The duties of obedience, confidentiality and disclosure become a risk management issue when a client wants an agent to withhold information in a transaction, or the agent withholds information themselves. When information is withheld during a transaction, the agent’s statutory duties of honesty and disclosure of latent material defects are implicated. Because these honesty and disclosure duties are found in the law, they cannot be avoided by claiming obedience to the client or pleading ignorance. Nor can the agent hide behind the duty of confidentiality.
The duty of confidentiality is implicated anytime an agent discusses the object of the agency relationship with a thirdparty. In real estate, that means anytime the agent discusses the property, their client’s motivation or the terms of a transaction with anyone other than their client. Confidentiality is a big duty. Fortunately, the definition of confidential information (anything learned as an agent that it 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 the statutory definition of “confidential information.”
Mitigating the direct risk created the duty of confidentiality – that is the risk that the duty will be breached – is very easy in the abstract: Never discuss your client or your client’s affairs with anyone other than your client. That is, of course, far too strict a rule to be practical when listing and selling real property. It is, nevertheless, useful as a default risk mitigation rule in the sense that unless some specific exception applies, an agent should never discuss their client or the client’s affairs with anyone other than the client.
The “specific exceptions” to the never discuss rule are those found in the statutory definition of “confidential information.” The first exception is when “[t]he buyer instructs the licensee or the licensee’s agent to disclose about the buyer to the seller or the seller instructs the licensee or the licensee’ agent to disclose about the seller to the buyer.” The second exception is when “[t]he licensee or the licensee’s agent knows or should know failure to disclose would constitute fraudulent representation.” Unless the information is clearly within one of these two exceptions, no information gained by an agent as a result of their agency relationship should ever be discussed with anyone other than the client.
The client-instruction exception covers information transmitted between parties for the purpose of furthering the transaction. Information formally exchanged between parties is, therefore, not a problem as far as confidentiality is concerned. What is a problem is information exchanged informally outside the transaction. “What is the seller’s real bottom line here” is a classic example of the kind of question that cannot be answered by the listing agent – at least not without the seller’s instructions. Before answering any question by someone other than your client, always ask yourself: will this information fall within the client-instruction exception. If there is any doubt whatever, ask the client for instructions.
One place the duty of confidentiality comes up all the time is when appraisers call agents to talk about the details of a closed transaction. Appraisers have, for many years, sought transaction details from agents. Agents have, for years, given these details freely. The practice does, however, create risk for the agent. Agents who wish to share transaction details with appraisers, or other third parties, can mitigate that risk by obtaining the client’s instruction regarding such disclosures. On the listing side, this could be easily accomplished by obtaining the necessary permission in the listing agreement. On the selling side, where the risk of the client disapproving of sharing transaction details is greater, the safest course would be to not discuss the client’s transaction with third parties unless the client has given permission to do so.
The other exception to confidentiality – the “fraudulent representation” exception – is there to handle the potential conflict between the agent’s duty of honesty and disclosure to all parties and the duty of confidentiality to clients. It is not uncommon for sellers to disagree with agents about what should or must be disclosed to buyers. This confidentiality conflict is essentially the same as the conflict created by the duty to obey. The risk is mitigated in the same way: by applying the duty of disclosure.
Mitigating risk is first a matter of knowing what information cannot be lawfully withheld. Honesty is implicated when an agent deliberately misleads a party, knowing the party will act on the false information to their detriment. This kind of deliberate misrepresentation is actually very rare, but buyers bring intentional misrepresentation claims all the time. They do so because they assume, after the fact, that the agent must have lied to them so they could get their commission. This argument has proved persuasive to juries. It is, therefore, critical to error on the side of disclosure whenever disclosure becomes an issue in a transaction: If you have to ask, the answer is: disclose.
The license law duty of disclosure applies to “material facts known by the seller’s agent and not apparent or readily ascertainable to a party” Click HERE to review statutory agency duties. A “material fact” is any fact that would substantially affect what a buyer is willing to pay or their willingness to purchase. That is, a fact which goes to the essence of the contract itself by changing the value or desirability of the property. Any misrepresentation of such facts, even innocent misrepresentations, undermines the legitimacy of the contract by undermining the mutuality of consent.
Mitigating the risk created by the duties of obedience, confidentiality and disclosure requires careful documentation of any interaction with the client where something that may turn out to be material is discussed. Clients, for the most part, do not put an unlawful instruction in writing. Most often they just refuse to disclose something claiming it is not material. Recent repairs and inspection reports from a prior deal-fail are classic examples of things sellers sometimes refuse to disclose.
Anytime a conversation about whether or not to disclose something takes place, it creates a dangerous “risk point.” The resulting risk must be mitigated as soon as that conversation takes place. That is done by creating a written record of the discussion. For risk management purposes, if there is any question whether what is being discussed involves material facts, the agent should consider the discussion a risk point and take affirmative steps to mitigate the risk involved.
