Clarity is Key When Dealing with Buyers and Sellers: Managing Dual Agency Situations and Conflicts of Interest
Representing both parties in a real estate transaction can be challenging for even the most senior professional. However, it is possible to fulfill your due diligence with some forethought and preparation. Agents need to be aware of possible self-dealing and use/misuse of confidential information in dual agency situations. The agent or broker can be held liable if both parties are not equally informed and the proper disclosures are not made. Here is a real-world case study that demonstrates the complexity of dual agency real estate transactions and highlights the issues agents should be aware of.
A real estate agent (the insured) was involved in locating large tracts of agricultural real estate throughout the country and then facilitated the sale of those lands. The insured did not always act as the broker or agent in a transaction, but rather was paid commission as a “finder’s fee”. The insured became aware the property in question was for sale and had an interested buyer, so he met with the seller. The listing agent received a lab report of water samples taken from various points on the property which indicated the groundwater contained higher than normal salt content. The soil maps included in the real estate brochure also indicated that the soil contained salt.
The real estate agent (the insured) became aware of a potential buyer who was known to be interested in agricultural properties and forwarded the listing to the buyer. The insured acted as a facilitator for the transaction that ultimately took place. The insured denied he acted as a real estate broker for the buyer. However, in several documents, the insured was identified as the buyer’s broker or representative. The insured admitted that he followed up on certain issues at the request and direction of the buyer, but it was made clear that the buyer was conducting the due diligence for the sale. The buyer paid $5.3 million for the property. At some point thereafter, the tenant on the property began to complain to the buyer about the salt content of the water and claimed it was difficult to grow certain crops on the farm.
The real estate agent (the insured) had a very limited role after he had “sourced” the property for the buyer, given the nature of the transaction and the fact that the parties had no brokerage agreement. However, the buyer felt he had a dual agency situation—the easiest way for the papers to reflect that the insured would gain a commission for sourcing the property. Unfortunately, there was no documentation supporting the dual agency situation, nor was there any documentation showing the insured’s exact role.
More troublesome is the fact that the insured was aware of the lab report on the salt issues from a previous attempted sale and showing. The report was not provided to the buyer because the insured believed it was inconsequential after discussing the matter with the seller’s water expert who advised the salt issue was manageable. The report was discarded when the initial lab results were never examined beyond preliminary review. The insured also didn’t disclose his prior relationship with the seller. Accordingly, the buyer was on notice of the problem without the disclosure of the reports.
The courts ruled that the agent/brokerage (the insured) owed a fiduciary duty to the buyer who was not represented. If the broker documented his representation, disclosed the report, and disclosed his relationship with the seller, the claim could have been defended and the insured could have avoided a settlement. The buyer claimed $1,000,000 in damages and the case was ultimately settled for $100,000.
When a real estate agent or licensee acts as a dual agent for both the buyer and seller in a real estate transaction, conflicts of interest and fiduciary duty problems commonly arise. This stems from the basic conflict between an agent’s role as advocate on behalf of either the buyer or the seller, as opposed to a dual agent, who represents the interests of both parties to the transaction. Most jurisdictions allow for dual agency situations, although each has specific limitations and rules for the agent.
The most prudent course of action for a dual agent is to fully disclose and confirm in writing. The simplest, and probably most effective way of meeting the burden of full disclosure is to provide both the buyer and seller a written explanation of dual agency under the jurisdiction’s requirements. In addition, both parties should sign and date receipt of the written material. The best practice is to have pre-printed brochures and other documents that mirror the jurisdiction’s requirements. A full disclosure should cover all aspects of potential conflicts of interest. Always give parties the option to decline and remember to document discussions and recommendations.
If agents are concerned about fulfilling their fiduciary duty not to act adversely to the interests of the principal, there are other options. One good idea is to suggest each party get their own licensee instead of using the existing dual agent to finalize the terms of the transaction, while remaining within the same brokerage. Proposing a designated agent is always an option too.
Whether you operate as a designated or dual agent, signed agreements that clarify responsibilities and full disclosure are necessary to ensure agents/brokers meet their fiduciary duties and will help reduce the likelihood of misunderstandings that could lead to a claim or litigation.
This article was produced in conjunction with XL Catlin and is not to be taken as legal advice.