The duty to “deal” honestly and in good faith establishes a duty of personal integrity during transactions. “Honesty” is pretty simple: you can’t lie to clients and customers during real estate transactions. “Good faith” is more complicated. Good faith, according to Black’s Law Dictionary, “encompasses an honest belief, the absence of malice and the absence of a design to defraud or to seek an unconscionable advantage.”
In Oregon, “good faith” is required in the performance of all contracts. A court faced with interpreting the statutory duty of a real estate licensee to deal honestly and in good faith would, no doubt, turn to contract case law imposing the common law duty of good faith in the performance of contracts. That means understanding good faith in the performance of contracts.
Contractual “good faith” isn’t just about honesty. Certainly, honest people are more likely to act in good faith and lying is certainly one way to act in bad faith. But contractual good faith is really about acting in a way that gives effect to the reasonable expectations of the parties to the transaction. To act with good faith you must understand the reasonable contractual expectations of the other party and give those expectations effect.
Good faith is a hard one for people and not just real estate licensees. Let me give you an example. A struggling flower grower quits paying its hothouse gas bill. Six months later, the gas company starts trying to collect its $50,000 bill. The grower tells the gas company they’ll have to wait because the flower growing business is cyclical and flower growers make most of their money right before Valentine’s Day. They are trying, says the grower, to get a second mortgage on their land so they can pay their debts and make it to Valentine’s Day.
Notwithstanding, or maybe because of, the grower’s explanation, the gas company files a lien on the grower’s property for the $50,000. They then send the grower a letter saying they will remove the lien and continue the supply contract only if the grower pays them $100,000. The grower doesn’t have the $100,000 and can’t get a loan because of the lien, so they go out of business. The grower then sues the gas company for breach of the duty of good faith in performance of the supply contract – and wins.
What the court determined in the flower grower case was that the gas company’s letter demanding twice the money due was an “excessive demand” intended to force the grower out of business by making his performance of the supply contract impossible. This result startles people, especially real estate licensees.
There is a sort of “all is fair in love, war and real estate contracts” belief that is alive and well in the industry. Think about all the stories you hear about cute ways to get a client out of a contract. Most of these stories involve clients telling agents I want out for reason X and the agent telling the client OK but let’s tell them Y. That is transactional bad faith.
Agents who get into this sort of thing often feel stuck between their duty to protect the client and their duty to deal honestly and in good faith with the other party. How can this sort of thing be resolved? An agent can’t just tell the other side the client’s real motive. Nor can they lie to the other side about motive. So how do you handle the duty of good faith and honesty?
Good faith and honesty are a lot easier for a real estate agent to deal with when they will realize they have a business problem, not a legal problem. Tell the client that terminating contracts is a serious legal matter beyond your expertise. Tell them they may want to consult an attorney before deciding. But if they decide that is what the want to do, you can send the other side a document stating their decision in their own words. You need to explain to your client that your duty of honesty to all parties will prevent you from lying on their behalf. (It is not a lie to send the letter because that is for good or ill what they want to do.) Then do a follow up letter to the client that says this is what you instructed me to do.
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