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Perils of Dual Agency

by / Wednesday, 23 April 2014 / Published in Articles

Perils of Dual Agency  

By Bryan Mashian  

 

California real estate brokers are permitted to serve simultaneously “two masters” if the dual agency arrangement is disclosed to and approved by both parties to the transaction. Some agents will readily jump at the opportunity to make a larger commission, even though the extra compensation comes with conflict of interests and risks.

Some buyers, to gain a competitive edge, agree to have the listing broker represent them as well as the seller. These buyers believe that by allowing the listing broker to “double end” the deal, they will gain favorable treatment from the listing broker. Also, savvy sellers negotiate that if one broker represents both sides of the deal, then seller will pay a lesser commission (for example, 4%) than when each side has a broker and the two brokers share the commission (such as 6%). So, a seller may save money and be financially incentivized to agree to a dual agency.

The parties may not appreciate that a dual agency transaction always involves a conflict of interest. The dual agent has the fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with both sides of the transaction. The broker will, for example, learn material facts that might affect one principal’s decision, and may have to disclose those facts to the other party.

This obligation is at odds with representing both sides. The broker cannot fully advocate the interests of one party at the peril of breaching the duties owed to the other side, or blowing the deal altogether and not making a commission at all. Sometimes, neither principal will receive the benefits they otherwise would have obtained by each being represented by a separate agent.

The dual agent may not, without express permission, disclose that the seller will accept a price less than the listing price or that the buyer will pay a price greater than the price offered. When one broker represents both the buyer and the seller, neither party may ever be comfortable that the broker was ever fully in their corner.

A single agent’s knowledge of price, terms, motivation, and other personal information of both principals is completely contradictory to the broker’s fiduciary duties owed to both principals. This situation creates the risk that the rights of one of the principals will be sacrificed to promote the interests of the other.

Besides advice regarding price and terms, an agent who represents both principals has other conflicts. This agent is legally required to make a full and complete disclosure of all material facts to both parties regarding any matter that would affect either principal’s decision to buy or sell.

For example, if a physical inspection reveals some serious latent defect with the property, the buyer will demand concessions from the seller, such as a price reduction. The seller naturally will question the validity of the inspection and may even want to move on to another competing buyer. There are scores of other similar problematic scenarios in a dual agency relationship which are difficult to resolve.

The law attempts to reconcile this conflict by requiring disclosure and consent, but the result is still necessarily problematic. In handling the negotiations between the adverse principals, a dual agent who satisfies the fiduciary duties to one party will likely breach fiduciary duties to the other party.

The disclosure of dual agency is significant enough that an undisclosed dual agent cannot recover any compensation. A principal who did not know and consent to the dual agency can rescind the transaction. The principal has the right of rescission whether or not the agent acted in good faith, committed no actual fraud, and caused no actual damage to the principal.

The principals must knowingly consent to the dual agency. A casual disclosure of the dual agency may not be sufficient without an explanation of the adverse ramifications that may follow if the principal does not receive the undivided loyalty and the best advice from the agent. For example, the agent should explain how the usual fiduciary duties are limited by the dual agency.

Before entering into a dual agency, real estate agents and the principals should give serious thought to all potential consequences that flow from this relationship. It is important for the agent to get an informed written consent from all parties prior to the starting the dual representation.

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