The evolution of the “rogue agent” defense in real estate

Real Estate Compliance Consultant and former California Department of Real Estate (DRE) Investigator, Summer Goralik, outlines best compliance practices when a real estate agent strays from their broker’s policies. Learn more by visiting the original post on her blog Expert DRE Compliance.

When it comes to real estate, the term “rogue agent” carries special meaning. It refers to a real estate agent who operates inconsistent with, or against the grain of, their brokerage, or worse, engages in activities which run afoul of the Real Estate law. In other words, a rogue agent may fail to adhere to their broker’s policy and procedures, transaction requirements, advertising guidelines and/or reporting rules. Given this work ethic and general disregard, it is no surprise that a rogue real estate agent may find themselves in legal trouble vis-a-vis a civil claim or under regulatory scrutiny by the California Department of Real Estate (DRE). The purpose of this article is to unpack what I call the rogue agent defense and hopefully educate agents about the myriad dangers of going rogue in real estate.

I should preface this piece by pointing out that a broker, sole proprietor or corporation, is always and ultimately responsible for the supervision and management of their agents and licensed activities. Even though there may be rogue agents in the industry, this does not change or relieve a broker’s statutory duty to perform reasonable supervision and ensure compliance. These are fundamental tenets that all responsible brokers should know and practice. However, for the benefit of this discussion, let’s put broker supervision aside and strictly unravel the rogue agent concept and what it means for everyone involved.

As a real estate agent offering and performing licensed activities on behalf of a brokerage, it is tantamount that the agent not only follows the broker’s rules and expectations, but also strictly abides by the law. In fact, when an agent first onboards and affiliates their license with a brokerage, they are usually required to review the broker’s policy and procedures as well as acknowledge their receipt and agreement to abide by them as a condition of their brokerage-agent relationship. Coincidentally, if an agent fails to adhere to their broker’s policies or company requirements, then it is almost inevitable that they are likely violating the law too, as so many brokers’ internal rules mirror statutory duties, the standard of care required of licensed real estate professionals, and best practices in the industry.

Interestingly enough, a rogue real estate agent is more than just an expression. As the title of this article suggests, it’s actually a defense, and one that may be adopted by a real estate brokerage during a DRE investigation involving one of their agents. As a real estate compliance consultant and former DRE Investigator, I have witnessed this defense evolve first hand. To illustrate, let’s walk through a simple scenario.

The rogue real estate agent

A consumer (buyer) files a complaint with the DRE against their agent, who not only represented them on their real estate purchase, but also represented the seller and acted as a dual agent. The complaint alleges serious violations such as misrepresentation and the failure to disclose material facts. Upon receipt of the complaint, the DRE initiates an investigation and contacts the agent. As part of the investigation, the agent will be required to provide a written, chronological summary about the transaction along with any answers to specific questions raised by the Department.

Needless to say, when an agent is being investigated by the DRE, the broker will also surely be notified and required to provide the Department with not only a response to the allegations, but a complete copy of the transaction file which is the subject of the complaint. Additionally, with any complaint, it is an opportunity for the Department to review and evaluate a broker’s supervision over their agents and licensed activities. Therefore, in addition to the complaint, the DRE may also decide to take a more comprehensive look at the entire brokerage operation.

Specifically, the Department may collect information regarding the broker’s system of supervision, including their methods of review and established policies and procedures. Accordingly, the DRE may also ask the broker to explain how they enforce or monitor compliance with their policies. Therefore, for the broker, one complaint against one agent could actually trigger a deeper dive into their entire real estate business and practices.

In consideration of the stakes involved, once the DRE’s notice is received by the broker, several important things usually happen next. The broker will normally take prompt action by investigating the matter internally, contacting the agent to obtain their version of events, and reviewing and evaluating their transaction file documents for both company and legal compliance. The broker may also bring in an outside consultant or refer to legal counsel to further assess the matter and provide advice. As it turns out, and based upon my experience, it is also during this period of internal review that the rogue agent defense often comes into play. Let me explain further.

To be clear, in this example, the broker first learned of the complaint, and the underlying issues between their agent and the buyer, when they received the DRE’s letter. They had no prior knowledge about the issues involved or violations alleged. Also, for the sake of argument, in this case, the responsible broker does actively review, supervise and manage its licensees, transactions and activities, as well as employ an effective system of supervision in order to monitor and ensure compliance. Moreover, it is against this backdrop that after the broker fully evaluates the transaction and complaint, they determine that the agent made fundamental mistakes, some of which could have been avoided or at least mitigated if the agent had simply followed company policy.

