General Practice, Solo & Small Firm DivisionBest of ABA Sections
SPRING 1998 - VOLUME 2, NUMBER 1
Real Estate Law
Real Estate Brokers: Shouldering New Burdens
By Ronald Benton Brown and Joseph M. Grohman
In the 1980s, real estate brokers discovered that they risked liability for breaching fiduciary duties they did not know they had if they failed to disclose property conditions to buyers, even though disclosure could violate their duty to sellers. Conversely, they might have breached their duties to sellers if they disclosed to prospective buyers unpleasant facts that stigmatized the property. Brokers reacted by lobbying for legislative protections. As a result, many states adopted statutes allowing brokers to enter into new relationships, shifting the burden of disclosing property conditions to sellers and shielding brokers and sellers who fail to disclose facts that psychologically stigmatize property. These statutory solutions, however, have failed to eliminate material risks to brokers and may have subjected them to new risks.
As a condition of membership in multiple listing services, a broker agreed that, when trying to sell properties listed by another member broker, the selling broker acted as an agent of the listing broker and, hence, as a subagent of the seller. Member brokers also agreed that, if another member produced the buyer, the listing broker would share the commission according to a prearranged formula, typically, 50-50.
Buyers generally thought of the brokers who helped them locate property as "their" brokers. But, as a subagent of the seller, a selling broker had a fiduciary duty only to the seller. A selling broker had no duty to the buyer other than the duty not to act in a tortious manner owed by one member of the public to another.
The fact that listing brokers also worked with buyers added to the confusion, as many buyers were left with the perception that the listing brokers were "their" brokers.
Regardless of buyers’ expectations, by law, listing and selling brokers had a duty to push a closing that was in the seller’s best interest, even if that was not in the buyer’s best interest. Many buyers later felt that "their" brokers had betrayed them.
Much to the brokers’ surprise, some courts rejected the traditional agency analysis. They recognized that a common law agency relationship is created when the principal manifests an intent that the agent act for him or her, the agent accepts responsibility and the principal has the right to control the venture. After analyzing the selling brokers’ conduct, these courts concluded that some selling brokers had entered into agency relationships with buyers concurrent with their agency relationships with sellers. Dual agency was, and is, perilous because it requires identical loyalties to parties with different, often opposite, wishes and needs. The dual agent must not violate the duty of loyalty to one party by fulfilling the same duty to the other. He or she must disclose the existence of the dual agency to both principals.
Some brokers became "buyers’ brokers." As such, they offered to act solely as agents of the buyers to ensure their undivided loyalty.
Agency law does not require that the agent be paid by the principal. Many multiple listing services, however, would not grant membership or multiple list access to buyers’ brokers. Many listing brokers refused to share commissions with buyers’ brokers because they had not performed as sellers’ subagents.
Brokers succeeded in lobbying forty-one states to pass statutes that allow a variety of relationships. Brokers can still enter into a traditional agency relationship with a buyer or seller. A selling broker can still be a subagent of the seller, and it is still possible to be a buyers’ agent. Now, however, in these states it is also possible to be a dual agent or a nonagent.
Typically under these new statutes, to enter into these relationships, brokers must follow prescribed disclosure procedures. Some statutes created what might be called a "disclosed dual agent." Under this approach, the broker simultaneously owes a fiduciary duty to the buyer and seller, but the duty to each is limited by the duty to the other.
In contrast, the nonagent represents neither party. Under the terms of some statutes, the nonagent is a "deal agent" who represents the deal rather than the parties. A broker creates this statutory relationship by following the proper disclosure procedures.
One additional problem is that in many states a licensed real estate salesperson can operate only through a broker. With the automatic offer of subagency for the seller that was common in multiple listing services, the knowledge and duties of each licensee are imputed to the broker and all licensees associated with the broker. For "in-house" transactions in which both the listing agent and the buyer’s agent are associated with the same broker, this imputation creates dual agency relationships throughout the brokerage.
Despite these developments, potential problems remain. Disclosures may not be properly made. Even if they are, a broker may not be able to prove proper disclosure.
In that case, the broker may be in an unexpected fiduciary relationship. Also, these statutes generally do not abrogate the common law of agency. Thus, brokers who originally enter into statutory nonagency relationships may find that their conduct has placed them in a fiduciary relationship.
Moreover, the whole statutory scheme is based on a disclosure to the prospective buyer. All the while, the broker’s conduct as a good salesperson might have led the buyer to expect that the broker was on the buyer’s side.
The statutory solution has been to provide consumers a disclosure statement. But a disclosure form is no way to explain agency law.
Under the traditional agency/subagency relationship, the broker could not disclose to the buyer any information that was detrimental to the seller. If a court found that a selling broker had become a dual agent, the fiduciary duty to the buyer required the selling broker to disclose property conditions that might affect the decision to buy.
Brokers responded by lobbying for statutes requiring sellers to disclose these defects to prospective buyers, thus shifting the disclosure burden to sellers and removing brokers from this predicament. Twenty-seven states had such statutes at the latest count.
Complying with the disclosure requirements requires collecting information, recalling events, and, in some states, properly completing a complicated form.
Another disclosure problem is information that might psychologically stigmatize or taint the property, making it difficult to sell.
The problem first caught the public’s attention when the stigma involved sellers or prior occupants infected with the HIV virus. Although public health officials have assured the public that the next occupant is not at any risk, many buyers would not knowingly buy such a property. Nondisclosure of HIV infection, however, is apparently protected by the 1988 amendments to the Fair Housing Act.
Two well-publicized cases, one involving multiple murders in a home and the other being "haunted," led some states to enact broader nondisclosure protections. Some statutes now shield brokers and sellers who do not disclose such facts as a death or violent crime on the premises or gang activity in the neighborhood. Some of these shield statutes have general catchall categories that might even protect a seller or broker who fails to disclose the suspected presence of a ghost.
Some of these statutes, however, have procedures by which buyers may inquire about stigmatizing facts.
In states with affirmative disclosure laws, the receipt of the sellers’ mandatory property condition disclosure forms will likely lull buyers into believing they know every material fact. To many buyers, however, these shielded facts may also seem material, as evidenced by the very existence of the shield laws. Arguably, based on the buyers’ reasonable expectations, "their" brokers have a duty to warn them that shield laws exist and that buyers cannot expect to learn this information from the normal disclosures.
In simpler times, the listing broker was the agent of the seller and the selling broker was the subagent. Both owed their sole duty of loyalty to the seller. Those simple times are over. In shouldering this new world of burdens, brokers must now choose what relationship to have with their clients, satisfy relationship disclosure requirements, not commit the unauthorized practice of law in explaining the relationship, and behave consistently with the chosen relationship.
Ronald Benton Brown and Joseph M. Grohman are professors at Nova Southeastern University Shepard Broad Law Center in Fort Lauderdale, Florida.
This article is an abridged and edited version of one that originally appeared on page 59 in Probate and Property, September/October 1997 (10:5).