In my time as an attorney, the long-running joke about real estate brokers is they only care about one thing—their commission. If you just chuckled, then you know what I am talking about. Fortunately, most real estate brokers are not quite so avaricious. But even the most ethical real estate brokers can make mistakes. This article will provide an overview of the fiduciary duties real estate brokers owe to their clients and how it benefits us, legal practitioners, to remind them of those obligations.
How Real Estate Brokers Violate Their Fiduciary Duties
Real estate brokers have fiduciary duties to their clients. Black’s Law Dictionary defines a “fiduciary” as “[a] person who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence, and candor.” Black’s Law Dictionary 702 (9th ed. 2009). The relationship between a real estate broker and a property owner for whom the agent has by contract agreed to sell the owner’s property is that of principal and agent. In the words of one court, a real estate broker “owes a fiduciary duty (1) to use reasonable care, skill, and diligence in procuring the greatest advantage to his client, and (2) to act honestly and in good faith, making full disclosures to his client of all material facts affecting his interest.” Vogt v. Town & Country Realty, 231 N.W.2d 496, 501 (Neb. 1975).
A real estate broker fulfills his duties of reasonable care, skill, and diligence when he performs his role in the real estate transaction in a competent manner that conforms with the standard of the profession when he uses knowledge and takes action learned from his professional education and experience and when he diligently pursues facts and information that assists the client. In addition, a real estate broker must act honestly and in good faith, but it goes beyond that. The real estate broker has a duty of loyalty to his client. The real estate broker must put his client’s interest above his own. Finally, the real estate broker must disclose any fact material to the client’s decision to purchase or sell real estate.
A breach of a real estate broker’s duty of care would be not taking reasonable care to determine that all representations made by his client are true. McRae v. Hagaman, 2004 WL 2378109, at *5 (Tenn. Ct. App. Oct. 25, 2004). An example would be a real estate broker not reading the terms of a purchase contract or not making inquiries regarding flooding that may have occurred on the subject property. See Staggs v. Sells, 86 S.W.3d 219 (Tenn. Ct. App. 2001). In Staggs, the seller was aware of the flooding but not asked about it by its real estate broker, and the purchase contract had a representation stating “that the Property has not been damaged or affected by flood or storm runoff and that the Property does/does not require flood insurance.” Id. at 221. The real estate broker checked the box next to the phrase “does not.” Id. As a result of the real estate broker’s breach of the duty of care, the court found the broker’s client liable for negligent misrepresentation.
The Staggs court stated the following:
The statement regarding flooding and storm runoff was patently false. Defendants’ [real estate broker] had an obligation to use reasonable care in determining that all representations made in the contract were true and correct. Such care was not used, and Defendants, as the principal, are now responsible for the negligence of their agent.
Id. at 223.
The author strongly suspects that the errors and omissions insurance policy for the real estate broker likely paid out on any claim made by the real estate broker’s client concerning the matter.
An example of a breach of a real estate broker’s duty of skill would be failure to memorialize an amendment to the purchase and sale agreement by having it written and signed by the parties. The real estate broker’s failure to do this violates the Statute of Frauds, which all real estate brokers should know well. As stated by one court, “[t]he care and skill required [of a real estate broker] is that generally possessed and exercised by persons engaged in the same business.” Cummings v. Carroll, 866 S.E.2d 675, 695 (N.C. 2021).
An example of a breach of a real estate broker’s duty of diligence would be a failure to determine whether a prospective real estate purchaser has the financial means to purchase real estate being sold by the broker’s client. See Marcotte Realty & Auction, Inc. v. Melvin Schumacher & Schumacher Bros., Inc., 624 P.2d 420, 429 (Kan. 1981) (stating, “It is no longer open to argument that one of a broker’s duties is to produce a prospective buyer who is financially capable of purchasing the listed property upon terms acceptable to the seller . . . How extensive is the broker’s duty to delve into the personal financial status of a prospective buyer? No definite statement of that duty, which would apply to all conceivable factual situations, can be formulated. One can safely say that a broker is required to exercise reasonable diligence and effort under the circumstances of the particular factual situation existing at the time.”)
