FIDUCIARY DUTIES OWED TO A PRINCIPAL BY AN AGENT, AN OVERVIEW

FIDUCIARY DUTIES OWED TO A PRINCIPAL BY AN AGENT, AN OVERVIEW

1. Loyalty and Confidentially

A real estate broker owes duties of loyalty and confidentiality to the broker's principal for whom the broker is
an agent and fiduciary. The broker is prohibited from personally profiting by virtue of the agency relationship,
except through the receipt of compensation for services rendered by the broker in accordance with the terms of
the employment agreement. This fiduciary duty and obligation of the broker as an agent of his or her principal
throughout the agency relationship is probably the most significant aspect of the relationship.

The courts have consistently equated the duty of an agent to a principal with the duty owed by a trustee to a
beneficiary. The Probate Code provides that, in all matters connected with a trust, a trustee is bound to act in
the highest good faith toward the trustee's beneficiary, and the trustee may not obtain any advantage over the
beneficiary by the slightest misrepresentation, concealment, duress or adverse pressure of any kind. (Probate
Code 16000, 16015 and Rodes v. Shannon (1963) 222 Cal. App. 2d 721, 725; Whipple v. Haberle (1963) 223
Cal. App. 2d 477, 36 Cal. Rptr. 9; Batson v. Strehlow (1968) 68 Cal. 2d 662, 674-675; Loughlin v. Idora Realty
Co. (1968) 259 Cal.App.2d 619, 629; Alhino v. Starr (1980) 112 Cal.App.3d 158, 169).

A broker may not unite his or her role as a special agent of a principal with his or her personal objectives (an
agent may not unite the agent's personal and representative characters) in the same transaction without
disclosure to and consent from the principal. The act of an agent within the course and scope of the agent's
authority is the act of the principal. In exercising that authority the agent is dealing with property or other
matters of grave concern to the principal. The agent has the principal's confidence and is, therefore, not
permitted to enjoy the fruits of any advantage which the agent might take of this confidential relationship. As a
fiduciary, the real estate broker performing as a special agent in relationships with a principal is bound by law to

exercise, among other duties, the utmost good faith, loyalty and honesty.

2. Fair and Honest Dealing

In addition to the fiduciary duties owed to a principal, a real estate broker who is the agent of a principal owes a
duty of fair and honest dealing to the other principal to the real property or real property secured transaction.
This duty includes, among others, the obligation to make a complete and full disclosure of all material facts.
Accordingly, the real estate broker owes the duty of full disclosure to a principal in a real property or real
property secured transaction even though the broker is not the agent and fiduciary of the principal to whom the
disclosures are being made. This is a duty which the courts have held to exist by reason of the agent's status as
a real estate broker. (Lingsch v. Savage (1963) 213 Cal. App. 2d 729, 736).

The duty of disclosure may also be found to exist by way of the agent's fiduciary obligation to the principal
upon whose behalf the disclosures are being made. Any misrepresentation or material concealment on the part
of the agent may afford the other principal grounds upon which to seek rescission or damages from the principal
for whom the agent is acting for purposes of making the disclosures. For example, a real estate broker must not
withhold from a prospective buyer material facts regarding the property which are known to, or should be
known to the broker, and which are unknown to the buyer or unascertainable by the buyer through diligent
attention or observation.

The duty of disclosure of a real estate broker representing the seller also includes the affirmative duty to
conduct a reasonably competent and diligent inspection of the residential property listed for sale, and to disclose
to prospective purchasers all facts materially affecting the value or desirability of the property that such an
investigation would reveal. (Easton v. Strassburger (1984) 152 Cal. App. 3d 90).

