced the amount they could get for the property. Accounting is not an issue here, and there's not enough information to determine whether he violated his duty of disclosure to Mike and Jan. That leaves reasonable skill, care, and diligence. It's fair to say that he violated this as well. If he used his skill to price the property appropriately, he should have been able to help the buyer understand why the list price was fair in terms of its market value. There's no way of knowing what kind of offers the listing may have received had he not, out of the gate, betrayed his duties of confidentiality and reasonable care.

Common claims that are generally excluded from E&O coverage include:

Intentional misrepresentation or fraud Transactions involving buying or selling one's own real estate Civil rights violations Commercial environmental issues

Fees or other compensation given for services not performed, but as a means of undisclosed commission for business referrals. (These are prohibited by RESPA.)

Kickbacks

The North Carolina Real Estate License Law indicates that the following conduct would be a breach of a licensee's duties:

Making any false promises of a character likely to influence, persuade, or induce [G.S. § 93A-6(a)(2)].

The North Carolina Real Estate License Law indicates that the following conduct would be a breach of a licensee's duties:

Making any willful or negligent misrepresentation or any willful or negligent omission of material fact [G.S. § 93A-6(a)(1)]. Pursuing a course of misrepresentation or making of false promises through agents, advertising or otherwise [G.S. § 93A-6(a)(3)].

Let's say Jackie's co-worker John has a buyer client who might be perfect for Sam and Martha's property. Can Jackie tell John about Sam and Martha's eagerness to sell to help move the deal along and meet their goal of a quick sale?

No

So, under certain circumstances, it would be OK for a buyer's broker to disclose material facts about the buyer to a seller customer. Do you think it would be a breach of a broker's fiduciary duty to a buyer client if the broker showed the same property in which his buyer is interested to other prospective buyers?

No - Showing the same property your buyer client is interested in to other prospective buyers would NOT breach your duty to your buyer client.

Being unworthy or incompetent to act as a real estate broker in a manner as to endanger the interest of the public would be a violation of the

North Carolina Real Estate License Law. / Areas of competence include the proper use of standardized contracts and disclosures, the delivery and handling of transaction instruments, proper handling of brokerage fees, retention of records, etc. Furthermore, agents must not conduct themselves in any way that constitutes improper, fraudulent or dishonest dealing.

A financial benefit an agent takes from a transaction without authority from the principal, nor informing the principal of the benefit retained.

Secret Profit

When a real estate agent buys the principal's property (or sells it to a relative, friend, or associate, or to a business he or she has an interest in) and accepts commission without disclosing that fact to the principal.

Self-Dealing

Any real estate professional who is found to have breached their fiduciary duties as an agent in a relationship with a principal can be disciplined or judged through the following avenues:

The North Carolina Real Estate Commission Civil liability of the agent and of the principal Criminal liability

Broker Rick has a listing contract on Kathy's property for $300,000; he is acting purely as a seller's agent. Consequently, Rick cannot take any consideration from anyone else without Kathy's prior written consent. So, a mortgage broker can't tempt Rick with a little check if buyer Barb gets her loan from them; a title company can't promise Rick a free round of golf for every 10 clients he sends their way; a home inspector can't deliver a bottle of expensive whiskey to Rick for every client he passes along.

True - this falls under conflict of interest. Remember - Conflicts of interest must be disclosed, giving the principal the right to decide whether or not to continue with the transaction.

________ money is any money that a licensee holds for the benefit of a principal or any third party to the transaction.

Trust / The most common examples of trust money are the earnest money deposit a buyer makes to show that he or she is serious and the security deposit that a tenant makes to ensure compliance with the lease.

Any money that a licensee holds for the benefit of a principal or any third party to the transaction.

Trust Money

an agent's compensation that is related to a particular transaction must be disclosed to a client in several circumstances:

When an agent agrees to share a commission with or receives a commission split from another agent. When in dual agency, the agent receives compensation from both parties or when the compensation arrangement is in any way different from that agreed to in the listing agreement. When the agent receives a bonus or other compensation from any party to the transaction other than the agent's client. Any so-called "secret profits" or another financial benefit to the agent, such as a promise of future business from a party to the transaction other than the client. This must be disclosed to the agent's client.

True Property Value.

