Form-of-the-Week: Conflict of Interest – Kinship, Position or Undue Influence – Form 527
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 unreservedly fulfill the fiduciary duties they have 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 professional courtesies, familial favors, and preferential treatment by others is compensation which must be disclosed to the client. [See first tuesday Form 119]
Alternatively, the referral of a client to a financially controlled business owned or co-owned by the broker is not classified as a conflict of interest. Referral to a financially controlled business is disclosed by use of an affiliated business arrangement (ABA) form. [See first tuesday Form 519]
A conflict of interest addresses the broker’s personal situations potentially at odds with the agency duty of care and protection owed to the client. A conflict of interest creates a fundamental agency dilemma for brokers. Thus, a conflict of interest is not a compensation or business referral issue.
A conflict of interest exists when:
- a broker has a positive or negative bias toward the opposing party in a transaction or a person not directly involved in the client’s transaction; and
- that bias in favor of or against the other person might compromise the broker’s ability to freely recommend action or provide guidance to the party they agreed to represent.
This bias regarding a party not directly involved in the transaction, to whom the broker may or may not also owe an agency duty, must be disclosed if the bias might disrupt the broker’s ability to make impartial decisions about the care and protection they owe to their client. 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 their client if the broker continues to act on the client’s behalf. [See first tuesday Form 527]
Situations involving a conflict
A conflict of interest, whether patent or potential, is disclosed by the broker at the time or as soon as possible (ASAP) after the conflict arises. Typically, conditions which bring about the conflict arise prior to providing a buyer with property information or taking a listing from a seller.
The disclosure creates transparency in the transaction, revealing to the client the bias held by the broker. When disclosed, the disclosure allows the client to take the known bias into consideration in negotiations. Though the disclosure and consent does not neutralize the inherent bias itself, it does neutralize the element of deceit which would breach the broker’s fiduciary duty if left undisclosed.
Potential overlaps of allegiance or prejudice which cause a conflict include:
- the broker or their agent holds a direct or indirect ownership interest in the real estate involved in the transaction;
- the broker or their agent are directly or indirectly a buyer of the property in the transaction, including a partial ownership interest in a limited liability company (LLC) or other entity which owns or is buying, leasing, or lending on the property [Whitehead v. Gordon (1969) 2 CA3d 659];
- an individual related to the broker or one of their agents by blood or marriage holds a direct or indirect ownership interest in the property or is the buyer [Sierra Pacific Industries v. Carter (1980) 104 CA3d 579];
- an individual with whom the broker or a family member has a special pre-existing relationship, such as prior employment, significant past or present business dealings, or deep-rooted social ties, holds a direct or indirect ownership, leasehold, or security interest in the property or is the buyer;
- the broker’s or their agent’s concurrent representation of the opposing party, referred to as a dual agency situation; or
- the unwillingness of the broker or their agent to work with the opposing party, or others, or their brokers or agents in a transaction.
Simply, a conflict of interest needs to be disclosed to the client when the broker has a pre-existing relationship with a person other than the client which might hinder their ability to fully represent the needs of their client. This pre-existing relationship may be based on any form of:
- common membership;
- religious affiliation;
- civic ties; or
- any other socio-economic context.
first tuesday’s Conflict of Interest is used by a broker or their agent when representing a buyer or seller to disclose the potential conflict of interest which may interfere with their ability to represent their client as agreed. [See first tuesday Form 527]
The conflict of interest form provides for information on facts which might create a conflict of interest for a broker or their agents in performing their agency duties on behalf of the client. Listed sources of a conflict include:
- the real estate;
- affiliation with a government agency;
- a business position;
- a business event;
- representation of others in the transaction; or
- kinship and employee relationships. [See first tuesday Form 527]
This disclosure is serious business. The client’s tardy discovery of the conflict and their complaint to the Bureau of Real Estate (BRE) for failure to make the disclosure and obtain consent before continuing to advise or act on behalf of the client are grounds for the suspension or revocation of the broker’s license by the BRE. [Calif. Business and Professions Code §10177(o)]