3. Disclosure Duties Pursuant to Civil Code § 2079 et seq.

After the Easton v. Strassburger decision, Civil Code § 2079 et seq., was enacted which provides:

a. A real estate broker has a duty to the buyer of residential real property of one to four units (including
manufactured homes) to conduct a reasonably competent and diligent visual inspection of property offered for
sale, and to disclose to said buyer all facts materially affecting the value or desirability of the property that such
an investigation would reveal, if the broker has a written listing contract with the seller to find/obtain a buyer or
is a broker who acts in cooperation with such a broker to find/obtain a buyer.

b. The above provision in (a) also applies to leases of such residential property with an option to buy and to real
sale property contracts as defined in Civil Code § 2985. (Civil Code § 2079.1).

c. The standard of care owed by a broker under this statute is the degree of care that a reasonably prudent real
estate licensee would exercise and is measured by the degree of knowledge through education, experience, and
examination, required to obtain a license under Part 1 (commencing at § 10000) of Division 4 of the Business
and Professions Code. (Civil Code § 2079.2).

d. The inspection to be performed does not include or involve an inspection of areas that are reasonably and
normally inaccessible to such an inspection, and if the property comprises: a unit in a planned development as
defined in § 11003.1 of the Business and Professions Code, a condominium as defined in Civil Code Section
783, or a stock cooperative as defined in § 11003.1 of Business and Professions Code.

e. The inspection does not include an inspection of more than the unit offered for sale, if the seller complies
with § 1368 of the Civil Code which requires a seller of such properties to furnish the buyer with copies of
covenants, conditions, and restrictions, by-laws, delinquent assessments and penalties, etc.

f. The inspection to be performed also does not include an affirmative inspection of areas off the site of the
subject property, or public records or permits concerning the title or use of the property. (Civil Code § 2079.3).

This disclosure law provides that in no event shall time for commencement of legal action for breach of duty
imposed by this article exceed two years from the date of possession, which means the date of recordation, the

date of close of escrow, or the date of occupancy, whichever comes first. (Civil Code § 2079.4). Nothing in
this disclosure law relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect
themselves including those facts which are known to or within their diligent attention and observation. (Civil
Code § 2079.5).

The two year limitation for the commencement of legal action, and the limitations imposed upon the agent's
duties of disclosure (whether of material facts about the property or of the agency relationships intended) do not
apply to the agent's fiduciary duties owed to a principal to whom the disclosures are being made. The fiduciary
duties of a real estate broker acting as a special agent of a principal in a real property or real property secured
transaction are distinguishable from mere disclosure duties.

For example, should the real estate broker be acting as a dual agent or as the exclusive agent of the buyer to
whom disclosures of material facts are made, the real estate broker as an agent and fiduciary of the buyer has a
duty to "explain" the disclosures to the buyer and to "counsel" the buyer about the disclosures, including
recommending that inquiry be undertaken about the material facts to permit the buyer to make an informed and
considered decision. (Galeppi v. Waugh (1958) 163 Cal. App. 2nd 507, 511, and Salahutdin v. Valley of
California (1994) 24 Cal.App.4th 555). (In Chapter 20, see the seller property condition form to be completed
and delivered to buyer in timely fashion before title transfer which indicates the various actual disclosures
required.)

4. Real Estate Transfer Disclosure Statement (TDS)

In addition to the common law duties imposed on sellers of residential real property, the California legislature
enacted Civil Code §§ 1102-1102.17 that added disclosure duties for sellers of residential real estate. Civil
Code § 1102(a) applies to residential property transactions, including any transfer by sale, exchange, lease with
an option to purchase, any other option to purchase, or ground lease coupled with improvements “of real
property or residential stock cooperative, improved with or consisting of not less than one nor more than four
dwelling units, ” including manufactured homes (Civil Code § 1102(b). These provisions are mandatory and
cannot be waived by the parties Civil Code § 1102(c). (Realmuto v Gagnard (2003) 110 Cal 4th 193).
However, there are certain statutory exceptions, such as sellers who acquire property through foreclosure.
(Civil Code §1102.2 (c)).

Sellers must complete and deliver to the buyer a comprehensive real estate disclosure statement. (Civil Code
§§ 1102.1, 1102.3-1102.3a, 1102.6). The statutory disclosure form in Civil Code §1102.6 contains an extensive
list of items normally found in residential properties about which the seller is required to provide some
disclosure. (Alexander v McKnight (1992) 7 Cal 4th 973).