Email is the most effective risk management tool available. A letter works, but is more time consuming – and more likely off-putting to the client. A note in a business diary or “to file” is good, but direct communication with the client is always preferred. What is communicated is a confirmation of the subject discussed, the client’s instruction and the agent’s anticipated course of conduct. For instance, a discussion between listing agent and seller regarding a prior repair of the roof might cause the agent to send the following email to the client:
“This is to follow-up on our conversation regarding prior repairs to your roof. As we discussed, disclosure is required when the matter is material to the buyer’s purchase decision. The more significant the repairs and the more recent and untested the repairs, the more material they may be to a buyer. Disclosure to potential buyers is always the safest course when dealing with repairs that could cause problems in the future. I, therefore, strongly suggest you disclose the repairs to potential buyers. Please let me know how you wish to proceed and if you become aware of any further information regarding the roof or its repairs as we go forward.”
An email documenting the discussion and the agent’s suggestion to disclose is only the first step. It creates a record of the conversation and the agent’s position. It does not resolve the disclosure problem. If the fact is “material,” both the agent and the seller are under a legal obligation to disclose it. Although sellers often believe otherwise, it is foolish not to err on the side of disclosure. A simple disclosure at the outset of a transaction that something has been repaired or caused a problem in the past is not likely to have any effect. On the other hand, if the information is withheld, and there is later a problem, the buyer will assume the information was deliberately withheld to hide the problem.
There is no way around the material fact disclosure dilemma. Any undisclosed fact that may turn out to be material creates risk. If the fact has been discussed, the conversation documented and the client warned, but the client still refuses to make the disclosure, the agent has only two choices. If the agent believes the facts are material and must be disclosed, they cannot simply ignore the duties of honesty and disclosure and proceed. Instead, the agent must warn the client that state law requires the disclosure and that the agent cannot continue to represent the client unless the disclosure is made. Email is again a great tool for such a warning. Here (using again the prior roof repair as an example) is an example of such an email:
“This is to follow-up on our conversation regarding prior repairs to your roof. As we discussed, disclosure is required when a matter is material to the buyer’s purchase decision. You will remember that I advised disclosure to potential buyers is the safest course when dealing with anything that could cause problems in the future and advised you to disclose the repairs to potential buyers. You have determined not to make the disclosure. Based on my experience as a real estate professional, I strongly advise against this course of action and cannot, consistent with my duties to all parties, continue as your agent unless the disclosure is made. Please let me know immediately how you wish to proceed.”
Such an email will bring the matter to a head. This should be done only when the agent has determined that a problem creates sufficient risk that it is not worth continuing the representation. This will be the case only when potential latent defects are extremely material, the cost to the buyer substantial and the risk of future problems likely. Making such judgments is rarely called for, but risk-averse agents must be ready to “warn and walk” when the risk becomes too great. Any suspicion that a client is deliberately withholding material information would, of course, warrant a “warn and walk” letter.
In most cases, the client will make the disclosure based on the agent’s advice that disclosure is the safest course. If the seller does not agree in cases where the materiality of the undisclosed fact is honestly questionable and the potential monetary consequences to the buyer (if the seller is mistaken) are not great, the agent may elect to continue, but only after clarifying the situation with a follow up email or letter. Here is a sample, again, using the prior roof repair example:
“This is to follow-up on our conversation regarding prior repairs to your roof. As we discussed, disclosure is required when a matter is material to the buyer’s purchase decision. You will remember that I advised disclosure to potential buyers is the safest course when dealing with anything that could cause problems in the future. You have determined not to make the disclosure because you believe the repairs fixed the problem and the leak is no longer material. Having no information myself to the contrary, and no training or experience in roof repair or inspection, I will proceed based on your judgment and decision that the problem no longer exists. That in no way negates my advice that disclosure is the safest course. Please let me know if you become aware of any further information regarding the roof or its repairs as we go forward.”
This kind of client follow-up communication will not prevent all misrepresentation claims, but it will greatly reduce the odds of anyone claiming non-disclosure was the agent’s idea. It will also prevent the seller from turning on the agent claiming lack of diligence. It will also demonstrate to the Real Estate Agency that the agent was trying to follow the law. When something goes wrong after closing, buyers (and their lawyers) will always look for non-disclosure. Mitigating that risk is about anticipating potential non-disclosure problems when they arise during the deal and using the right communication tools to protect yourself.
As was the case with conflict of interest disclosures, risk point mitigation communication with clients follows a specific pattern. First, the communication should make it clear the matter has been discussed with the client. Next, the significance of the subject discussed must be made clear to the client. Next, the client’s instructions and agent’s course of action, including any caveats, must be clearly set out. Finally, the client’s responsibility for keeping the agent informed should be clearly stated. Remember, we are using anticipation to mitigate risk by communicating with clients, not drafting legal disclaimers that require signatures.
Because we are dealing here with risk mitigation, any question of any kind involving disclosure to a buyer should be documented – even if no disclosure is required or given. For instance, ORS 93.275 declares that certain facts, like a death or suicide, are not material to a real estate transaction in Oregon. Even when the statute clearly applies, it is still good risk management to have a risk point mitigation communication in the file. That is the case because whether to disclose or not is still the client’s decision. Even if not required, disclosure (other than in the case of AIDS) may still be a good idea for moral or practical reasons.
