How Do Real Estate Agents Breach a Contract?
When a real estate agent agrees to help someone in the sale of their house, they typically sign a contract that lays out the terms and conditions of the sale. This contract creates an agency relationship which legally subjects real estate agents to “fiduciary duties.” Fiduciary duties are a set of legal obligations that require them to act in the best interest of their clients. These specific duties include:
- Loyalty: requires agents to act only in their client’s best interests, and nobody else’s
- Reasonable Care: requires agents to use reasonable care and diligence when assisting their clients
- Confidentiality: requires agents to keep information confidential that would hurt the bargaining position of their client (given withholding said the info would not be a contract breach)
- Disclosure: requires agents on both sides to disclose certain information that would be helpful to their party
- Obedience: requires agents to obey their client’s requests and fulfill them in a timely manner (this excludes requests to illegal acts or those out of their scope)
- Accounting: requires agents to account for all money or assets entrusted to them by the client
Loyalty refers to the duty of the real estate agent to act only in the client’s best interests when assisting them in their affairs. This means that doing something during the home buying/selling process that is meant to serve the agent’s or a 3rd party’s interests could constitute malpractice, even if it was not necessarily detrimental to the client.
Example: A realtor convinces an unknowing client to sell his house for $500,000 when it is really worth $650,000. The buyer of the house knows the realtor personally and conspired with him to have the client sell him the house for a low price. The buyer pays the realtor $25,000 for doing so, and the client has now made significantly less money than he could have.
The realtor clearly failed to act in his client’s best interests because he acted directly in the interest of himself and his friend. This would be a breach of the fiduciary duty of loyalty.
Real estate brokers are expected to use a certain standard of care when handling their client’s real estate transactions. The standard of care for agents is that of a competent real estate professional, one who has significantly more knowledge of real estate than the average person. Failure to act within the required standard of care would be a breach of contract.
It is required that agents do not disclose information that would hurt their clients’ chances of buying or selling a home for the best possible price. However, they are not required to remain confidential withholding the information would be a contract breach act itself.
Example: Agents may not disclose the client’s maximum price point when they are making an offer on a home that is less than that amount. Saying something like “We are offering $300,000 but our client would be willing to pay up to $325,000” is not only a silly thing to disclose, but it is also a breach of contract.
On the contrary, an agent selling a house should not remain confidential about the termite infestation in the basement. While it would hurt their client’s bargaining power to disclose this, keeping it a secret from a potential buyer would be a contract breach itself.
While certain information must be kept confidential by real estate agents, they also have the duty to disclose certain information when they are both buying and selling a property.
A realtor assisting someone with buying a property must disclose information such as:
- The lowest possible price that they know the seller will accept
- Any issues or defects with the property that they know of
- Other offers that have been made on the property
A realtor assisting someone in selling a property must disclose information such as:
- All offers made on their property and the identity of the people making them
- Anything that may affect the property value
- A buyer’s intention to “flip” their property upon sale (buy and sell shortly after for profit)
Obedience simply means that the agent must obey the commands of their clients unless those requests are outlawed by either their contract or the law. The client has the ultimate say in whether they should take an offer or wait for a better one, for instance. The client cannot, however, tell them to hide the fact that the air conditioning unit must be replaced.
Accounting refers to the agent’s duty to safeguard and keep track of all money and documents entrusted to them. This makes it their responsibility to make sure they correctly bill the client and do not release private or sensitive information, especially if it would hurt their bargaining power.