Mitigating risk created by the duty of loyalty means using proper disclaimers and disclosures anytime an agent is involved in a transaction with their principal or otherwise benefits personally from the agency relationship in a way the client doesn’t know about. Click here for a complete discussion of the duty of loyalty. A listing agent buying the listed property, an agent representing a buyer relative, an agent taking a kickback on a home warranty purchased by a client, an agent taking an interest in property that is purchased though the agent are all classic examples of loyalty problems. Each situation creates a potential conflict between the interests of the principal and the interests of the agent.
Conflicts of interest are mitigated in one of two ways. The first is to avoid the conflict – don’t buy your own listing, don’t represent the seller and a relative at the same time, don’t take kickbacks from third-party providers, don’t take undisclosed bonuses and don’t be an agent and an investor in the same deal. Avoiding conflicts is always the safest approach. Unfortunately, conflicts cannot always be avoided or avoiding them may not be possible or even in the best interests of the client.
The second way to mitigate conflicts of interest is to proceed only after giving full disclosure and obtaining the knowing consent of the principal. “Full disclosure” and “knowing consent” are legal terms of art taken from the common law. Full disclosure means all of the facts relevant to the client’s understanding are disclosed. “Knowing consent” means the client has sufficient understanding to make an informed decision. Every agent should be proficient in making full disclosure/knowing consent conflict of interest disclosures.
A conflict of interest disclosure is effective only if it provides evidence that the client knowingly consented to a specific conflict in a specific situation. Take, for instance, the time honored tradition of disclosing that the buyer’s agent is “related to” the buyer. Scribbling “agent is related to buyer” on a sale agreement is the historic manner of handling this kind of disclosure. It is also the perfect example of an ineffective conflict of interest disclosure.
The “related to buyer” disclosure was born in the long gone era of seller only representation when everyone represented the seller – even agents from offices other than the listing office. In those “sub-agency” days of old, an agent from another office writing a deal for a buyer the agent was related to had an obvious conflict of interest because the agent actually represented the seller. Of course, the agent didn’t really have any loyalty to the seller and the seller didn’t really expect any. Scribbling “buyer related to agent” on the offer was thought fair disclosure in that “sub-agency” context.
Today, the “related to buyer” situation is more complicated. A buyer agent who does not represent the seller has no conflict to disclose just because they are related to their buyer. A buyer-only agent must put the buyer’s interests first whether the buyer is related to the agent or not. There is no conflicting duty to the seller. Notwithstanding the lack of actual conflict, the REALTOR® Code of Ethics is thought to require the “related to buyer” disclosure whether the buyer’s agent also represents the seller or not. Thus, needless “related to buyer” disclosures are still seen all the time in real estate and will no doubt continue for the foreseeable future.
Needless “related to buyer” disclosures aren’t a big problem. That is, they aren’t a big problem as long as they didn’t lead to inadequate disclosure when an actual conflict really does exist. Unfortunately, this is often the case. Take, for instance, the situation where the listing agent’s spouse wants to buy the listed property. “Agent is related to buyer” is not sufficient disclosure in this situation. That is the case because it does not inform the seller, whom the agent represents, of the actual conflict.
When the listing agent’s spouse is the buyer, the buyer may have access to the commission the seller is paying their agent. The agent may also benefit financially from the spouse’s purchase. A seller armed with that understanding will negotiate for a reduced commission or a higher purchase price. Telling your seller client you are “related to” the buyer is not the same as telling them “the buyer is my spouse.” “Related to” labels the conflict but does not inform the seller of the actual conflict. A “related to” disclosure is inadequate when the conflict involves a spouse.
“Related to” is too narrow a disclosure when the relationship is a spouse – and probably even a parent or a child – because representing a spouse (parent or child) focuses on the relationship rather than the conflict. It is the actual conflict that must be disclosed, not just the relationship that creates the conflict. Take for instance a listing agent who also represents their life-long best friend in the purchase of property they have listed. They may not be “related,” but the potential conflict should be obvious and disclosed. “Related to” is just a subset of potential conflicts where the agent’s loyalty may be called into question. To mitigate the risk created, the agent must focus on the conflict itself and disclose the potential consequences.
Conflict disclosures are similarly complicated when the listing agent wants to purchase their own listing. Over the years, a sort of Bullwinkle “agent is purchasing with the intent to make a profit” disclosure has become standard disclosure fare. That phrase is nice, but misses the real point. A listing agent who wants to purchase their own listing has a very serious conflict of interest that has little to do with wanting to make a profit.
