All real estate licensees have a general duty to disclose material facts known by the agent and not apparent or readily ascertainable to a party. This duty applies to both the listing agent and the selling agent. The duty is not the same as the affirmative duty of disclosure because it applies to all parties, not just to the client. Because it applies to all parties, the duty is limited in scope of the disclosure of known material facts not apparent or readily ascertainable by others.

The duty to disclose material facts comes into play on the listing side mostly in disclosure of material defects in the property. The duty to disclose material defects in property has long been an issue in the industry. Although it unfortunately happens, it is very rare that an agent will deliberately try to hide a material defect they know about. Most lawsuits against agents for failure to disclose material defects are based not on the claim that the agent failed to disclose known defects but that the agent was negligent in not knowing of the defect.

The classic failure to discover defects case is Easton v. Strassburger, a 1984 California case. In Easton, a California court found the listing agent had a duty to disclose facts materially affecting the value or desirability of the property which through reasonable diligence should have been known. According to the court, there was substantial evidence to support the finding that the listing agent was negligent because a number of red flags indicated problems with the property. The court held the problems, which involved earth movement, were within the knowledge a typical real estate licensee familiar with property in the area.

The Easton duty to discover material defects does not require listing agents to inspect the property they list. Rather, the standard is really one of diligence. The listing agent must use the care of an ordinary real estate licensee when looking at or showing the property they list. The agent cannot ignore red flags that would be obvious to the average real estate licensee. Click here for a copy of the Easton case.

On the selling side, disclosure of material defects rarely comes up because buyers are rarely as defective as houses. In fact, about the only way a buyer can be defective is to not have the financial wherewithal to perform as agreed. This comes up in two important places in a real estate transaction: redemption of earnest money and credit worthiness. A buyer’s agent must disclose to the other side any knowledge that their client does not intend to, or cannot, redeem earnest money due under the contract. A buyer’s agent also cannot hide from the seller the buyer’s financial inability to perform the contract.

The statutory duties a real estate licensee owes to their own client mirrors common law fiduciary duties. The common law duties of loyalty, obedience, disclosure, confidentiality, diligence, and accounting are included among the statutory duties owed a client. There is no practical difference as far as a licensee’s obligations are concerned between those duties and their common law counterparts. Click here for a detailed explanation of common law fiduciary duties. These affirmative statutory duties to clients may not be waived by the agent or the client. There are, however, several statutory duties which have no common law counterpart.

Under Oregon statutory law, agents have a duty to advise their client to seek expert advice on matters related to the transaction that are beyond the agent’s expertise. This affirmative duty is the flip side of a provision of Oregon agency law that says agents have no duty to investigate matters that are outside the scope of the real estate licensee’s expertise unless the licensee or the licensee’s agent agrees in writing to investigate a matter. Taken together, these two duties mean that, while an agent need not themselves investigate matters that are beyond the expertise of a real estate licensee, they may have a duty to advise the client to have another professional look into the matter. So, for instance, an agent would not have to investigate an encroachment onto a property but might, depending on the circumstances, have a duty to tell their client they need to consult with an attorney about the encroachment.

Another place where statutory duties do not exactly mirror common law agency duties is in marketing property under contract or finding additional properties for a buyer under contract. Unless agreed otherwise in writing, an agent must make a continuous, good faith effort to find a buyer for their seller or property for their buyer. Agents are not required, however, to seek additional offers to purchase or find additional properties once their client has entered into a contract for sale. The agent and principal may agree to seek additional offers or property but they are not required to do so as a matter of agency duty.

Oregon statutory agency duties clarify the common law by expressly allowing the seller’s agent to show properties owned by another seller to a prospective buyer. Similarly, a listing agent can list competing properties for sale without breaching any affirmative duty to the seller. The same rules apply to buyer agents who can show properties one buyer client is interested in to another buyer client.
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The general duty to present all offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase is an artifact of the sales industry. The presentation duty is really just an application of the duty of honesty that says an agent cannot hide documents or communications from the parties to a transaction even if the agent would rather the parties didn’t know about the document or communication.

The presentation of offers duty is largely an artifact of the sales industry origin of the industry. In those days, listing agents tried to get their unrepresented buyer’s offer in front of the seller before a subagent of the seller in another company could get their unrepresented buyer’s offer in front of the seller. The advent of buyer agency has greatly reduced, but not eliminated, the need for this specific duty. About the only place presentation becomes an issue any more is in multiple offer situations.
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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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Although there are three types of agency relationships set out in Oregon statute, there is really only one basic set of agency duties. Whether representing a seller or a buyer or both, real estate licensees in Oregon owe everyone involved in the transaction (the seller, other principals and the principals’ agents) three legal duties. They are: (1) To deal honestly and in good faith; (2) To present all written offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase; and (3) To disclose material facts known by the seller’s agent and not apparent or readily ascertainable to a party.

