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Unintended Dual Agency

by / Saturday, 24 May 2014 / Published in Articles

Unintended Dual Agency  

By Bryan Mashian 

 

A dual agency may be created unintentionally, which may have severe consequences for the real estate broker and others. If the dual agency is neither disclosed to nor approved by both parties to the transaction, undisclosed dual agent cannot recover any compensation, and a principal can rescind the transaction. Unintended dual agency can occur whether one or two brokers are involved.

In the single-broker scenario, the listing broker, who is hired by the seller to sell the property, meets a prospective buyer, for example at an open house or through the listing broker’s marketing efforts. The interested buyer does not have a broker and asks the listing agent for help. At this point, the law allows agency elections and relationships to be made by agreement of the principals and the broker. Some brokers as a matter of principle simply refuse to act as a dual agent in order to avoid the conflict of interest inherent in simultaneously representing two principals. But, if the listing agent so choses, the agent may act as a dual agent, or continue to represent only the seller. The listing agent cannot act solely as the agent for the buyer. If the parties do not make an express agreement, an agency relationship can be implied from the parties’ conduct. So, if the listing broker then works with the buyer to complete the sale, the single broker often becomes a dual agent.

When the single agent is only the seller’s agent but provides assistance to the other party, the courts have found the agent to be a dual agent in certain situations. For example, when the seller’s broker negotiated a loan on behalf of the buyer, the broker was held to be a dual agent. Also, when the buyer’s broker approached the property owner on behalf of his clients and subsequently entered into a listing agreement for the sale of the property, that broker was held to be a dual agent.

Who pays the broker’s compensation does not necessarily determine the agency relationship. But, depending on other factors, payment of the commission is a strong indicator that an agency relationship exists between the broker and the paying party. The two-broker scenario arises when there are different salespersons licensed under the same broker. Each salesperson is an employee of the broker and their actions are the actions of the employing broker. The real estate industry usually characterizes real estate agents as “independent contractors” for tax purposes, which may create a misunderstanding. But all listing contracts and all commissions are in the name of the broker, and all salespersons are employees of the broker, regardless of their status for tax purposes.

When one salesperson obtains the listing and represents the seller, and another salesperson employed by the same broker represents the buyer, they both act as employees of the same broker. That broker thereby becomes a dual agent representing both parties. So, if a listing broker does not want to be a dual agent, referring the buyer to another agent with the same broker will not avoid such dual agency.

The unintended dual agency also arises when the same broker, through two of its salespersons, represents two prospective buyers competing for the same property. This is not unusual for many large brokerage organizations with numerous salespersons. In this situation, the broker has a conflict of interest since the broker owes fiduciary duties to both buyers. These duties include the obligation of undivided loyalty, the duty to negotiate for the best price and terms for the benefit of the buyer, and the duty to disclose all material matters that would affect the buyer’s decision.

Sometimes the listing broker is the agent of the seller and two salespersons employed by the broker represent competing buyers. Here, there are multiple dual agencies present. The broker has to disclose to seller and both competing buyers the existence of both potential buyers, and the negotiations may result in a breach of fiduciary duty to one or more of the principals. Since dual agency can be implied based on certain facts, it is good practice for the broker to document the intended agency relationship. If the broker provides assistance to a party whom the broker does not represent, such as providing comparable properties, furnishing reports or answering questions regarding the reports, the broker should document that this assistance does not change the agency relationship and is provided only as a courtesy.

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