When an agent negotiates with their own client, the agent is on both sides of the deal. The agent is engaged in dual agency as well as a personal transaction. Such a dual conflict cannot be disclosed with something as tepid as warning the client the agent intends to make a profit. That, at best, handles the personal transaction part of the disclosure. Something also must be said about the dual agency conflict. What is needed is evidence the client knowingly consented to both conflicts.
When an agent purchases their own listing, the client will owe a commission to the agent. The agent can apply the commission to the purchase price. They can also, as a real estate professional with complete knowledge of the seller’s situation, negotiate from a position of superior knowledge. The agent, unlike other buyers, can use superior knowledge and, if the seller allows dual agency, the commission to get a real bargain. The seller, as the principal, is entitled to understand the true situation. Therefore, the agent must disclose much more than that they intend to make a profit.
An agent purchasing their own listing should disclose the commission issue inherent in continuing the representation. The agent should also disclose that they are privy to confidential information regarding the property and the seller’s financial condition. It would be a very good idea to warn the client to seek legal or financial advice. Finally, the little “intends to make a profit” disclosure is always nice. Here is an example of an adequate listing-agent-purchasing-their-own-listing disclosure:
“The buyer in this transaction is the listing agent. As the listing agent, the buyer has been privy to information regarding the property, the seller’s motivation to sell and current market condition not available to other buyers. Seller has consented to the agent representing both the seller and himself in this transaction understanding that agent may apply the real estate commission paid by the seller to agent’s transaction costs. Agent is purchasing the property with the intent to resell the property for a profit. Seller is advised to seek such separate legal and financial advice regarding this transaction as they deem appropriate.”
The agent could, of course, forego the commission disclosure by ending the agency relationship and taking no commission. Even then, a disclosure would still be a very good idea so there was no confusion about the relationship after the fact. Here is an example of a listing agent purchasing their own listing disclosure where the listing agent foregoes the commission:
“The buyer in this transaction was the listing agent. As the listing agent, the buyer has been privy to information regarding the property, the seller’s motivation to sell and current market condition not available to other buyers. Seller and agent have agreed to terminate their agency relationship, including all commissions, and proceed with each party representing their own interests. Buyer is purchasing the property with the intent to resell the property for a profit. Seller is advised to seek such separate legal and financial advice regarding this transaction as they deem appropriate.”
Conflict of interest disclosures always follow the same pattern. That pattern is for the agent to disclose the actual conflict, the potential consequences of the conflict and that the client consents to the conflict. A separate legal and financial advice clause is always a good idea. If you apply this conflict disclosure pattern to the spouse in listing agent’s buyer scenario discussed above, a full disclosure/knowing consent disclosure might look like this:
“The buyer in this transaction is the listing agent’s spouse. Although the agent has not and will not disclose confidential information to the buyer, and will represent both parties under a separate Disclosed Limited Agency Agreement, seller understands that the close relationship between agent and buyer may be perceived as a conflict of interest. It may also allow the buyer to benefit indirectly from the commission paid the listing agent by the seller. Seller also understands that the listing agent may personally benefit indirectly from the transaction. By signing the Disclosed Limited Agency agreement, Seller has consented to the listing agent representing their spouse. Seller is advised to seek such separate legal and financial advice regarding this transaction as they deem appropriate.”
Now that you know the pattern, it should be easy to construct conflict of interest disclosures for other situations. Take, for example, the close personal friend situation mentioned earlier. Our disclosure pattern is to disclose the conflict, the potential consequences of the conflict and that the client consents to the conflict. As usual, we will include a separate legal and financial advice clause because it is always a good idea. Following the pattern, a close personal friend disclosure might look like this:
“The buyer in this transaction is the listing agent’s close personal friend. Although the agent has not and will not disclose confidential information to the buyer, and will represent both parties under a separate Disclosed Limited Agency Agreement, seller understands that the close relationship between agent and buyer may be perceived as a conflict of interest. By signing the Disclosed Limited Agency agreement, Seller has consented to the listing agent representing their close personal friend. Seller is advised to seek such separate legal and financial advice regarding this transaction as they deem appropriate.”
The key to mitigating risk created by the duty of loyalty is to be aware of both actual and potential conflicts of interest. An actual conflict is one where the agent will personally benefit in the transaction. A potential conflict exists anytime the loyalty of the agent could be questioned. A spouse client in a dual agency situation creates both actual and potential conflicts. A close personal friend relationship creates only a potential conflict unless the agent intends to share part of their commission with their friend. Anything that viewed with hindsight might call the agent’s loyalty into question should be dealt with by a full disclosure/knowing consent disclosure. That means everything from the old “related to” disclosure, to the buyer is a personal friend to the inspector is my brother-in-law to buyer is agent’s spouse. The relationship may create the conflict, but what is disclosed is not the potential conflict, its potential consequences and the principal’s consent.
Back to Top