A good example of a material fact that is exempt from disclosure but still a risk management issue is a sex offender in the neighborhood. The fact or suspicion of a sex offender residing in the neighborhood is not material according to ORS 93.275. If a seller client has been given notice that a sex offender is located in the neighborhood and asks about disclosure, the agent can make the client aware of ORS 93.275 and direct the seller to the Oregon Seller’s Advisory discussion of “Deaths, Crimes and External Conditions.” Click here to view or obtain and copy of the Seller’s Advisory. The discussion with the client, the agent’s direction of the seller to the Advisory and the client’s decision regarding disclosure should then be memorialized in an email or letter to the client. Here is an example of such an email:
“This is to follow-up on our conversation regarding the notice you received that there is a sex offender living in the neighborhood. As we discussed, disclosure is not required because the fact or suspicion that a convicted sex offender resides in the area is not material to a real estate transaction in Oregon. You will remember that I directed you to the “Deaths, Crimes and External Conditions” of the Oregon Property Sellers Advisory for more information about Oregon real estate laws and practices. Please let me know if you have not been able to access this information or have any questions regarding the information. I will proceed based on your judgment and decision not to disclose the notice you received. Please let me know if you become aware of any further information regarding this matter.”
Notice again the pattern of the email. What we are doing is creating evidence of diligence in a way that promotes client service. Making use of external tools like the Oregon Property Sellers Advisory demonstrates competence and diligence and makes someone other than the agent the legal “authority.” Always look for such external sources when discussing legal matters with clients. Keep in mind always that the fact that something is not material, whether in fact or law, does not mean that the issue can be ignored. Focus on the potential for something to become material or even that someone will think it material. If the potential exists, mitigate the risk.
Mitigation of risk by disclosure applies to your client as well as others in the transaction. When it comes to your own client, however, a lot more than material defect disclosure is needed. The disclosure risk issue is raised anytime an agent withholds any information the client is entitled to know. On the listing side, for instance, the agent might withhold the fact that another offer is coming in, or that the buyer has failed to meet some deadline or anything else the client seller is entitled to know about. It is the “entitled to know about” part upon which managing this kind of risk must focus.
A client is entitled to know anything the agent knows or finds out that could in anyway affect the client’s decisions. The key is “decisions.” There are thousands of decisions, little and large, in a real estate transaction. Mitigating the risk created by the duty of disclosure is about understanding which of these decisions the client should make for themselves. It is not a matter of deciding what the seller will or ought to do. It is a matter of deciding whether the seller is entitled to the information. For risk management purposes, the answer is always “yes” if there is any question whatever about whether the information is important. When in doubt, disclose, but do so in a way that demonstrates professionalism and efficiency.
Email is again the most practical tool available to create the disclosure record necessary for risk mitigation purposes. When it comes to disclosure of information to the client, the pattern is to set out the subject of the client disclosure, the business consequences faced by the client and client’s decision. It is critical to allow the client an opportunity to make a decision after they have the relevant information. Take, for instance, a buyer’s failure to redeem an earnest money note as required under the contract.
When an agent learns that the other party has not, or even may not, meet a contract deadline, the client is entitled to know that fact. They are also entitled to understand the transaction consequences of what has happened and have a chance to make a reasonable business decision. Here is an example of an email in an unredeemed note situation that covers these points.
“It has come to my attention that the buyer has not redeemed the earnest money note as required by the purchase agreement. The buyer’s failure to redeem the note is covered in the “Earnest Money Payment/Refund” section of the purchase agreement. You should review that section and talk to an attorney if you want to terminate this transaction based on the buyer’s failure to redeem the earnest money when due. If you do not wish to terminate the transaction at this time, I recommend we immediately notify the buyer that failure to redeem the note is a serious matter and that unless immediately redeemed, you will exercise your right to enforce the contract. We can give this warning by email to the buyer’s agent. Please let me know how you wish to proceed.”
Notice that no legal advice is given. This is accomplished by reference to an external source – in this case, the purchase agreement. Notice also that business options, not legal options, are presented, (i.e. see a lawyer or proceed with a warning are business options). Finally, notice that the decision is left to the client. Client disclosures should follow this simple subject-business consequences-business decision format. The trick is to look forward to anticipate what might go wrong.
Foresight means taking action (here, making a disclosure) before the consequences of not acting are known. Once the roof leaks it is easy to see that recent roof repairs should have been disclosed. When the buyer backs out two weeks after the deposit was due without ever depositing the earnest money, the seller is going to want to know why they didn’t know what was going on. Anticipate what might go wrong.
The trick, for risk mitigation purposes, is to disclose the repairs before the roof leaks or the buyer backs out without depositing the earnest money. And that, and this is the point of risk mitigation when it comes to disclosure, requires thinking diligently about what might go wrong. That doesn’t mean being a deal killer. It means being a business focused realist with the client’s interests always in mind. Ultimately, disclosure isn’t a separate duty – it is wrapped up with all the fiduciary duties including, most particularly, the duty of reasonable care and diligence.
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