The seller's duty to deliver the disclosure form to a prospective buyer operates as a condition to the buyer's
obligation and duty to perform under a real estate purchase agreement. (Realmuto v Gagnard (2003) 110 Cal
4th 193). An action for negligent misrepresentation against a broker for violation of Civil Code §§ 1102-
1102.17 must be brought within 2 years after the date of the violation. (Civil Code §2079.4; Loken v Century
21-Award Props. (1995) 36 Cal. 4th 263, 272)

5. Malpractice Insurance Coverage

Because of the foregoing affirmative duties of disclosure being imposed upon real estate brokers when acting as
special agents of principals in real property transactions, the legislature was concerned that the codification of
these statutory duties may result in insurers seeking to exclude from errors and omissions coverage the duties
imposed upon real estate brokers. As a result, an amendment was made to the Insurance Code adding § 11589.5
of the Insurance Code which provides:

a. No insurer who provides professional liability insurance for persons licensed under the provisions starting
with § 10000 of the Business and Professions Code shall exclude from coverage under that policy liability
arising from the breach of the duty of the licensee arising under Article 2 (starting with § 2079) of Chapter 3 of
Title 6 of Part 4 of Division 3 of the Civil Code.

b. An insurer may exclude coverage against liability arising out of a dishonest, fraudulent, criminal, or
malicious act, or as the result of an error or omission committed by, and at the direction of, or with knowledge
of the insured.

The Legislature also declared that it is desirable to facilitate the issuance of professional liability insurance as a
resource for aggrieved members of the public, and declares that the provisions of this act are, and shall be
interpreted as, a definition of the duty of care found to exist by the court's decision under Easton v. Strassburger
(1984) 152 Cal. App. 3d 90, and the manner of its discharge. (Cal. Civil Code § 2079.12.)

6. General Disclosure Duties

In a fiduciary relationship it is the duty of the agent, in whom such trust and confidence are reposed by the
agent's principal, to make full disclosure of all material facts relating to the subject matter of the agency. For
example, the courts have held that negotiating a sale to the real estate broker's wife without making a full
disclosure to the principal is a violation of the duty which the broker owes to disclose all material facts. A later
case was concerned with the failure of the real estate broker to disclose to the seller that the buyer was the
broker's mother-in-law.

The court stated that where a seller's real estate agent is obligated to disclose to agent's principal the identity of
the buyer, and where the buyer is not the agent but has with the agent such blood, marital or other relationship
which would suggest a reasonable possibility that the agent could be indirectly acquiring an interest in the
property, such relationship is a material fact which the agent must disclose to the agent's principal.

In addition, a licensee who acts as a principal to a real estate transaction must disclose the fact of his or her
licensure to the other principal to the transaction (Business and Professions Code § 10177 (o)).

An agent's duty includes full disclosure and explanation of facts necessary for the principal to make an informed
and intelligent decision. In George Ball Pacific, Inc. v. Coldwell Banker & Co. (1981) 117 Cal. App. 3d 248
the court found that the broker had made an inaccurate representation when he arranged a lease without
knowing whether the lessor owned the property being leased.

Also, refer to the definition of a fiduciary and to the duties and obligations imposed on fiduciaries as discussed
in this Chapter in the section entitled, “Mortgage Brokers”. Fiduciary duties and obligations are equally
applicable to real estate brokers as well as to mortgage brokers who are real estate brokers acting within the
meaning of Business and Professions Code §§ 10131(d) and (e), 10131.1 et seq. and 10166.01 et seq.

7. Limits on Disclosure/Antidiscrimination Provisions

Licensees who participate in discriminatory practices in the housing market may incur liability under any of a
number of fair housing statutes. Brokers have been held to be covered by California's Unruh Civil Rights Act (
Civil Code § 51) (Lee v O'Hara (1962) 57 C2d 476).

The Fair Housing Act (FHA) (42 USC §§ 3601-3631; commonly referred to as Title VIII of the Civil Rights
Act of 1968) and the Civil Rights Act of 1866 (42 USC §§ 1981-1982) prohibit discriminatory practices in the
sale or rental of a dwelling and serve as potential bases for imposing liability for damages on brokers who
participate in discriminatory practices.