These three general duties apply without regard to the agency relationships. Although the duties are “affirmative” in the sense that they mandatory, they are not “fiduciary” duties like those that apply between agent and principal under the common law. Because they apply to all parties regardless of representation, it is critical to understand these general license law duties.
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In Oregon, as is now the case in many other states, the duties a real estate licensee owes buyers or sellers are set out in statute. For the most part these “plain language” statutory duties parallel the common law fiduciary duties. Like most but certainly not all states, Oregon real estate law assumes the relationship between real estate licensees and their clients will be an agency relationship. Thus, statutory law now controls both whether there is an agency relationship and the duties owed in that relationship.

ORS 696.800 through ORS 696.880 are the Oregon license laws provision that deal with agency. ORS 696.810 concerns itself with buyer agency. ORS 696.815 covers representation of both the buyer and the seller. Seller representation under ORS 696.805 is mandatory for any agent acting under a listing agreement. Representation of buyers, or representation of both in the same transaction, is permissive.
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The duty of accounting requires the agent to account to the principal for any and all money or property of the principal’s coming into the agent’s hands. Accounting is rarely an issue unless money has been misappropriated. Misappropriation of a client’s money is a very serious breach of agency duty that can result in loss of license and even criminal sanctions.

Typically, the only client funds entrusted to real estate agents is the earnest money. Earnest money accounting and handling is separately regulated by statute and administrative rule in Oregon. Other than earnest money, the duty of accounting causes few problems in real estate as long as the agent is very careful to document any monies of the client that flow through their hands.
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Like the duty of confidentiality, the duty of diligence can be confusing. Diligence means the attention and care legally expected or required of a person. What is legally expected of a real estate licensee is that they have the attention and skill of the average real estate licensee. This self-referential standard feels mushy, and in many ways it is, but that is no accident. Measuring diligence by reference to peers creates a dynamic standard of care in an industry.

As circumstances in the industry change, so does the standard of care. Until well into the 1980’s no one thought anything of a buried heating oil tank. Today, an agent, whether representing a seller or a buyer, would hardly be considered diligent if they ignored the existence of such a tank. The same is true of man-made siding, mold and any number of other issues. Diligence doesn’t require a person to be a good real estate agent but it does require that they not be a bad one.

The duty of diligence is arguably the most important of the common law duties. A lack of due diligence is another way of saying “negligent.” Negligence is important because an agent can be negligent both in what they do and what they don’t do. Failing to understand a transaction document can be negligent. Failing to read that same document can be negligent and, depending on the circumstances, it may even be negligent not to know there ought to be such a document. It is this last, or negligence by omission, aspect of the duty of diligence that makes it so dangerous.

Negligence by omission is easily confused with misrepresentation by omission. Indeed, the two legal theories overlap because each is based on the idea of not knowing what one should know. This overlap has caused the industry to focus on disclosure as a means to control risk. Unfortunately, disclosures do not help when the claim is a lack of diligence rather than misrepresentation.

Diligence requires the application of training and intelligence to specific circumstances. It is for this reason that general disclosures of potential problems are ineffective when the claim is lack of diligence. Take, for example, the problem of mold. Disclosing that mold can be a serious problem in housing does not excuse the agent who misses or ignores “red flags” like odors or stains that indicate there may be mold in a particular property. In fact, quite the opposite is true.
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The duty of confidentiality can be a little confusing. Confidentiality means not telling other people things your principal doesn’t want disclosed or that would be harmful to the principal if disclosed. Obviously, the duty of confidentiality can conflict with the duty of honesty and disclosure. Fortunately, the duty of confidentiality does not require the agent to be dishonest or unethical in order to protect their client.

In Oregon, “confidential information” is defined by statute ORS 696.800(3). Confidentiality is a specific statutory duty in Oregon and is discussed at length in the Statutory Agency Duties section of this topic. The common law idea of confidentiality is basically the same as in the statute in that it simply requires the agent to hold in confidence any information entrusted to the agent by the principal, unless the law requires it disclosed or client wants it disclosed.
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Obedience means doing what the principal asks. The duty of obedience does not, however, require doing things that are illegal, unethical or in conflict with other legal duties. The client’s instruction to the agent must be lawful instructions. That is, they must be instructions to do what the law allows done. In dual agency situations, obedience can cause problems. That is why disclosed limited and designated agency statutes have provisions that forbid agents involved in such relationships from taking actions that are harmful or detrimental to either party.
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Loyalty means the agent must put the client’s interests before anyone else’s, including their own. It would be disloyal, for instance, for a buyer’s agent to purchase property of interest to the client for themselves without first finding out if the client wanted the property. Loyalty can also become an issue if an agent is receiving a bonus or fee sufficiently different from that the client would expect or is typical in the situation.

In such cases, doubt can be raised about whether the agent’s conduct in the transaction was driven by their duty to the client or their own interest in the bonus or fee. It is not that the agent is receiving a fee or commission. There is nothing disloyal or wrong about an agent receiving a fee or commission. Rather, it is that the fee or commission is unusual enough to cast doubt on whether it, instead of client needs, motivated the agent’s actions. As with any conflict of interest calling into question the agent’s loyalty, disclosure of the conflict is the appropriate course of action for the agent.
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