07 Law of Agency 2 Chapter 4: Dual Agency

Dual Agency with Designated Sales Agents

Although not required in order to enter into a dual agency agreement in the state of New York, the use of designated sales agents is commonly employed in brokerages where sponsored salespersons are available to fulfill this role. You might recall that, during our review of the state agency disclosure form, I suggested that this variation of dual agency can be looked at as a broker's attempt to provide at least some degree of individual representation to an in-house real estate transaction.

Disclose It Immediately

As soon as your single agency relationship begins to morph into a dual agency transaction, disclose it! Even if advance consent was previously given in writing, you should still inform all parties that you'll be moving forward according to dual agency procedures. Explain all the ramifications of that to the parties involved.

Advance Consent

Because dual agency is not always planned or foreseen, license holders usually will attempt to get what we've previously identified as advance consent to dual agency. This should happen first with the New York State Disclosure Form, followed up by signed consent in the representation agreement (listing or buyer-broker) if an agency relationship is ultimately established.

Undisclosed Dual Agency Trap Four: Blind Ads

Blind ads are another issue related to self-dealing and undisclosed dual agency. If a salesperson were to attempt to sell their own property in an advertisement outside of their sponsoring brokerage (as though they were a private individual rather than a license holder), such an ad would be considered a blind ad. It is perfectly legal for a license holder to sell their own property, but, whether it's their property or any other, the advertising must adhere to New York Real Estate License Law §175.25 (b)(1), which states: Advertisements placed or caused to be published by an associate real estate broker, a real estate salesperson or a team for the sale or lease of property listed with or represented by a real estate broker are not permitted except where the property is listed with or represented by the real estate broker with whom the associate real estate broker, real estate salesperson or team placing the ad is associated and said real estate broker approved placement of the advertisement. This law is just trying to make sure that the buyer is not "blind" to the fact that the seller is a licensed professional. By requiring that a license holder's advertisement of real estate be listed or represented through their employing broker, the law provides for that proper disclosure. If not for this law, the license holder could conceivably carry out the transaction as a for-sale-by-owner between two private, unrepresented parties when, in reality, it would be a two-party transaction overseen by one license holder — which would, technically, be undisclosed dual agency.

Why Consent Is Needed (cont.)

Certainly both parties ultimately want the same thing — the transfer of a piece of property from one party to the other. But the two parties' desired price and terms of that transfer are often diametrically opposed: The seller wants the highest price; the buyer the lowest price. The seller wants no contingencies; the buyer wants as many as are needed to protect themselves. These are but two examples where the interests of the parties create a conflict of interest for the dual agent. The best that a broker can commit to in dual agency is making sure the transaction is conducted in a fair and impartial manner, with confidentiality preserved in such a way that neither party obtains an advantage over the other. While this sounds nice and proper, realize that most single agents are NOT trying to act impartial; they are unabashedly partial towards their client's interests, which is exactly what the client expects. And that is what is given up in dual agency.

Dual Agency: Recap

Dual agency is legal in New York as long as there is disclosure and consent of all parties. Dual agency results in the loss or compromise of certain fiduciary duties, specifically undivided loyalty and full disclosure. The New York State Disclosure Form provides an opportunity to obtain advance consent to dual agency (with or without designated sales agents). Dual agency often comes about as result of a changing agency relationship within the course of a single transaction. Purposeful or unintentional, undisclosed dual agency is a violation of the New York Real Estate License Law. Compensation from multiple parties, which can happen in dual agency, must be disclosed and consented to by all parties. Dual agency with designated sales agents provides a broker with an opportunity to afford a degree of individual representation to both parties within an in-house transaction. A real estate broker acting as a listing agent, and who also operates as a mortgage broker or loan originator in the same transaction, is engaging in dual agency and must adhere to banking dual agency disclosure laws.

Advance Consent (cont.)

Even when a license holder works for a brokerage that allows dual agency, that agent doesn't necessarily go into a particular agency relationship thinking dual agency will come into play in that transaction. More often than not, the relationship starts off as a single agency relationship, with the license holder agreeing to represent a seller or buyer in the transaction and, afterwards, circumstances dictate a move to dual agency. For example, when an agent representing a seller ends up negotiating with a buyer that is also represented by the same brokerage — even if by a separate license holder — dual agency is created. Likewise, when a buyer represented by an agent ultimately chooses to purchase a property listed by the brokerage of the buyer's agent, dual agency is created.

Dual Agency & Banking (cont.)

For example, let's say a broker is serving as the listing agent for a seller-client. That broker is also acting as the loan originator for the buyer because the buyer needs financing to purchase the seller's property. That broker is engaging in dual agency. Prior to accepting both roles, the broker would need to comply with Article 12-D of the New York Banking Law, which reads, in part, as follows: § 38.12 Dual agency transaction disclosures. The dual role performed by the mortgage broker, or a mortgage banker or an exempt entity acting as a mortgage broker, in those instances when the mortgage broker is also the real estate broker in the same residential real estate transaction, must be disclosed at the first substantive contact between the mortgage broker and the buyer/borrower. In addition, any regular business relationship that the mortgage broker maintains with any lender to which he/she presents loan applications, if he/she intends to utilize three or fewer lenders, must also be disclosed at the first substantive contact between the mortgage broker and the buyer/borrower. The appropriate disclosure form and acknowledgment set forth hereunder must be provided to and signed by the buyer/borrower and the seller before services as a mortgage broker may be rendered. The disclosure required by this section may be in writing or via electronic transmission and the required signatures may be hand-written or digital to the extent such signatures are recognized as binding under New York State law. A hard or electronic copy of the disclosure form and signed acknowledgment must be maintained by the mortgage broker for at least three years.

