What is fiduciary duty?

Fiduciary duty is the duty owed by an agent to act in the highest good faith toward the principal and not obtain any advantage by the slightest misrepresentation, concealment, duress or undue influence.

As a fiduciary, the broker’s and agent’s conduct under the employment are equated to the

conduct required of a trustee acting on behalf of a beneficiary. This fiduciary duty, also called agency, survives the termination of the contractual employment relationship. [Calif. Civil Code §2079.16]

Also, an oral agreement to perform brokerage services on behalf of a client imposes an agency law obligation on the broker and agents to act as fiduciaries. However, the client’s oral promise to pay a fee does not entitle the broker to enforce collection of the fee due from the client.

A fee agreement employing a broker to purchase or sell real estate, lease a property for over one year, or arrange trust deed financing is controlled by the rules of contract law.

Thus, before a broker can enforce their right to collect a fee, the fee agreement is to be:

  • in writing; and
  • signed by the client. [CC §1624(a)(4)]

Agency duties owed to sellers by a seller’s agent

Every exclusive listing agreement entered into by an agent on behalf of their broker documents an employment which established a client relationship. The employment imposes special agency (fiduciary) duties on the broker and the agent to use due diligence.

Due diligence is a continuous effort by the broker and their agents to meet the objective of the employment.

The promise of due diligence is the consideration a broker and their agents owe their client when rendering services in exchange for employment as the exclusive representative of the client. If the promise to use diligence in the employment is not stated in the exclusive listing agreement, it is a duty implied as existing in the relationship.

The broker with authority to be the exclusive representative of a client takes reasonable steps to promptly gather all material facts about the property in question which are readily available to the broker or the broker’s agent.

After gathering factual information about the integrity of the property, the broker’s agent proceeds to do every reasonable and ethical thing to pursue, with utmost care, the purpose of the employment.

Guidelines and checklists

Following are some — but certainly not all — steps a broker and their agent may undertake to fulfill their employment responsibilities owed to the client. They include:

  1. A property profile of the seller’s title from a title company in order to identify all owners needed to list, sell and convey the property.
  2. A Transfer Disclosure Statement (TDS), also known as a condition of property disclosure sheet, filled out and signed by the seller. [See RPI Form 304]
  3. A home inspection report (prepared by a home inspector) paid for by the seller and attached to the TDS before the seller’s agent signs the TDS.
  4. A natural hazard disclosure (NHD) on the property from a local agency or a vendor of NHD reports, paid for by the seller, and reviewed and signed by the seller and the seller’s agent. [See RPI Form 314]
  5. An annual property operating data sheet (APOD) covering the expenses of ownership and any income produced by the property, filled out and signed by the seller, together with a rent roll and copies of lease forms which the owner uses, to be included in the marketing (listing) package only after reviewing the seller’s data. [See RPI Form 352 and 562]’
  6. Copies of all the Covenants, Conditions and Restrictions (CC&Rs), disclosures and assessment data from any homeowners’ association involved with the property. [See RPI Form 150 §11.9]
  7. A termite report and clearance paid for by the seller.
  8. Any replacement or repair of defects noted in the home inspection report or on the TDS, as authorized and paid for by the seller.
  9. An occupancy transfer certificate (including permits or the completion of retrofitting required by local ordinances), paid for by the seller.
  10. A statement on the amount and payment schedule for any special district property improvement bonds which are liens on the property (shown on the title company’s property profile).
  11. A visual inspection of the property and a survey of the surrounding neighborhood by the seller’s agent to become informed about readily available facts affecting the marketability of the property.
  12. Advising the seller about the marketability of the listed property based on differing prices and terms for payment of the price, and for property other than one-to-four residential units, the financial and tax consequences of various sales arrangements which are available by using alternative purchase agreements, options to buy, exchange agreements and installment sales.
  13. A marketing package on the property compiled by the seller’s agent and handed to prospective buyers or buyer’s agents before the seller accepts any offer to purchase the property. This consists of copies of all the property disclosures required to be handed to prospective buyers or the buyer’s agent by the seller and seller’s broker.
  14. A marketing plan prepared by the seller’s agent and reviewed with the seller for locating prospective buyers. This plan may include distributing flyers, disseminating property data in multiple listing services, newspapers and periodicals, broadcasts at trade meetings attended by buyer’s agents, press releases to radio or television, internet sites, posting “For Sale” signs on the premises, hosting open house events, posting on bulletin boards, mailing to neighbors and using all other advertising media available to reach prospective buyers.
  15. A seller’s net sheet prepared by the seller’s agent and reviewed with the seller each time pricing of the property is an issue. Issues may include obtaining a listing, changing the listed price, reviewing the terms of a purchase offer or when substantial changes occur in charges or deductions affecting the net proceeds from a sale since the net sheet discloses the financial consequences of the seller’s acceptance of a purchase agreement offer. [See RPI Form 310]
  16. Informing the client of the listing agent’s sales activities by weekly due diligence communications advising what specifically has been done during the past several days and what the seller’s agent expects to do in the following days, as well as what the seller may do in response to comments taken by the seller’s agent from buyers and their agents, and to changes in the real estate market.
  17. Keeping records in a client file of all communications, activities and documents generated due to the listing.

Agency duties owed to buyers by a buyer’s agent

 Special agency duties are owed to a buyer when a broker and their agents undertake to locate property on the buyer’s behalf. The duty to the buyer first arises when the broker:

  • enters into an exclusive right-to-buy agreement with the buyer; or
  • presents property information to an unlisted buyer who they have agreed to assist by locating qualifying properties suitable to the buyer.

When representing a buyer under a written exclusive right-to-buy employment agreement, the broker (and their agents) has entered into a bilateral employment agreement. Such an employment obligates the broker, through their agents, to exercise due diligence by way of a constant and continuing search to locate qualifying properties, while keeping the buyer informed of their progress.

Without an exclusive right-to-buy listing, the brokerage duties which exist to locate properties for a buyer are best-effort obligations created by an oral (or written) open listing, called a unilateral employment agreement. A best-effort obligation requires no affirmative action (diligence) on the part of the broker’s office to locate property.

However, under a buyer’s listing, be it a written exclusive or oral open, the act of delivering property information to the buyer they are assisting obligates the broker and agents to use due diligence in their efforts to:

  • gather readily available data on the property under review;
  • assist in the analysis and consequences of the property data gathered; and
  • advise the buyer regarding the property and any proposed transaction in a conscientious effort to act honestly, and to care for and protect the buyer’s best interests.

When acting as the buyer’s agent regarding the acquisition of a particular property, due diligence includes:

  • disclosing facts about the integrity of the property; and
  • recommending investigative activity which the agent knows might influence the buyer’s conduct in negotiations.

History of the word

The term “fiduciary” comes from the Latin root fidere meaning “to trust.” In Roman law, fiducia was “a right transferred in trust.” During the 1600’s fiduciary meant “holding something in trust”.