While a broker who is an exclusive seller's agent is obligated to perform a comparative market analysis before listing the property, when trying to obtain a listing, an unscrupulous agent may be tempted to inflate the value of property. A high value may make sellers more willing to sign an exclusive listing, but that's a breach of an agent's duty to act in good faith. An agent must tell sellers a property's true value and should point out things that he or she may know about the title or property that may affect its worth or suggest inexpensive repairs that may increase the selling price.

Broker Maggie is holding an open house for seller client Baxter. Jake, a prospective buyer, walks in with his buyer's agent, Grace. Maggie can hear Jake and Grace talking as they walk through the house. Jake is very enthusiastic and tells Grace that he would be willing to offer $12,000 over the listing price. The next day, Grace sends Jake's offer to Maggie. It's for $5,000 over the list price. Is Maggie obligated to tell Baxter that Jake would be willing to spend $7,000 more than his initial offer?

Yes

Broker Ben's listing for a property at 3521 Oak Street expires. A week later, Ben's buyer client, Harriet, wants to see the 3521 Oak Street property. Do you think there could be a conflict of interest here?

Yes - Ben no doubt has confidential information about that Oak Street property. The fiduciary obligation of confidentiality to a client never expires, even if the agency relationship does. Ben would likely need to disclose to Harriet that he had a prior agency relationship with the owner of that property and cannot share any confidential information with her.

Retiree Betty purchases a two-unit residence for $125,000 as an investment property. Her broker, Frank, earns $4,000 commission on the sale and had asked the seller to pay him a $20,000 bonus as well, which the seller does. Frank asked Betty to sign a disclosure about the bonus, but in hindsight, Betty claims he never really discussed it with her or explained it. Now Betty believes that she could have paid much less for the property if the seller was not paying such an unusually high bonus to her agent. Do you think Frank breached his fiduciary duty to Betty?

Yes - While Frank did disclose his bonus to Betty, you do have to ask whether or not he put her interests first in this transaction. It was, after all, an extraordinary bonus. Did he disclose that the seller would probably have been willing to accept less? Even if he "disclosed" his bonus, it sounds like he did not clearly explain it to her. In this case, it seems as though Frank was loyal to Frank, not his client Betty.

Which of these situations do you think must LEAST LIKELY remain confidential if shared by your principal?

Your buyer client's application for a loan was denied. - If your buyer client does not get the loan he or she needs to purchase the property, that is a material fact that must be disclosed. All of these other situations should remain confidential between the client and the agent because each reveals something about the client's motivations related to the transaction. wrong answers: Your seller client is getting a divorce. / Your seller client has a new job out of town. / Your buyer client's lease is up in one month. / Your buyer client's best friend lives next door.

June, a small business owner, is moving out of state and needs to sell her home as well as a commercial property she owns. Licensee Harold tells seller June that he will take a lower commission on the sale of her property if she lists her commercial property with him. Do you think Harold must disclose his arrangement with June to the buyer of her property?

no - Harold's arrangement with June does not meet the disclosure of interest obligations we just discussed. He has a fiduciary relationship with June, and their relationship in a separate commercial real estate transaction does not impact the sale of June's property and should be irrelevant to the buyer.

Rick was the buyer's agent for Tom, whose offer for Jim's property was countered with an amount that's $10,000 below list price. But this was still more than Tom wanted to pay. Tom found another property and bought that instead. Now Rick is the buyer's agent for Harry, who wants to put in an offer on Jim's property. Can Rick tell Harry that Jim would accept $10,000 below list? Why or why not?

no - No, Tom's earlier negotiations with the seller are confidential. The details of client Tom's negotiations with the seller are confidential information. That fiduciary obligation never ends unless Tom gives Rick permission to divulge that.

The common law fiduciary obligations include

obedience, loyalty, disclosure of information, confidentiality, accounting, and reasonable skill, care, and diligence.

Which would LEAST LIKELY be considered a disclosure requirement to a seller client?

only offers that meet or exceed the seller's asking price wrong answers: any relationship between buyer and broker / buyer's financial position / true property value

A _______ profit is a financial benefit that an agent takes from a transaction without authorization from the principal and without informing the principal of the benefit retained. Again, this is a breach of the agent's loyalty to the principal.

secret

Neither may confidential information learned during the course of the agency relationship be used later against the principal, even after the relationship is terminated. This includes financial information used in negotiations involving subsequently listed properties or personal information unless you obtain a _______________ from the former client.

written release