What is a conflict of interest?

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 fulfill their 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 conflicting sources are required to be disclosed to the client. This includes compensation in the form of:

  • professional courtesies;
  • familial favors; and
  • preferential treatment by others toward the broker or their agents. [See RPI Form 119]

Alternatively, the referral of a client to a financially controlled business, owned or co-owned by the broker, needs to be disclosed by use of an affiliated business arrangement (ABA) disclosure. [See RPI Form 519]

A conflict of interest addresses the broker’s personal relationships potentially at odds with the agency duty of care and protection owed the client. Thus, a conflict of interest creates a fundamental agency dilemma for brokers; it is not a compensation or business referral issue.

Situations involving a conflict of interest

A conflict of interest is disclosed by the broker at the time it occurs or as soon as possible after the conflict arises. Usually, the conflict arises prior to providing a buyer with property information or taking a listing from a seller.

The disclosures create transparency in the transaction. It shows the client the bias held by the broker which, when disclosed, allows the client to take the bias into consideration in negotiations. The disclosures and consent does not neutralize the inherent bias itself. However, it does neutralize the element of deceit which would breach the broker’s fiduciary trust if left unclosed.

A conflict of interest arises and is disclosed to the client when the broker:

  • has a pre-existing relationship with another person due to kinship, employment, partnership, common membership, religious affiliation, civic ties, or any other socio-economic context; and
  • that relationship might hinder their ability to fully represent the needs of their client.

Relatives participation in a real estate transaction

A seller’s broker needs to disclose their acquisition of any direct or indirect interest in the seller’s property. The broker also discloses whether a family member, a business owned by the broker, or any other person holding a special relationship with the broker will acquire an interest in the seller’s property. [See Form 527 §3.6]

A broker cannot act for more than one participant in a transaction, including themselves, without disclosing their dual agency and obtaining the client’s consent at the time the conflict arises. [Calif. Business and Professions Code  §10176(d)]

A seller’s broker also has an affirmative duty to disclose to the seller their agency or other conflicting relationship they might have with the buyer. The duty to disclose exists even if the seller fails to inquire into whether the broker has a relationship with the buyer.

Further, failure to disclose a broker’s personal interest as a buyer in a transaction when they are also acting as a broker on behalf of the seller constitutes grounds for discipline by the Department of Real Estate (DRE). [Whitehead v. Gordon (1970) 2 CA3d 659]

History behind the Word

The word conflict originated in Latin as conflictus, meaning a striking together.

In the early 15th century, the term meant “armed encounter, battle” in Old French. The phrase conflict of interest was in use in the English language by 1743.