Whether statutory or common law, a real estate agent’s legal duties to the client are designed to protection the client’s interests. Breach of duty is a legal concept of some complexity. For risk analysis purposes, however, the legal complexities of breach of duty claims are of little interest or concern. Every time a principal in a real estate transaction suffers a loss as a result of the transaction, the agents are exposed to the risk that the principal may attempt to shift the loss to the agents.
Looked at in this way, it is easy to see that risk analysis is more about understanding the principal’s interests than the agent’s duties. You can think of agency duties, whether set out in statute or labeled and defined by common law courts, as mechanisms used by society to assure that professionals who represent the important interests of others are honest and competent. It follows that real estate agents are most exposed to direct risks when the situation creates doubts as to honestly or competency.
If you look again at the legal duties of a real estate agent, you will quickly see that most of them are honesty-based duties. Although there is some overlap with competence, duties like loyalty, honesty, obedience, confidentiality, disclosure and accounting are honesty duties. Although expressed as affirmative duties, these duties are intended, and used, to curb dishonesty in situations where there is plenty of opportunity to be dishonest.
Loyalty is an issue when the agent deals with the principal from an undisclosed position of advantage. The duty of loyalty prevents the agent from taking unfair advantage of the client’s trust. Loyalty, therefore, matters only when there is a conflict of interest, real or potential, between agent and client. Analyzing the direct risks associated with the duty of loyalty is, therefore, mostly about identifying conflicts of interest.
Any transaction between agent and client creates a direct risk that must be managed. Agents are hired to deal on the behalf of the client, not their own behalf. When the agent deals with the client personally, they create an actual conflict between their interests and those of their client. It does not matter how fair or in the client’s interest the deal actually is. The conflict exists and resulting risk must be mitigated no matter the circumstance every time an agent contemplates any kind of transaction with a client. Mitigation of such risk is covered in the Risk Mitigation section of this subject.
There are, of course, any number of ways an agent can take advantage of their relationship with the client without becoming involved in a transaction with the client. Referring a client to a third-party service provider who pays the agent for the referral creates a conflict of interest every bit as much as dealing directly with a client. Indeed, any payment to an agent from any source other than the client creates risk. That is the case because, unless the principal knows of the payment, the client may assume the agent’s conduct and advice was motivated more by personal gain than professional responsibility.
Whatever the truth between personal gain and professional responsibility, the fact that a personal interest was not disclosed will tip the balance toward personal interest if something goes wrong. That makes disclosure of potential conflicts the key to loyalty. Mitigation of such undisclosed conflict of interest risk is covered in the Risk Mitigation section of this subject.
Unlike the duty of loyalty, the duty of obedience is rarely violated directly. It is rare for an agent to simply refuse to do what the principal asks. No matter how stupid or ill advised the client’s desires, the agent must obey (after advising the client appropriately) unless doing so violates some other duty to another person. Obedience only becomes a risk management issue when the seller wants the agent to do something, usually withhold information, in circumstances where the agent has a duty to disclose that information.
Understanding obedience risks is about understanding conflicting duties. Duties conflict if owed to more than one person. There is no such thing, in a legal sense, of a conflict of duties to the client. The client is always right and always has the last word unless and until that word would require the agent to violate the law. One must, therefore, look to the law to find duty conflicts. In Oregon, such a conflict is written right into the statutory duties of a real estate licensee because licensees owe the duty of honesty and fair dealing to ALL parties to a real estate transaction.
False statements made during the course of a real estate transaction raise the question of fraud. Fraud (technically, intentional misrepresentation) violates both the contract and tort duty of honesty. Fraud requires the intent to deceive another to their detriment. It is rare for sellers or agents to engage in outright fraud. It is not rare, however, for buyers (and their lawyers) to claim both the agent and the seller engaged in fraud by deliberately failing to disclose material information. From the buyer’s after-closing perspective, almost any failure to disclose an after-discovered defect can be seen as an attempt to trick the buyer into buying something they otherwise would not have purchased.
A famous judge once opined that “even a dog knows the difference between being tripped over and being kicked.” That is a nice expression of the difference between intent and mistake, but not really consistent with human nature. A buyer harmed by a seller’s misstatement (or lack of statement) will invariably assume intent to deceive. Once a buyer assumes intent to deceive, they will look for evidence of that intent in the seller’s and agent’s conduct during the transaction. Innocent actions viewed in retrospect after something has gone wrong, can look very intentional. How to avoid creating such evidence is what managing this kind of risk is about. This subject is covered in detail in the Risk Mitigation section of this subject.
The duty of confidentiality is much like the duty of obedience for risk analysis purposes. The duty is implicated anytime an agent discusses the object of the agency relationship with a thirdparty. In real estate, that means anytime an agent discusses the property, a client’s motivation or the terms of a transaction with anyone other than the client. Fortunately, the definition of confidential information (anything learned as an agent that is not in the principal’s interest to disclose or is not required by law to be disclosed) makes analyzing and controlling confidentiality risk fairly simple. Click here for a copy of the statutory definition of confidential information.
