A conflict of interest arises when a broker or their agent, acting on behalf of a client, has a competing professional or personal bias which hinders their ability to fulfill fiduciary duties undertaken on behalf of their client.

In a professional relationship, a broker’s financial objective of compensation for services rendered is not a conflict of interest. However, fees and benefits derived from conflicting sources are required to be disclosed to the client. This includes compensation in the form of:

  • professional courtesies such as referrals;
  • familial favors; and
  • preferential treatment by others toward the broker or their agents. [See RPI Form 119]

Similarly, a broker’s referral of a client to a financially controlled business, owner or co-owner needs to be disclosed by use of an affiliated business arrangement (ABA) disclosure. [See RPI Form 519]

A conflict of interest addresses the broker’s personal relationships potentially at odds with the agency duty of care and protection owed the client.

Thus, a conflict of interest creates a fundamental agency dilemma for brokers; it is not a compensation or business referral issue.

Unless disclosed and the client consents, the conflict is a breach of the broker’s fiduciary duty of good faith, fair dealing and trust owed to the client when the broker continues to act on the client’s behalf.

Situations involving a conflict

A conflict of interest, whether patent or potential, is disclosed by the broker at the time it occurs or as soon as possible after the conflict arises. Typically, the conflict arises prior to providing a buyer with property information or taking a listing from a seller.

The disclosure creates transparency in the transaction. It reveals to the client the bias held by the broker which, when disclosed, allows the client to take the bias into consideration in negotiations. The disclosure and consent does not neutralize the inherent bias itself. However, it does neutralize the element of deceit which would breach the broker’s fiduciary duty if left undisclosed.

A conflict of interest arises and is disclosed to the client when the broker:

  • has a pre-existing relationship with another person due to kinship, employment, partnership, common membership, religious affiliation, civic ties or any other socio-economic context; and
  • that relationship might hinder their ability to fully represent the needs of their client.

Relative’s participation in a transaction

A seller’s broker is to disclose their acquisition of any direct or indirect interest in the seller’s property. The broker also discloses whether a family member, a business owned by the broker or any other person holding a special relationship with the broker will acquire an interest in the seller’s property. [See Form 527 §3.6]

A broker cannot act for more than one participant in a transaction, including themselves, without disclosing their dual agency and obtaining the client’s consent at the time the conflict arises. [Bus & PC §10176(d)]

Also, a seller’s broker has an affirmative duty to disclose to the seller their agency or other conflicting relationship they might have with the buyer. The duty to disclose exists even if the seller fails to inquire whether the broker has a relationship with the buyer.

Further, failure to disclose a broker’s personal interest as a buyer in a transaction when they are also acting as a broker on behalf of the seller constitutes grounds for discipline by the Real Estate Commissioner. [Whitehead v. Gordon (1970) 2 CA3d 659]

A relative owns the property sold

A buyer’s broker is to disclose to the buyer the nature and extent of any direct or indirect interest the broker or the broker’s agents hold in any property presented to the buyer.

For example, a buyer’s broker shows the buyer several properties, one of which is owned by the broker and others, vested in the name of an LLC. The broker does not inform the buyer of their indirect ownership interest in the property.

The buyer later decides to purchase the property owned by the LLC. An offer is prepared on a purchase agreement with an agency confirmation provision stating the broker is the agent for both the buyer and seller. The offer is submitted to the LLC. [See RPI Form 159]

The broker, aware the buyer will pay a higher price for the property than the initial price offered by the buyer, presents the buyer with a counteroffer from the LLC at a higher selling price. The buyer accepts the counteroffer.

Here, the broker has a duty to promptly disclose their ownership interest in the property to the buyer the moment the conflict arises. The conflict of interest in the broker’s ownership is a material fact requiring disclosure since the buyer’s decisions concerning acquisition of the property might be affected.

As a result of the nondisclosure, the buyer can recover the fee received by the broker and the increase in price under the counteroffer.

Had the buyer known the broker held an ownership interest in the property when it was first presented, the buyer might have negotiated differently when setting the price and terms for payment. Alternatively, the buyer may have retained a different broker who was not compromised by a conflict of interest.

Acting as principal

A broker acting solely as a principal in the sale of their own property is not restricted in their conduct by compliance with agency obligations. The broker selling or buying property for their own account acts solely as the seller or buyer. The licensee has no conflict due to the existence of their license since they are not holding themselves out as a broker or agent acting on behalf of another person in the transaction. [Robinson v. Murphy (1979) 96 CA3d 763]

However, when a broker-seller receives a brokerage fee on the sale of their own property, or on the purchase of their own property, the broker subjects themselves to real estate agency requirements.

This article was originally published in February 2016 and has been updated.