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Real Estate Brokers

Real estate lawyers and real estate brokers frequently find themselves working together to serve a common client. They also frequently butt heads. Real estate brokers consider lawyers to be deal-killers. Lawyers think that real estate brokers are loose canons, oblivious to the legal duties of themselves and their clients. This will be the first in a series of letters trying to sort out the complex relationship between brokers and their clients, and possibly highlight some reasons for these different points of view.

Let’s assume the typical situation: a seller engages a real estate broker to market the seller’s property. This broker becomes an agent for the seller, whom the law terms the broker’s principal. The law recognizes the very high level of trust the seller reposes in the broker, and imposes a commensurably high level of duty owed to the broker’s principal, the seller. The broker’s duties are similar to those owed by a trustee to the beneficiary of the trust, generally described as a standard of utmost good faith and fair dealing, and include:

1. The duty to disclose. A broker must make a full and complete disclosure to the seller of all facts material to the pending transaction. This means that:

  • The broker must inform the seller of all offers received, regardless of whether they conform to the terms of the listing agreement or whether the broker considers them attractive. Failure to disclose an offer is equivalent to a representation that no offers were received.
  • The broker must disclose all material facts relating to the value of the listed property, including the possibility that a higher price might be obtained.

2. The duty of undivided loyalty. A broker may not act as an agent to more than one party to a transaction without making full disclosure to all parties and obtaining their consent.

3. Confidentiality. A seller’s broker who suggests to a prospective buyer that the seller is willing to accept less than the listing price may be committing a breach of this fiduciary duty.

4. Secret profits. The broker is liable to the principal for any secret profits obtained in the transaction. The broker must disclose all profits regardless of whether the principal suffered any actual damages. A “net listing”, allowing the broker to keep all proceeds above a pre-set price, is illegal. The broker must account for all funds held on the principal’s behalf and cannot commingle the principal’s funds.

The duties above arise out of the relationship between the owner/seller and a broker based on common law principles of principal and agent. They may be enlarged or reduced by contract between the two though, if the contract does not directly address them, they will be independent of the contract. They are also independent of the rules imposed upon brokers by the California Department of Real Estate, the breach of which give rise to disciplinary remedies but not necessarily private remedies.

These rules become far more complicated when:

1. The broker acts through its sales staff;

2. The broker works with subagents or cooperating brokers with whom the commission is split; and

3. The broker, or the brokers’s sales staff, also represents the buyer.

These more complex issues of sorting out the fiduciary duties in the presence of these additional parties, as well as issues of broker compensation, will be left to subsequent newsletters.

Please do not hesitate to contact me if you have any questions or if I may be of any service. I remain

Very truly yours,

Robert Jay Grossman