It is not uncommon for sellers to disagree with agents about what should or must be disclosed to buyers. Confidentiality is often used as a make-weight in these disagreements. Withholding information from buyers based on confidentiality duties raises the issue of “materiality” because Oregon license law requires the listing agent “[t]o disclose material facts known by the seller’s agent and not apparent or readily ascertainable to a party.” Basically, if the facts in question are material and not apparent or readily ascertainable, they are not confidential and, therefore, must be disclosed. Disclosure is once again the key. How to deal with confidentiality problems is covered in the Risk Mitigation section of this subject.
Loyalty, obedience and confidentiality are all disclosure-managed duties. The duty of reasonable care and diligence is not. The duty of reasonable care and diligence is breached by failure to protect or advance the client interests. To understand the risk created requires first understanding the client’s interests. The seller’s interests in a real estate transaction are mostly financial. The seller wants the best price and terms. Care and diligence on the listing side is, therefore, first about getting the seller the best price and terms.
If property is listed unreasonably high and doesn’t sell as a result, the seller may claim the agent did not exercise reasonable care and diligence in recommending a listing price. If a property is listed correctly but doesn’t sell, the seller may claim insufficient or incompetent marketing. What the seller is claiming is a financial lost due to the costs of staying on the market without a sale. Sellers who become aware of these costs may try to shift them to the real estate agent. At that point, the agent must be able to show the listing price was established with care and the property diligently marketed. How to do that is covered in the Risk Analysis section of this subject.
The same kind of lack of care and diligence claim can be created on the listing side risk if the property is listed too low for the market. Instead of lost opportunity costs, the seller will suffer a direct loss equal to the difference between the fair market value of the property and its sale price. This sort of claim is not uncommon in rapidly increasing markets. Again, the key is being able to show the price was established with care and the property diligently marketed. Mitigating of this kind of risk is covered in the Risk Mitigation section of this subject.
Care and diligence applies to any action taken as a real estate licensee, not just listing and marketing. On the listing side, agents also undertake to help the seller negotiate the contract and to assist the seller in performing the resulting agreement. Care and diligence attach to each of these undertakings. That means protecting and advancing the seller’s interests during negotiations and performance.
Much, of course, will depend on the exact circumstances under which the contract is negotiated and performed. The key to managing risk in negotiation and performance of contracts, however, is going to be making certain important decisions are made by the client, not the agent, and that the client has sufficient information to make the decisions. How to prove transaction decisions were the client’s and not the agent’s and that the client had sufficient information to make the decisions is covered in the Risk Mitigation section of this subject.
Although not often appreciated by real estate licensees, diligence is also at the bottom of most misrepresentation claims. The seller, and the seller’s agent, must exercise care in determining what is said or is not said to the buyer. That means deciding what facts are material and have to be disclosed. Another part of diligence is discovery of material facts. Both discovery and disclosure of material facts involve care and diligence.
A “material” representation is: “A representation relating to the matter which is so substantial and important as to influence the party to whom it is made.” In real estate, that means anything that would influence a buyer’s willingness to purchase, or how much might be offered. Money is one way to measure materiality. Anything that might cost the buyer real money to repair or that might, once discovered, substantially devalue the property, is material. The size of the property and location of the boundaries, for instance, is always material. A detailed discussion of materiality can be found in the Risk Mitigation section of this subject.
Generally, there is no legal duty for real estate licensees to inspect or investigate property to discover defects. In Oregon, the statutory section that sets out agency duties specifically states that: “Nothing in this section implies a duty to investigate matters that are outside the scope of the real estate licensee’s expertise, including but not limited to investigation of the condition of property, the legal status of the title or the owner’s past conformance with law, unless the licensee or the licensee’s agent agrees in writing to investigate a matter.” Click here to review statutory agency duties. This statute protects Oregon agents as long as the agent stays within the scope of their license and does not miss defects that would be apparent to an agent operating within the scope of their license.
Staying within the scope of a real estate license means refusing to perform tasks other professionals are trained or licensed to perform. The list of other professionals includes appraisers, surveyors, financial advisors, tax consultants, lawyers, engineers, home inspectors, mortgage brokers and the like. Real estate transactions implicate each of these other professions. Clients will invite real estate agents to help them with problems or decisions in each of these areas. Such invitations create substantial risk for licensees. How that risk can be controlled is covered in the Risk Mitigation section of the subject.
Accounting is the final statutory duty on the listing side that creates risk for the listing agent. Accounting is a duty that flows logically from the duties of loyalty, disclosure and diligence. The duty to account requires the agent to keep track of (account for) any money or property of the client’s coming into the agent’s hands as a result of the agency. On the selling side, there is usually not much opportunity for the client’s money to end up in the agent’s hands and, therefore, accounting is not a big duty on the listing side.
Although not a big duty on the listing side, the duty of accounting must always be taken seriously. The duty to account can be violated innocently by simply not keeping close track of the client’s money. For instance, money given an agent to pay inspectors or contractors or other third party service providers during a transaction must be recorded and accounted for to the penny. Unfortunately, failure-to-account claims can also be the result of the agent deliberately hiding or otherwise misappropriating their client’s funds. Avoiding such claims and proper accounting are covered in the Risk Mitigation section of this subject.
In addition to the risks created by agency duties, there is also a direct risk that flows from just being in the business of providing real estate services. This risk is created by the Unlawful Trade Practices Act. The Unlawful Trade Practices Act is state consumer protection legislation that protects consumers from sharp business practices. It creates a separate duty that applies to all businesses in Oregon to not engage in unlawful business or trade practices.
According to ORS 646.607, “[a] person engages in an unlawful practice when in the course of the person’s business, vocation or occupation the person: (1) Employs any unconscionable tactic in connection with the sale, rental or other disposition of real estate, goods or services, or collection or enforcement of an obligation; (2) Fails to deliver all or any portion of real estate, goods or services as promised, and upon request of the customer, fails to refund any money that has been received from the customer that was for the purchase of the undelivered real estate, goods or services and that is not retained by the seller pursuant to any right, claim or defense asserted in good faith. This subsection does not create a warranty obligation and does not apply to a dispute over the quality of real estate, goods or services delivered to a customer; or (3) Violates ORS 401.107 (1) to (4).”
In addition to these general unlawful practices, ORS 646.608 sets out some sixty-one different actions that are unlawful when in the course of the person’s business, vocation or occupation. The unlawful acts covered by ORS 646.608 fall into two general categories: Misrepresentation of goods, services or price and violation of specific other statutes. All real estate licensees are familiar with misrepresentation claims. The provision of ORS 646.608 simply add another means of complaining about the same behavior: lack of care in making material representations. The specific acts covered by ORS 646.608 include everything from violating state anti-discrimination statutes to making phone calls in violation of state “no call” statutes. Often, the Unlawful Trade Practices Act is just an enforcement mechanism for other laws.
Violations of the Unlawful Trade Practices Act must be “willful.” Under the Act, a “willful violation,” occurs “when the person committing the violation knew or should have known that the conduct of the person was a violation.” Because of the “should have known” language, Oregon courts have interpreted this provision as establishing a simple negligence standard. That means that real estate licensees must use reasonable care in their business to avoid a violation of the Act.
The employment of an “unconscionable tactic” under the Act includes, but is not limited to, actions that: “(a) Knowingly takes advantage of a customer’s physical infirmity, ignorance, illiteracy or inability to understand the language of the agreement; (b) Knowingly permits a customer to enter into a transaction from which the customer will derive no material benefit; or (c) Permits a customer to enter into a transaction with knowledge that there is no reasonable probability of payment of the attendant financial obligation in full by the customer when due.” There is very little case law on this provision of the Unlawful Trade Practice Act, but “unconscionable” generally means anything that is shocking, unfair or unjust. Unconscionable unusually involves deceit. That is deliberately misleading a consumer to their detriment.
The second unlawful act covered by the Unlawful Trade Practices Act that impacts real estate licensees is the failure to deliver all or part of real estate or goods as promised, or failing to refund money due the consumer. Advertising something that doesn’t for some reason get delivered is the most common way a real estate licensee gets involved with the Unlawful Trade Practice Act. The specific misrepresentation provisions of ORS 646.608 cover specific misrepresentation in the same way subsection 607 covers more general misrepresentation. Because the Act requires only negligence, the two sections of the Act place a separate legal duty on real estate licensees to avoid misleading advertising or representations in real estate transactions. For instance, when the seller takes the refrigerator the listing agent advertised as “included” in the sale, the question becomes whether the listing agent knew or should have known the seller intended to take the refrigerator and failed to correct their representation of what was included in the sale. Any representation, oral or otherwise, that concerns what is being sold, or its value, attributes or quality, raises potential Unlawful Trade Practices claims if that representation was made without exercising adequate care.
Lawyers who represent consumers love the Unlawful Trade Practices Act. The “should have known” standard is often easy to meet with hindsight. The Act allows punitive damages in some cases. Best of all, as far as the lawyers are concerned, the Act provides for attorney fees. If the plaintiff recovers anything under the Act, even the minimum $200 for a violation that causes no real monetary damage, the defendant has to pay the plaintiff’s legal fees. This provision essentially places a bounty on the heads of real estate licensees because lawyers will take a case that may be worth very little knowing that any win will get them their full fees. Fortunately, the statute of limitation for an Unlawful Trade Practices claim is one year from the discovery of the unlawful method, act or practice. How to deal with the risk created by the Unlawful Trade Practices Act is covered in the Risk Mitigation section of this subject.
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