Common Lawsuits Real Estate Agents Face and How to Avoid Them (Part #1)

This article will be the first part in our brokerage litigation series discussing common lawsuits that real estate brokers and agents have filed against them on a regular basis. Brokers are pseudo-legal personalities who deal with contracts on a daily basis and often facilitate communications between their clients and attorneys. This unique position places them at risk for litigation from unhappy clients on a regular basis. Today’s topic is agency.

The question of agency is simple once the legal basics are broken down. When lawyers talk about agents, they are not referring to people like James Bond. While some real estate transactions can be action-packed thrillers, most (either fortunately or unfortunately) would make boring movies. The real question is, who does a broker work for and why does that matter?

Who Is the Client and What is an Agent?

For most brokers, the identity of the client is normally obvious. The client is the person who hired the broker and pays the broker’s fee, whether the broker was hired to sell property or to help a buyer make a purchase. Occasionally, brokers will be hired by more than one person (for example, where buyer and seller want a joint-broker to manage their transaction), in which case, the broker’s clients are the multiple people who hired him or her.

A legal agency relationship refers to a master-servant relationship between two people. In the brokerage context, the client is the master and the broker is the servant. However, agents are not employees. An employee may be a type of agent, but an agent can essentially be anyone tasked to do something by another person.

The Fiduciary Nature of Agency

The first type of lawsuit that can emerge from a broker-client relationship is a claim for breach of fiduciary duties. Legal agents, including brokers, are required to act only in the best interests of their clients. The basic role of a fiduciary is to provide honest representation and disclosure of material facts while avoiding conflicts of interest. Fiduciaries have two core legal duties. First, fiduciaries must act with care when undertaking tasks for their clients. Second, fiduciaries must remain loyal to their clients. Both of these duties of care and loyalty must be carried out in good faith.

Liability can arise where a real estate professional breaches one of those duties. This can happen in a number of different ways. The most common breaches in the brokerage context arise out of the duty of loyalty and conflicts of interest. The real estate broker must always be clear on which party he or she represents. In the case of joint representation, serious conflicts between the parties to the transaction may even require the broker to withdraw to avoid legal entanglements.

Agent Liability and Authority

The second type of lawsuit that can arise from a broker-client relationship are authority-related lawsuits. In general, agents are granted a certain type of authority. In the real estate context, for example, a broker may be given the limited authority to show a home, but not authority to accept a buyer’s offer without the seller’s consent.

There are generally two types of authority: actual authority and apparent authority. Actual authority is based on the relationship that the broker has with his or her client. A broker’s actual authority could be express, such as the client telling you to show the home; however, authority can actually be implied, such as the right to light scented candles and dust for the purpose of showing a home successfully. When a broker exceeds his or her grant of actual authority, that could result in trouble. For example, if a client gives a broker authority to sell a home at no less than $500,000, but the broker accepts an offer for $490,000, that would constitute a violation of the broker’s inherent authority and open up the possibility of a future issue.

In contrast to actual authority, apparent authority arises out of the relationship that a third party believes that the broker has with his or her client. Problems with apparent authority can arise out of two circumstances: knowledge of representation and misunderstanding of authority. First, it is generally required by law in most states (and also good policy) for a real estate broker to disclose who their client is, or at the very least that they are acting as an agent. Additionally, when a broker represents both parties to a transaction, that broker should disclose his or her dual agency. Disclosure prevents any confusion as to where the grant of authority comes from. Second, third-party buyers or sellers may misunderstand the extent of an agent’s actual authority, which can lead to legal problems. To use a previous example, if a broker accepts an offer for a $500,000 home for $10,000 less than the market price, unless the third-party buyer actually knows otherwise, he or she is justified in believing that the broker had the authority to accept such offer on behalf of the seller.

Agency relationships in the brokerage context create complex legal problems, and hopefully this article shed some light on the types of liability issues that brokers can face. While many brokers are sufficiently capable of handling legal trouble on their own (many brokers and real estate agents even hold law degrees), brokers facing legal trouble should consider hiring an attorney. Not only can an attorney help clarify the legal issues that arise in a case, but an attorney may become necessary if litigation results in a trial. Real estate agents and brokers searching for an attorney should find hire experienced real estate litigators who have strong reputations in the community. If you want to succeed in litigation, you should hire an attorney, and the Law Offices of Yuriy Moshes is ready to provide excellent service.