Notably, the agent failed to immediately alert the broker to the transactional dispute with the buyer which occurred mid-escrow. The agent could have reported this information to the broker at the time of the incident, sought their guidance or counsel, and potentially resolved or mitigated the problem. Put another way, although the agent was aware of the brokerage policy, and agreed to abide by it, the agent’s failure to report or disclose the transaction issue to the broker may have unnecessarily put the brokerage at risk and at the forefront of a DRE investigation.

It is precisely at this moment in the investigation when the broker, while defending themselves in connection with the DRE’s inquiry and examination, may accuse the licensee of failing to abide by the broker’s requirements, violating company policy, and essentially going rogue. By utilizing the rogue agent defense, the broker takes the position that the agent’s actions are not a symptom of lack of supervision on their part, but rather, directly related to, and the result of, the agent’s willful disregard for the broker’s policies and Real Estate law. Barring the Department does not find any evidence of violations committed by the broker, guilty knowledge about the complaint matter, lack of supervision and/or any pattern of misconduct by the company or its agents, the rogue agent defense can be quite effective and may actually relinquish a broker from further DRE scrutiny.

Given the above illustration, it is important to point out that when the DRE is investigating an agent, the most ideal situation is one where the agent has the broker’s full support in connection with their position and rebuttal to the consumer’s allegations and complaint. This consolidated front, between the broker and agent, is often a key ingredient to challenging and dismissing claims. Of course, in order to garner such brokerage support, the agent’s activities and practices must be in line with the company’s policy and procedures, and both evidence and reinforce the broker’s overall efforts to maintain a compliant real estate operation.

Compliance matters

Admittedly, even a law-abiding agent with good intentions could be guilty of not reading their broker’s policy and procedures, or failing to recognize that a transaction issue warranted their broker’s attention and review. Furthermore, I hope this article serves as an important reminder to all agents to make sure they are operating in line and consistent with their company’s operation and rules. Also, if you are not sure, please make sure, as guesswork in the real estate industry is quite dangerous and can be costly.

Finally, it should be mentioned that the rogue agent defense loses significant value when real estate agents follow these simple rules:

Please read (maybe twice) your broker’s policy and procedures, and make sure you fully understand what they mean and require of you before acknowledging your agreement with them in writing. If you are confused about any of the rules, please remember to ask questions. You might even document your questions and the answers that you obtain from the brokerage and keep for your future reference and records.
Familiarize yourself with any mandatory reporting required by your brokerage. These reporting expectations are usually outlined in your policy manual, or may be located in your relationship agreement with the brokerage (e.g., employment or independent contract agreement). Typically, there are specific events that trigger such reporting rules, and if you study these requirements up-front, you will likely not forget when the time actually comes to report an issue to your broker.
Seek immediate help and guidance from your broker if you ever feel not proficient or competent when it comes to a specific type of real estate transaction, contract, disclosure, form, or practice; have questions about required or appropriate procedures or processes; or have been asked a question by your client that you don’t know how to answer or feel unsure about. The reality is, if you fail to seek advice and direction from your broker at these critical junctures, you may be putting the company at risk and ultimately subjecting your real estate license to potential discipline.
If a legal issue, dispute or consumer complaint arises in connection with a real estate transaction, please immediately report this information to your broker. The sooner you bring your broker into the matter, the better off you will be. The disclosure of this information to your broker affords them the opportunity to provide guidance and direction, and may even enable them to mitigate or resolve the issue completely. Also, even if the issue cannot be resolved, the broker’s timely awareness of the problem undoubtedly provides the company the ability to react more quickly, immediately correct or address any potential compliance issues, and seek legal counsel prior to the issue rising to the level of a civil or regulatory complaint.

In closing, the purpose of this article is certainly not to scare agents, and the reality is, thoughtful and compliant-minded agents have no reason to fear the rogue agent defense. That said, I hope this piece has hopefully highlighted the importance of adhering to, and/or continuing to stay compliant with, their company’s internal policies. Bottom line, if an agent’s activities strictly abide by their broker’s policy and procedures, they are likely operating on the right side of compliance.

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