Undisclosed Dual Agency Trap Two: The Relative's Place

Helping a relative sell their property is a nice thing to do — as long as you advise all parties to the transaction as to what you're doing. If you're a working with a buyer-client, you must disclose to them your relationship with the seller, regardless of whether you're the listing agent or not. And once disclosure is made, informed consent of the buyer will be needed.

Undisclosed Dual Agency Trap One: The Open House

If a listing agent running an open house chats up a visiting customer and agrees to show that customer other properties at a later date, that could be construed as the creation of implied agency as a buyer's agent. And because that happened while on the property of the agent's current client, it could also be argued that the agent established undisclosed dual agency in the process. Forget about whether you could win that argument, Mustafa. You don't even want to have that argument.

It's a Trap!

Imagine if Admiral Ackbar from Star Wars were discussing dual agency with you. (Can you say "profitable sequel"?) Chances are he'd warn you about a few traps that undisclosed dual agency can pose. Traps such as...

What Is Dual Agency?

In Chapter 2, we defined dual agency as an agency relationship wherein both the buyer and the seller are represented by the same broker in an in-house real estate transaction. For this to be legal in the state of New York, it requires written consent from both parties.

Undisclosed Dual Agency (cont.)

Purposeful or unintentional, undisclosed dual agency is a violation of the New York Real Estate License Law. And the ramifications of undisclosed dual agency can be very serious, including: Loss of real estate license or other penalty Loss of commission Recession of the contract Legal action against the broker

Undisclosed Dual Agency Trap Three: Self-Dealing

The illegal practice of self-dealing isn't a trap where a license holder gets caught inadvertently practicing undisclosed dual agency; rather, it's when a license holder purposely falls into the greed trap. This occurs when a broker decides to buy a property they agreed to list for a client. They are tempted by the idea that they can both purchase the property AND collect on the sales commission as the listing broker. In this self-dealing plan, the broker would serve as a dual agent for the buyer (themselves) and seller. To avoid self-dealing, there must be full disclosure. But most feel that, beyond than disclosure, brokers should simply give up the listing (and commission) and represent themselves as buyers in the transaction if they wish to purchase the property.

Undisclosed Dual Agency

The last thing you want is to practice undisclosed dual agency. Undisclosed dual agency is the term for when both parties to a real estate transaction are unknowingly represented by the same broker.

Why Consent Is Needed

The reason why consent is needed (and required) from both parties in order to practice dual agency is because of the compromise to representation that inevitably ensues, specifically regarding the fiduciary duties of full disclosure and undivided loyalty. When both parties to the transaction are being represented by a single broker, that broker can't possibly promise to pursue the best interests of each party when the two will have interests that conflict at times.

Dual Agency & Banking

There is another type of dual agency in New York that you might run into, Mustafa. A real estate license holder, who also operates in the state as a registered mortgage broker or licensed mortgage loan originator, could conceivably represent both parties in a single real estate transaction, serving in a separate capacity for each party.

Dual Agency with Designated Sales Agents (cont.)

Through this form of dual agency, the broker will assign sponsored salespersons to each party. The salesperson assigned to the seller will function as a seller's agent, and the salesperson assigned to the buyer will function as a buyer's agent. The designated sales agents will, other than the disclosure of material facts, keep the confidences of the client they represent. Additionally, they can give counsel and advice to that client — something that a dual agent operating without designated sales agents cannot do. All that said, even with the assignment of designated sales agents, neither the buyer nor the seller gains 100% undivided loyalty in a dual agency environment, as both appointed salespersons are, after all, sponsored subagents of the same broker, the actual dual agent.

Informed Consent

We've discussed the concept of consent as it pertains to dual agency, and I've even addressed how and why to get that consent in advance. So, now, I want to shift a bit and make sure you're clear on what exactly it is that you want the parties to consent to. In other words, I want to focus now on the informed part of "informed consent."

Informed Consent (cont.)

What does true informed consent consist of? Well, from the New York State Disclosure Form definition of dual agent, we see that the parties need to understand and consent to the fact that: The dual agent will NOT be providing the full range of fiduciary duties, including that of undivided loyalty and full disclosure The dual agent WILL be acting for the other party, as well The agent WILL be subject to any additional provisions as set forth in the dual agency agreement Additionally, informed consent of the parties requires an acknowledgement that: Individual confidentiality of both parties will be maintained as long as it is not in conflict with any mandated disclosure of material facts The license holder can receive compensation, as specified by the agreement, from one or more parties to the agreement Both parties must consent to dual agency Both parties are advised to get legal advice before proceeding to dual agency It's a good idea to cover your bases - both in baseball and in real estate. To ensure that all the critical points of the particular form of dual agency being consented to in a given transaction are fully spelled out, restate those points in a document (separate from the state mandated disclosure form) and have all the parties sign that document. Whew! Bases covered. ✔️ ⚾️

Disclosure Compensation

While we're on the topic of disclosure, here's a friendly reminder... Per Regulation 175.7 of the New York Real Estate License Law, if a broker intends to receive compensation from more than one party, this must follow full disclosure and written consent from all parties. We've talked about this before, but it's worth bringing up again because it typically happens in an environment of dual agency.

undisclosed dual agency

a form of agency created when both parties to a real estate transaction are unknowingly represented by the same broker; signals a failure on the part of the broker to fully disclose agency relationships and obtain required approval from the principals

undivided loyalty

an agent's fiduciary duty to put the client's interests first, including over those of the agent; given up by the parties when consenting to dual agency