Why this matters: Learn to identify conduct giving rise to dual agency representation and understand dual agency as a conflict of interest requiring prompt disclosure and consent.
Fee sharing agency concepts
An agency relationship between a broker and their client is created by either:
- a written representation agreement entered into with the client; or
- the fiduciary conduct of a broker when interacting with a buyer or seller.
The payment of a fee due a buyer broker in a transaction which is paid by the seller does not convert the buyer broker into a dual agent as also the agent of the seller. Likewise, a dual agency is not created when the seller broker splits their fee with a buyer broker. [Calif. Civil Code §2079.19]
Also, the buyer broker is not converted to a seller agent when they show their buyer a property listed by another broker, whether published in a multiple listing service (MLS) or not. However, a buyer broker becomes a dual agent when they represent both the buyer and seller of a property under separate representation agreements.
A broker’s membership in a trade union or an MLS does not create an agency relationship with the client of another broker. These trade association memberships are marketing relationships and, like the buyer broker fee paid by the seller, do not and cannot create an agency. Again, an agency is created by a written representation agreement with a client or by the conduct of the broker or their agent directly with a consumer of real estate services.
Related article:
Dual agency disclosed as a conflict of interest
A conflict of interest exists for a broker when the:
- broker has a positive or negative bias toward the opposing party in a transaction or a person indirectly involved in the client’s transaction;
and - bias might compromise the broker’s ability to freely recommend action or provide guidance to a client the broker agreed to represent.
Viewed another way, a conflict of interest arises when:
- a broker or their agent, acting on behalf of a client, has a competing professional or personal bias; and
- the bias hinders their ability to unreservedly fulfill the fiduciary duties they have undertaken to advise and act on behalf of the client.
Related video:
Read more about this topic here.
Dual agency by coincidence is authorized
A dual agent is the broker who simultaneously, themselves or through their agents, represents opposing participants in a transaction in expectation of a fee for representing both.
Typically, it is different agents employed by the broker who carry out the broker’s duties owed each of the opposing clients — seller and buyer, landlord and tenant, owner and lender.
The expectation of a broker fee for representing each side: the buyer and seller or tenant and landlord in a transaction is a one-broker fee arrangement called double ending.
However, inherent in every dual agency representation is a conflict of interest. The conflict arises out of the broker’s representation of opposing clients in the same transaction, a condition promptly disclosed to both clients. Further, consent is obtained from all involved before the broker and their agents can further negotiate or process the transaction.
Dual agency arises naturally by a series of common events and is proper brokerage practice, though risk-prone activity.
The failure of the broker to promptly disclose the dual agency conflict subjects the broker to:
- the inability to collect their broker fee;
- liability for money losses incurred by the buyer- and seller-clients; and
- disciplinary action by the Department of Real Estate (DRE) on receipt of a complaint.
For example, a buyer broker enters into a buyer representation agreement with their buyer-client to locate and acquire property. The broker’s office later enters into a representation agreement with a seller to market a property for sale. The seller’s property is brought to the attention of the buyer-client — its location, bedrooms, baths, square footage and amenities.
The buyer expresses an interest and seeks more information on the property. A buyer’s inquiry into details about the property is a buyer’s first act of negotiation toward possible acquisition. The request for information triggers the broker’s duty to promptly advise the buyer-client — as soon as possible (ASAP) — a conflict of interest has arisen as their broker also represents the seller of the property — a dual agency situation.
Here, the dual agent conflict of interest is managed by a timely disclosure to all participants. The disclosure is made prior to providing their buyer-client with more than preliminary MLS-type information on a property for sale by the broker’s seller-client. [See RPI Form 527]
Upfront disclosure of a dual agency conflict enables the clients to take the disclosed bias into consideration in future discussion and negotiation. Once the conflict is disclosed and both clients have consented, no further mention of the conflict need be made by the broker or their agents.
Understandably, the disclosure and consent to the dual agency does not neutralize the bias disclosed. However, it does neutralize the element of deceit which, when a bias is left undisclosed, is a breach of the broker’s fiduciary duty owed both clients.
Related video:
Read more about this topic here.
Both clients are entitled to advice
A dual agency in a one-to-four unit residential sales transaction bars the broker from passing confidential pricing information between the opposing participants. For example, the broker and their agents may not disclose to the seller the price the buyer is willing to pay or inform the buyer the price the seller is willing to accept.
Confidential pricing information needs to remain the undisclosed knowledge of the dual agent, unless authorized in a signed writing to release the client’s confidential pricing information. [CC §2079.21]
The broker makes the decision not to release pricing information and maintains that position from the moment the dual agency arises.
The dual agency conflict typically arises when a buyer is a client under a representation agreement, or after assisting the buyer by presenting property listed by other brokers. Initially, the buyer-client is exposed to properties available for sale by other brokers. At some point, the buyer is exposed to a property for sale by their broker under a seller representation agreement.
Related article:
Dual agency and diminished benefits
A broker owes a client, buyer or seller, the duty to pursue the best business advantage legally and ethically obtainable. However, by law, a broker as a dual agent and their agents are prevented from actively achieving this advantage for either client.
The dual agent may not take sides with one or the other during negotiations concerning pricing. A natural inability exists, as also exists by agency rules, for dual agents to negotiate the highest and best price for the seller, and at the same time, negotiate the lowest and best price for the buyer.
Clients of a dual agent do not receive the full range of benefits available from an exclusive agent. This holds true even when different agents employed by the same broker separately work with the seller or the buyer in the same transaction.
Typically, one agent employed by the broker enters into a seller representation agreement with a property owner to market property and locate a buyer. Another agent employed by the broker enters into a buyer representation agreement to locate qualifying properties available for sale in the market.
Here, the broker employing the two agents becomes a dual agent the moment the buyer-client handled by one agent inquires further into a property for sale by a seller-client assisted by another agent of the broker.
Related article:
