This article discusses the different situations creating the need for confidentiality of information in real estate transactions.

Personal information received by agent

The owner of a single-family residence (SFR) enters into a listing agreement employing a broker to locate a buyer for his property. The broker is represented by a listing agent in his employ. The listing price is set at the fair market value (FMV) based on a comparable marketing analysis (CMA) the agent prepared in anticipation of listing this property. [See first tuesday Form 318]

The owner informs the broker’s agent that his motivation for selling the property is due to his need to obtain cash to satisfy federal and state income tax claims he owes which have not yet become recorded liens.

The listing agent markets the property in an effort to locate a buyer. In the process of providing property information, he divulges to selling agents representing prospective buyers that the seller’s tax liabilities are the motivation for selling. As a result, a prospective buyer is informed about the seller’s motivation. The buyer, sensing the urgency of the seller’s situation to quickly convert his equity in the property to cash, makes an offer which is considerably lower than the seller’s listed price. The seller accepts the offer following negotiation with the buyer and a lack of any other ready, willing, and able buyers at the moment.

After the sale closes, the seller learns of the agent’s use of the seller’s personal circumstances to induce buyers to make offers. He determines the property was worth the listing price at the time of the sale. The seller then makes a demand on the listing broker and his agent to recover the value lost based on the difference between the listing price and the sales price. The seller claims the broker and the listing agent breached their fiduciary duties as agents of the seller by releasing confidential information unrelated to the property being sold.

Is the broker liable for any lost property value on the sale caused by the unauthorized disclosure of the owner’s personal and privileged financial information?

Yes! The listing broker’s fiduciary duty as an agent acting on behalf of the seller prohibits the broker from communicating the seller’s personal and privileged information to a third party to the detriment of the seller. Any information released to a third party which is not readily available to the public or related to the condition of the property is improper. [Calif. Civil Code §§ 2079 et seq.; Rest.3d Agency §8.05]

This release of privileged information which drove down the price the buyer offered to pay was devoid of any concurrent depressed market conditions brought about by generally negative economic conditions for selling. In contrast, consider a sale negotiated during an economic downturn with a prospective buyer who uses, when making his purchase offer, his general knowledge that cash and mortgage credit are scarce. Any encouragement given by the seller’s agent to a prospective buyer to make an offer without concern for the listing price would not be a violation of confidentiality. This general knowledge about economic developments is not personal or privileged.

Agency law requires brokers (and their agents) to keep a seller’s personal and privileged information confidential in order to avoid harm to their clients. Personal and privileged information is any information that does not have to do with the property being sold or the terms negotiated for a sale, but instead deals with the seller’s personal life and motivation for selling. Privileged personal information received by a client include:

  • impacts of a divorce;
  • terminal or debilitating illness;
  • income tax obligations;
  • financial difficulties; and
  • lost employment.

Thus, a listing broker who has been authorized by his seller to release information on the personal motivation of the seller in a marketing program designed to attract buyers needs to obtain written authorization for the release of that personal information. [See first tuesday Form 118]

While confidentiality is imposed on the broker and his agents with respect to the client when entering into an employment such as a listing agreement, the duty to keep information confidential is also imposed on persons involved in a real estate transaction, be they principal or agent, based on:

  • a special relationship with a non-client, called a customer, such as the contact a real estate licensee has with the public by virtue of activities authorized by his licensure;
  • an agreement with provisions requiring the maintenance of confidentiality on specific information; or
  • any conduct making disclosure or non-disclosure wrongful.

Privileged information withheld by licensees

The fiduciary duty owed the broker’s client and the general duty a broker owes to any party to a transaction are the product of the agency laws which control the conduct of real estate licensees. These duties are initially disclosed by use of the statutory Agency Law Disclosure form mandated on sales transactions involving one-to-four residential units. [CC §2079.16; see first tuesday Form 305]

Confidentiality among members in syndication

Consider a real estate developer who solicits prospective investors to join with him in a partnership to acquire an option to buy a developable site and bid for a contract to develop and lease the improved property to the government. The developer completes his due diligence investigation and works up extensive documentation on the building site and the government contract requirements in order to develop a bid for the contract. He forwards this information on to all the prospective investors who have orally committed to join in the syndicated investment.

Later, one of the investors pulls out of the partnership. Unbeknownst to the developer, this investor who withdrew forms another investment group which acquires a back-up option for the same site and prepares a bid for the same government contract.

The government agency approves the developer’s site as the future building location, but requests that the rents offered in the developer’s bid be lowered. The developer declines to lower the rents. The investor and his new investment group adjust their bid in order to undercut the developer and are awarded the contract.

The developer learns the contract was awarded to the investor and makes a demand on the investor to recover his losses. The developer claims the investor breached his fiduciary duty as a partner in the agreed-to investment group when he used information about the property and the contract bidding for his own benefit and to the detriment of his former partners. The investor claims that by terminating his interest in the partnership by withdrawing he was released of any fiduciary duty owed to his former partners.

Is the investor liable to the developer for a breach of his fiduciary duty to his former partners?

Yes! The fiduciary duties owed a partner are those of an agent and are not terminated by merely withdrawing from a partnership, they continue until the previously contracted-for investment activity is complete. [Leff v. Gunter (1983) 33 C3d 508]

The developer might have avoided the investor’s abuse of their fiduciary relationship by the investor’s use of confidential information received during that relationship had the developer insisted on a written confidentiality agreement at the time the developer brought the investor into the prospective investment. [See first tuesday Form 257]

The special relationship of licensure activity: a general duty to all

The listing broker’s fiduciary duty to his seller not to disclose personal and privileged information is a position paired and contrasted with the broker’s general duty owed to others who are not his client. This general duty is created by the broker’s status as acting as a licensee in the transaction, not when he is acting solely as a principal. As an agent acting on behalf of anyone in a transaction, the broker is required to disclose any information about the property that he knows or should know exists and might affect the value of the property to the seller or the buyer. A broker cannot rely on an “as-is” provision to avoid disclosing information about the property on a sale.

Consider a broker’s listing agent who, on conducting his visual inspection of a property, has reason to believe the property fails to conform to building and zoning regulations.

The listing agent knows a prospective buyer interested in making an offer is not aware of the possible violations, and might view the property’s value differently if he learns the violations exist.

The buyer submits a purchase agreement offer. The listing agent prepares a counteroffer for the seller to sign, which includes an “as-is” disclaimer provision. The provision states the agent “makes no representations regarding the property and incurs no liability for any defects, the buyer agreeing to purchase the property ‘as is.’” The counteroffer is signed by the seller, submitted to the buyer, and accepted.

After closing, the city refuses to provide utility services to the residence due to building code and zoning violations.

The buyer makes a demand on the seller’s broker and listing agent for the buyer’s money losses due to overpricing the property and the cost of corrective repairs. The buyer claims the seller’s broker and listing agent breached their general agency duties owed the buyer since they failed to disclose material defects in the property known to the listing agent, but not the buyer.

The broker claims the buyer waived his right to collect money damages when he signed the purchase agreement containing the “as-is” disclaimer.

Does use of an “as-is” disclaimer provision shield a listing broker from liability for the buyer’s losses caused by the building and zoning violations which were suspected to exist by the broker’s listing agent and not known or suspected by the buyer?

No! The seller’s broker and listing agent have a general duty, owed to all parties in the transaction, to personally conduct a competent visual inspection of the property sold. Based on their inspection, they are to disclose all known and observable property conditions which adversely affect the value and desirability of the property which are not already known or should have been known by the buyer. The breach of this duty by the listing agent’s failure to disclose his knowledge or observations about potential adverse conditions is not excused by writing an “as-is” disclaimer into the purchase agreement in lieu of factual disclosures. [Katz v. Department of Real Estate (1979) 96 CA3d 895]

Thus, facts about the property itself, or any other material facts which might affect the terms or parties to a transaction are never confidential.

Though less frequently encountered than a seller who must disclose material facts about a property, the buyer who has material information regarding the property he is negotiating to purchase which is unknown by and detrimental to the seller must disclose his knowledge to the seller, such as unpaid delinquent property taxes or judgment liens which will cause him to lose the property.

Similarly, under a dual agency in which a broker is acting as the agent for opposing parties in the same transaction, the broker may not reveal any personal and privileged information from one party to the other. This is in addition to his existing statutory duty not to relate what price the buyer may be willing to pay or the seller may be willing to accept. [CC §2079.13(d), §2079.21]

Voluntary confidentiality:contract law prevails

Now consider an agent who is employed to locate a buyer under an exclusive right-to-sell listing with a seller. He receives an offer from a buyer submitted by the buyer’s agent. The offer is reviewed with the seller, and rather than promptly responding to the buyer’s agent, the listing agent decides to hold up on having the seller accept or reject the offer. Later, as anticipated, an offer from another prospective buyer is received, but at a lesser price. The agent uses the first offer as leverage to negotiate a higher price and sell the property to the second buyer.

Has the listing agent violated any agency duty by using the first offer as leverage to negotiate a better advantage for his seller?

No! The listing agent has no duty to keep the original purchase offer confidential. Nothing in his general agency duty owed to the prospective buyer who is not his client and submitted the first offer prohibits him from using the first offer to obtain a better price for his seller. Indeed, the fiduciary duty owed exclusively to the seller commands that he do his utmost to maximize the price his seller receives.

Editor’s note —Of course, if the broker in this scenario were a dual agent, he would be bound by his fiduciary duty to the prospective buyer not to release pricing information about the first purchase offer to either the seller or a backup buyer.

Often on the sale of an investment property, the seller wants information relating to his operations of the property, his management, and the very existence of the transaction, to be treated as confidential information which is not to be revealed to parties not involved in the transaction.

Consider the owner of an apartment building who enters into a listing agreement with a broker to sell the property. He receives a Letter of Intent (LOI) form from a prospective buyer’s agent which requests information about the property as part of a due diligence investigation on behalf of a prospective buyer. These items include:

  • rent rolls;
  • occupancy histories;
  • security and maintenance arrangements;
  • property management aspects;
  • title insurance;
  • loans on the property; and
  • any other information regarding the property’s condition.

Unless otherwise agreed, none of this information is required to be kept confidential by the buyer or the buyer’s agent.Thus, it may be in the seller’s best interest to make sure a confidentiality provision is entered into by the buyer to ensure the information about his property is not released or made available to persons other than the buyer’s agents and advisors. Likewise, a buyer may contract for confidentiality in either his letter of intent or directly on a purchase agreement should he want their purchase and investment activities with a seller and the listing agent not to be made public. [See first tuesday Forms 185, 159, and 257]

Client confidentiality to prevent a wrongdoing

Consider the tenant of a property who enters into a lease agreement which requires the landlord to improve the property to be occupied by the tenant. Both the landlord and the tenant are represented by separate brokers who are paid their fees for negotiating the lease transaction. After the landlord begins the tenant improvements (TIs), but before the tenant takes occupancy of the property, the tenant discloses to his agent that he is experiencing financial difficulties and is considering terminating his lease agreement.

Later, the tenant and the landlord enter into a mutual cancellation agreement terminating the lease agreement.

The landlord makes a demand on the tenant’s agent for lost rent, claiming the tenant’s agent owed him a fiduciary duty to disclose the tenant’s financial difficulties to the landlord since they impacted the lease agreement and the landlord’s earnings. The tenant’s agent claimed he was not liable to the landlord for lost rent since he owed no duty to the landlord to disclose confidential information about the tenant’s finances which arose after the lease agreement had been entered into.

Is the tenant’s agent liable to the landlord for failing to disclose the tenant’s financial difficulties arising after the binding lease agreement had been entered into?

No!The tenant’s agent owed no duty of care to the landlord, and was under no obligation to disclose information about the tenant’s finances he received as the tenant’s agent after the lease agreement had been executed. The fiduciary duty of the broker was owed only to the tenant, and the broker would have been in breach of that fiduciary duty had he revealed his client’s confidential financial information received by the broker after the lease agreement had been executed by all. [Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 CA4th 858]