An example of a breach of a real estate broker’s duty to act honestly and in good faith is an outright lie about the property no longer being available for purchase after it was already placed under contract. See Porter v. Tenn. Real Estate Comm’n, 271 S.W.2d 21 (Tenn. Ct. App. 1954). In Porter, the real estate broker negotiated a contract between his clients and sellers and subsequently promoted the sale of the exact property to a second purchaser without regard to the contract previously entered into. The real estate broker told his original clients the property had been sold to another purchaser by another agent employed in his office. Id. at 23. When asked about his deceptive conduct in court, the real estate broker candidly replied, “Well, I misrepresented, sir. I misrepresented, I am sorry to say.” Id.
A real estate broker’s most important duty to the client is to fully, fairly, and promptly disclose all facts that might affect the client’s interest. If a real estate broker is representing a buyer of real estate, this would include a duty to disclose (i) that the seller has expressed a willingness to accept a lower price than its asking offer; (ii) anything that is affecting the value of a property; (iii) any past existing offers or counter-offers that have been made on a property; (iv) how long a property has been on the market; (v) whether the broker has an existing relationship with the seller of the property; (vi) seller’s urgency to sell a property; and (vii) any fact or information that would help the buyer obtain a property for a lower price. What is a Real Estate Agent’s Fiduciary Duty?, Seller’s Shield (April 13, 2020), https://tinyurl.com/4uu82c8f. If a real estate broker is representing a seller of real estate, this would include a duty to disclose (i) whether the real estate broker has a relationship with the buyer; (ii) the identity of anyone who has placed a bid on the seller’s property; (iii) all offers made on the seller’s property; (iv) anything that would affect the value of the seller’s property; (v) whether the buyer is willing to pay a higher price for the property; (vi) any information that would affect the seller’s ability to get a higher price for the property, and (vii) whether the buyer has any intention to subdivide the seller’s property or resell it for a higher price. Id.
Takeaways for Advising Real Estate Brokers
Real estate brokers are a valuable source of business referrals to real estate lawyers. If your practice area includes handling commercial leases, residential closings, or commercial closings, then you know the value of real estate brokers to your practice.
In the author’s experience with commercial real estate transactions, real estate brokers tend to be more sophisticated and not “quarterback” the deals—the attorney does that. The brokers primarily handle acquisition of the prospective tenant or buyer. The attorney may or may not handle drafting the letter of intent for a commercial lease but will certainly handle the drafting of the lease. For a commercial closing, the same is true. The attorney may or may not draft the letter of intent for the purchase or sale of commercial real estate but will certainly handle the drafting of the contract. Commercial brokers do not need that much “handholding.”
Residential closings are entirely different. The brokers for residential closings may not be as sophisticated as those for commercial closings and tend to handle a lot of the closing themselves—completing the purchase and sale agreement and guiding the client through the transaction until the very end. The residential closing attorney tends to stay in the background much of the time, handling the title review, preparing a title commitment for title insurance, preparing the settlement statement, disbursing funds, and managing all post-closing matters. That’s true for the author in the “attorney states” he’s licensed in, including South Carolina and Georgia. In many jurisdictions, however, title companies will handle this aspect of the closing and have attorneys on staff to assist. Still, attorneys are not required to effectuate the residential closing (or commercial real estate closing, for that matter). Because real estate brokers are so much more hands-on in a residential closing, there is a greater potential for breach of fiduciary duties during the transaction. And it would be wise for us, as lawyers, to counsel them when we can.
Whether you primarily handle commercial or residential matters, finding ways to remind brokers of their fiduciary duties to their clients can build rapport with these great referral sources. These reminders can come in e-newsletters, articles you write (which can be shared with these referral sources), or content you post online on your website or social media (LinkedIn, Twitter). These reminders position you as the expert on the matter and let brokers know you are the person to call if a fiduciary issue with a client arises. You can then handle that matter or refer it to a colleague or outside attorney who can assist. In either scenario, it is good business.
Real estate brokers owe fiduciary duties to their clients, including providing reasonable care, skill, and diligence in their transactions. In addition, real estate brokers have a duty of honesty and good faith and to disclose any issues that are material to a client’s decision to lease, buy, or sell real estate. Real estate brokers can be valuable referral sources for real estate lawyers. It behooves us to remind them of their fiduciary duties to their clients for their benefit and our own.