The Real Estate Agent as Fiduciary – Some Examples

In Vacation Time of Hilton Head v. Lighthouse Realty, Inc., (1985), the South Carolina Court of Appeals addressed a case where a real estate broker failed to make a full and complete disclosure to its principal regarding (a) the offered purchase prices from prospective purchasers and (b) that the broker was an interested party involved with one of the prospective purchasers. The Court stated that ” a [real estate] broker owes a duty to its principal to keep it fully and promptly informed of all material facts that come to the broker’s knowledge with respect to the transaction in which the broker is engaged, affect the principal’s interest, and might influence the principal’s action.”. The broker had failed to advise its principal that one of the prospective purchasers was willing to substantially increase its purchase offer above that of another, which had made an initially superior offer, if that increase was necessary to close the deal… In addition, the broker neglected to advise the principal that it had an interest in the purchaser which had made the initially superior offer. The ‘lower’ offer stood and the principal sued the broker for, among other things, breach of fiduciary duty. The appellate court affirmed the trial court award of $50,000.00 in actual damages. The Court recognized that “…it is the duty of a broker who is employed to sell property at a specified price to inform his principal… , upon hearing that a more advantageous sale… can be made, the facts concerning [such] which are unknown to the principal, to communicate the same to him before making the sale as expressly authorized. A neglect to do so renders him liable to his principal for whatever loss the latter may suffer as a consequence thereof.”

In Owen v. Shelton, (1981), the Virginia Supreme Court was faced with a situation where a broker had failed to advise his principals of a significant contingency in a real estate sale transaction. The broker neglected to advise that the purchasers were paying certain sums to the sellers (principals) under protest to expedite the closing and had reserved the right to litigate against the sellers for those sums at a later date. The deal closed and the broker took his agreed-upon commission. The purchasers eventually sued the sellers who successfully defended, but incurred substantial costs and lawyer’s fees in that defense. The principals then sued the broker to recover those costs. The trial court granted the broker’s motion for summary judgment, however the appellate court reversed. The Supreme Court stated that “a real estate broker occupies a fiduciary relationship to his principal and so long as that relation continues is under a legal obligation, as well as a high moral duty, to give his principal loyal service.” The Court further recognized that “incorporated in every contract between a fiduciary and his principal is an obligation, imposed by law upon the fiduciary, to disclose anything known to him which might affect the principal’s decision whether or how to act.” In this case the broker, “[a]s a real estate agent, presumably experienced,… knew, or should have known, that these were circumstances which might influence his principal’s decision whether or not to close.” This was especially true since if the deal had not closed the broker would have never received his commission.

The Tennessee Court of Appeals, in Bessey v. Arellano, (1986), confirmed that a real estate broker was a fiduciary who “owe[d] undivided fidelity and faithfulness to his principal.” In this case the broker obtained a tenant for his principal residence. Based upon the availability of a tenant, the principal entered into a lease agreement and moved out-of-state. Unbeknownst to the principal, the broker was negotiating with the tenant for the tenant to purchase the broker’s own residence. After the tenant breached the lease agreement and purchased the broker’s residence, the principal sued the tenant and the broker. The trial court awarded the principal $12,543.08 in damages against the broker and the appellate court affirmed. The Tennessee Court of Appeals held that the broker had breached its fiduciary duties to its principal by (a) encouraging the tenant to breach the lease, (b) selling the tenant the broker’s own residence, and (c) interpreting the lease in such a manner as to cause the tenant to commit a breach.