Another possible basis for imposing liability on brokers for discriminatory practices is the California Fair
Employment and Housing Act (Government Code §§ 12900-12996). Government Code § 12920, prohibits
discrimination based on “race, color, religion, sex, marital status, national origin, ancestry, familial status,
disability or sexual orientation in housing accommodations...” A broker who supplies information on the race,
color, sex, religion, ancestry, or national origin of a prospective buyer, even when requested by the seller,
violates the California Fair Employment and Housing Act (FEHA) ( Government Code §§ 12900-12996).

Brokers are also subject to administrative action under the Real Estate Law (Business and Professions Code §§
10000-10580) to revoke the broker's license. (Business and Professions Code § 10177(l); 10 CCR, Chapter 6,
§§ 2780-2781. (Also, Business and Professions Code §§ 125.6, 10170.5(a) (4); 10 CCR, Chapter 6 § 2725.

In addition, a licensee is not liable for failing to disclose a death at property sold or leased that occurred more
than three years before the transfer or if there was a death caused by AIDS at any time (Civil Code § 1710.2).

8. Reasonable Care and Skill

An agent moreover is under a duty to use reasonable care and skill (and depending upon the fact situation,
utmost care) to obey directions of the employer, and to render an accounting to the principal. The language in
Civil Code § 2079.16 requires "a fiduciary duty of utmost care, integrity, honesty and loyalty. . ." The
reasonable care and skill standard is assigned to the party in the transaction who is not the agent's principal.
Whether the standard is utmost or reasonable will depend upon the fact situation and the relationship between
the agent and the principal. A gratuitous agent (i.e., one who is not paid for the agent's services) cannot be
compelled to perform the undertaking, but such an agent who actually enters upon performance must obey
instructions and is bound to exercise the utmost good faith in dealing with the principal. This aspect of the
fiduciary duty is further embodied in Business and Professions Code § 10177 (g).

9. Agent May Not Act for More Than One Party Without Consent of Both

An agent cannot act for two or more principals in negotiations with each other unless each have knowledge of
and consent to the dual agency. Such conduct is opposed to public policy in that it places the agent in a position
where the agent may represent conflicting interests. Therefore, regardless of the real estate broker's honesty, or
the fairness of the contract in the particular case, the real estate broker cannot recover commissions from the
principals unless the dual agency is both disclosed and consented to by the principals. Further, it has been held
by the Supreme Court that an undisclosed dual agency is a ground for rescission by any principal without any
necessity of showing injury. (L. Byron Culver & Associates v. Jaoudi Industrial and Trading Corp. (1991) 1
Cal. App. 4th. 300, 305; McConnell v. Cowan (1955) 44 Cal. 2d 805, 811; Jarvis v. O'Brien (1957) 147 Cal.
App. 2d, 758, 759; and, Glenn v. Rice (1917) 174 Cal. 269, 272).

Even when the dual agency relationship is known and consented to by all parties, the agent owes to each party
the same duty of utmost good faith, honesty, and loyalty in the transaction, and the same duty to disclose
material facts which would affect the judgment of either principal. This rule of disclosure of dual agency is
specifically mentioned in the Real Estate Law, and its violation is cause for revocation or suspension of a real
estate license. (Business and Professions Code §§ 10176(a) and (d)). Also, disclosure to and consent by the
principals is required by law in transactions involving 1 to 4 residential units. (Civil Code § 2079.13 et seq.). It
is important to note that § 10176 (d) applies to any transactions within which a real estate broker or his or her
salespersons or broker associates are engaged as special agents acting within the course and scope of their
licenses.

10. No Secret Profits or Undisclosed Compensation

The courts have unequivocally held that an agent cannot acquire any secret interests adverse to the principal;
that the agent cannot lawfully make a secret personal profit out of the subject of the agency; and that if an agent
conceals the agent's interest in the property being conveyed or encumbered, the agent is liable to the principal
for all secret profits made by the agent.

In addition, the courts have held that where an agent falsely represents the amount at which a property may be
purchased by an offeror and then purchases for him or herself at a lower amount permitting the agent to pocket
the difference, the agent will be compelled to disgorge the secret profits. The fact that the offeror was willing to
pay the larger amount or that the property may have been worth the amount paid by the offeror is immaterial.

Claiming or receiving a secret profit or any form of undisclosed compensation is cause for discipline under
Business and Professions Code § 10176(g). (Ward v. Taggart (1959) 51 Cal. 2d 736). The obligation to disclose
all compensation regardless of the form, time, or source of payment is imposed upon real estate licensees
whether acting in a real property or real property secured transaction.

11. Attitude of the Courts

The decision in the case of Rattray v. Scudder (1946) 28 Cal. 2d. 214, is a clear exposition of the attitude of the
California Supreme Court toward the fiduciary relationship between the real estate broker and the principal. In
that case, a real estate broker was retained by an owner of real property to find a buyer for the property. The
fiduciary duties of the broker were violated when, without disclosing to the principal that broker had found a
buyer, the broker made misrepresentations about the salability of the property at the asking price. The broker
made untruthful and misleading statements to induce the principal to reduce the price of the property and to sell
it to the brokerage firm of which the broker was a member.

In commenting on duties and good faith of a broker the court held: "The law of California imposes on ... the real
estate agent the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his
beneficiary. Violation of his trust is subject to the same punitory consequences that are provided for a disloyal
or recreant trustee."

A real estate broker when acting as an agent and fiduciary in a real property or real property secured transaction
is duty bound to inform a principal of every fact material to the principal. The duty to disclose material facts is
not limited to the relationship between the agent and the principal. A real estate broker and his or her
salespersons and broker associates each have duties to disclose material facts to the principal in a real property
or real property transaction even when the broker owes no fiduciary duty to that principal. For example, a
listing broker who is not a dual agent owes the duty of disclosure of material facts to the buyer.

When acting within the course and scope of a real estate license, a real estate broker, whether acting in a
fiduciary or nonfiduciary capacity, owes affirmative duties of disclosure. When the real estate broker is acting
within a fiduciary capacity, the broker's duty extends beyond mere disclosure to the duty of "explaining" and
"counseling" about that which has been disclosed, or should have been disclosed. Of course, the duty to
"explain" and to "counsel" is limited by the course and scope of the agency and by the license, knowledge,
experience, and training ascribable to real estate brokers. The duty to "counsel" includes the obligation to offer
advice and to make recommendations to the principal within the course and scope of the agency to permit the
principal to make informed and considered decisions.

Not only does the failure to abide by these fundamentals place the broker in a position of jeopardizing the
broker's license, but the courts have held that the broker as an agent of a principal in a real property transaction
is not entitled to any profit from the transaction in which such agent is guilty of violating these principles. In
the case of Thomas v. Snyder, (1930) 114 Cal. App. 397, 300 P. 117, it was held that "What is required of an
agent toward his principal is clearly set forth in the text found in 1 California Jurisprudence, page 789, as
follows: 'The proposition is conclusively settled that an agent is charged in full measure with the duty of good
faith in his dealings with his principal, touching the subject of his authority. The animating principle in this
proposition is that no one should, nor will he be permitted to enjoy the fruits of an advantage taken of a
fiduciary relation whose dominant characteristic is the confidence reposed in one person by another. The law
requires perfect good faith on the part of agents not only in form but in substance, and not only from agents
receiving compensation, but also from gratuitous agents. Indeed, the rule is so familiar as to be trite that the
obligation of an agent to his principal demands of him the strictest integrity and most faithful service.’ "

The requirements of law governing the relationship between agent and principal is to the effect that the agent
cannot be allowed to profit at the expense of the agent's principal, no matter whether the result is reached by
misrepresentation, concealment or other fraudulent device. In the case of Rempel v. Kells the court held that an
agent obtaining profits by fraudulent conduct and concealment from the principal is not even entitled to recover
expenses incurred by the agent in connection with the transaction. The duty of a real estate broker to disclose
material facts known by him to the seller employing him was again confirmed in the appellate court case,
Jorgensen v. Beach 'n' Bay Realty, Inc., (1981) (125 Cal. App. 3d 155).

In Jorgensen, the listing broker presented an offer to his seller that was only about 7 percent less than the listing
price. The broker presented the offer on behalf of a speculator for whom the broker hoped to act in future
transactions. When the broker presented the offer, he informed the seller that he was also acting on behalf of
the offeror and was therefore a dual agent in the transaction. The seller wished to counter offer on the price, but

the broker recommended that the seller not do so. The seller followed this recommendation. The sale was
consummated. Shortly thereafter the purchaser resold the property through the broker at a 13.5 percent profit.

In reversing a nonsuit for the broker, the appellate court held that the broker did not fully discharge his fiduciary
obligation to the seller by simply disclosing that he was acting as a dual agent in the transaction. It was the
broker's duty to disclose all material facts known to him which might have affected the seller's decision to
accept the offer. The court suggested that the facts known to the broker which might have affected the seller's
decision included (l) the fact that the buyer was acquiring the property for investment purposes and (2) the fact
that the broker had a substantial personal stake in negotiating a bargain purchase for the buyer. (Field v.
Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18).

12. Obligations of Real Estate Salespersons or Broker Associates

A real estate salesperson or broker associate is subject to the same duties and obligations arising out of the
fiduciary relationship between the broker and the broker's principal. The salesperson or broker associate is the
supervised employee or agent of the broker and is employed to carry on licensed activities on behalf of the
broker through whom the fiduciary duties of the salesperson or broker associate are owed to the principals of
the transaction. When a salesperson or broker associate owes a duty to a principal or, for that matter to a party
to a real estate transaction who is not a principal, that duty is the equivalent to the duty owed to the party for
whom the salesperson or broker associate functions. The term "broker associate" in this context refers to a real
estate broker who has entered into a written contract to act as the agent of another broker in connection with
acts requiring a real estate license and to function under the latter broker's supervision. (Civil Code §
2079.13(b)).

In performing the acts for which a real estate license is required, the salesperson or broker associate must
disclose to the broker's principal all the information the salesperson has or should have which may affect the
principal's decision. A failure on the part of the salesperson or broker associate to fulfill this obligation could
result in disciplinary action against the salesperson's license and may result in disciplinary action against the
license of the broker with whom these licensees are associated. Moreover, the broker will generally be held
liable in damages to the principal or any other party to whom the broker owed a duty for acts and omissions of
the broker's salesperson or broker associate.

Since the broker may be subject to administrative disciplinary action or civil liability for the acts of the broker's
salespersons or broker associates, the broker should take particular care in instructing salespersons or broker
associates about their duties and obligations to the broker's principals and other parties to whom the broker
owes a duty. The salespersons or broker associates should also exercise the greatest care in carrying out these
instructions of the broker when dealing with the broker's principals or any party to whom duties are owed.

Real estate salespersons and broker associates are subject to the same duties as a broker by whom they are
employed, including prescriptions against dual agency, secret profits or undisclosed compensation, and other
acts and omissions which violate an agent's duties to the agent's principal. Since a real estate broker has a
statutory duty to exercise reasonable supervision over the activities of his or her salespersons or broker
associates, it is quite possible for a broker to be disciplined for the acts and omissions of broker's salespersons
or broker associates in violation of provisions of the Real Estate Law even if the broker was not aware that
specific acts had taken place. (California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th 1575, and
Business and Professions Code §§ 10159.2, 10176(a), (b), (d), and (g), 10177(h), 10177.5 and 10179).

For purposes of a civil action, the duty of the qualifying broker under a corporate license to supervise
salespersons or broker associates is a duty owed to the corporation. In the case Walters v. Marler (1978) 83
Cal. App. 3d 1, a salesperson breached the duty to disclose to the buyer all material facts affecting the buyer's
decision. The court held that when a salesperson who is agent for the buyer acting through the supervising
broker, breaches a duty owed to the buyer, the qualifying broker's duty to supervise did not make the broker
individually liable for the damages suffered by the buyer. The broker's actions are considered the actions of the
corporation. Therefore, the corporation remains liable for damages resulting from the acts of its salesperson.