An inherent conflict of interest
A dual agent is a broker who simultaneously represents opposing participants in a transaction, either by themselves or through the agents they employ.
A dual agency
- sale;
- rental or leasing transaction; or
- mortgage origination or assignment.
A dual agent owes a fiduciary duty to both principals they represent since each is the broker’s client. Thus, the dual agency alone creates a conflict of interest, which needs to be promptly disclosed to each client. [Calif. Civil Code §2079.17]
Conflict of interest scenarios also arise for a broker when:
- a broker or their agents, acting on behalf of a client, have a competing professional or personal bias for or against some person affiliated with the transaction; and
- the bias may hinder their ability to unreservedly fulfill the special fiduciary duties they have undertaken to advise and act on behalf of the client.
In sales transactions, the conflict of interest in a dual agency typically evolves when the buyer:
- is an existing client as they have received information from the broker or their agents on qualifying properties listed by other brokers; and
- is now exposed to or expresses interest in property listed by the broker.
This conflict arises before a purchase agreement — with its agency confirmation provision referencing the dual agency and the agency law statement — is prepared and presented to the buyer and seller. In the agreement, the broker confirms the agencies the broker has undertaken with the buyer and seller. [See RPI Form 527]
How does a broker avoid a breach of fiduciary duty when their buyer inquires into facts about a property they have listed with a separate seller?
First, disclose the conflict of interest at the earliest opportunity. This means the disclosure is to be made prior to:
- providing the client-buyer with information on a property listed with the broker; or
- taking a listing from a seller when the broker already represents a buyer who has an interest in acquiring the property.
Disclosure of any conflict of interest, such as a dual agency situation, allows the principals to take the disclosed bias into consideration in further discussion with the broker and in negotiations with the opposing principal.
Though disclosure and consent to the dual agency do not neutralize the bias disclosed, it does eliminate the element of deceit. Failure to disclose is a breach of the broker’s fiduciary duty.
A broker who untimely discloses their dual agency at a time other than at the moment it arises is subject to:
- the loss of their brokerage fee and any other benefits received in the transaction;
- liability for their principals’ money losses; and
- disciplinary action by the California Department of Real Estate (DRE). [Calif. Business and Professions Code §10176(d)]
Notice and Consent to Dual Agency
With RPI’s Notice and Consent to Dual Agency form, a broker may disclose their dual agency relationship to both the buyer and seller and obtain written consent from each of them to continue services. [See RPI Form 117]
The contents of the Notice and Consent to Dual Agency form includes:
- the address of the property [See RPI Form 117 §1];
- information regarding the broker’s responsibility in the dual agency [See RPI Form 117 §2];
- a notice which contains a declaration that the buyer negotiating to purchase the listed property is represented by the broker who also represents the seller [See RPI Form 117 §3]; and
- a notice which states the broker and their agent may continue to represent both the buyer and seller. [See RPI Form 117 §4]
Each participant then signs the form, including the buyer, the seller, the broker and the broker’s agent. [See RPI Form 117]
Required confidentiality of a “secret” agent
Additionally, a broker acting alone or through their agents as a dual agent in a one-to-four unit residential sales transaction may not pass on confidential pricing information to the opposing principals. Thus, the broker and their agents may not tell the seller the ultimate price the buyer is willing to pay. Alternatively, the broker may not tell the buyer the price the seller is willing to accept.
Confidential pricing information is to remain the undisclosed knowledge of the dual agent from the moment the dual agency arises, unless authorized to release the information in writing signed by the principal in question. [CC §2079.21]
Protecting their clients’ confidential pricing information is integral to the broker’s duty owed to each client to pursue the best business advantage legally and ethically obtainable for their client.
Diminished benefits
The dual agency situation necessarily imposes limitations on the benefits obtainable by the principals. Though a dual agent is duty-bound to work diligently on behalf of both clients, they are prevented from actively achieving the full advantages of negotiations for either client. Like the opposing ends of a teeter totter, a natural inability exists to simultaneously negotiate the highest and best price for the seller, and the lowest and best price for the buyer.
Thus, clients of a dual agent generally do not receive the full range of benefits available from an exclusive agent.
This environment, even when handled properly, exposes dual agents to claims of breach of duties — mostly by sellers in a rising market or in a change of use/zoning situation, claiming the buyer received a price advantage.
This client disadvantage holds true even if different agents employed by the same broker each work with different principals in the same transaction. Typically, one agent employed by the broker enters into an exclusive sales listing on behalf of their broker with a property owner. At the same time, another agent in the broker’s employment works with a buyer to locate and provide information on qualifying properties listed for sale on various multiple listing service (MLS) sites by other brokers.
The broker becomes a dual agent the moment this buyer is exposed to and seeks additional information about a property that is the subject of an in-house listing.
In an important distinction, a broker does not automatically become a dual agent when two of their agents each work with different principals to a sales or leasing transaction. Dual agency only applies when both of the broker’s agents take action which indicates they owe fiduciary duties to the respective principals.
For instance, when the buyer is a person who has not been exposed to properties other than those listed with the broker, only general duties regarding property disclosures are owed to the buyer by the broker and their agents. No specific fiduciary agency duties are owed to the buyer. Here, a dual agency does not arise due to the lack of a prior search on behalf of the buyer for qualifying properties beyond in-house listings.
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