INTRODUCTION

INTRODUCTION

The subjects of agency and the fiduciary relationships between real estate brokers and their principals are
among the most difficult concepts for real estate licensees to understand and apply when engaged in real
property or real property secured transactions.

A significant percentage of claims presented to insurance carriers offering errors and omissions coverages
involve alleged negligence, professional negligence, negligent misrepresentations and breaches of fiduciary
duty by real estate licensees. Equally, civil actions brought against real estate licensees by the public usually
include causes of action for negligence, professional negligence, negligent misrepresentations and breaches of
fiduciary duty.

The purpose of this Chapter is to provide the reader with an understanding of the concept of agency and
fiduciary duty in the expectation that those who practice as real estate licensees will better perform their
responsibilities to the public they serve. Fiduciary duties include, among others, loyalty; confidentiality; the
exercise of utmost care (and in certain fact situations, reasonable care); full and complete disclosure of all
material facts; the obligation to account to the principal; the obligation to act fairly and honestly and without
fraud or deceit; and the duty to "explain" and "counsel" about that which has been disclosed or should have
been disclosed thereby permitting the principal to make an informed and considered decision to buy, sell, lease,
exchange, borrow or lend.

The concept of agency and fiduciary duty is quite old. According to Civil Code § 2295 (which was enacted in
1872), "An agent is one who represents another, called the principal, in dealings with third persons. Such
representation is called agency." In an agency relationship, the principal delegates to the agent the right to act
on his or her behalf, and to exercise some degree of discretion while so acting. The agency relationship
between a real estate broker and his or her principal results in a special agency typically limiting the broker to
soliciting and negotiating on behalf of the principal to the real property or real property secured transaction.
(Business and Professions Code § 10131 et seq.; Civil Code § 2297). Generally, real estate brokers are neither
entitled to act in the place and instead of nor are they entitled to bind their principals.

An agency relationship creates a fiduciary duty owed by the agent to the principal within the course and scope
of the agency and the authority granted by the principal. The fiduciary duty owed by real estate brokers to their
principals has been compared by the courts to the duty owed to the beneficiaries by a trustee under a trust.
(Civil Code § 2322, Probate Code §§ 16000-16105.)

In most real property transactions, the real estate broker acts as an agent for someone else - the principal - who
seeks to sell to, buy from, or exchange with a third party real property or a business opportunity. The real estate
broker also may be acting on behalf of another or others to negotiate a loan, the repayment of which is secured,
directly or indirectly, by real property. As a special agent, the real estate licensee is authorized to represent the
licensee's principal with third persons in real property or real property secured transactions. (Business and
Professions Code § 10131 et seq.; Civil Code § 2079.13 et seq. and § 2297.)

A real estate broker is a special agent who is authorized by the principal to carry out certain defined acts within
the course and scope of the agency established by the principal. The real estate salesperson is an agent of the
real estate broker, regardless of whether he or she is an employee for purposes of the Real Estate Law, or an
independent contractor of the real estate broker for federal and state income tax reporting purposes. The broker
in the real property transaction is responsible for his or her salesperson who acts as an agent of the broker.
When a salesperson owes a duty to the buyer, the seller, or to any principal or party in a real property
transaction, the duty is equivalent to the duty owed by the real estate broker for whom the salesperson acts.
Broker associates act as agents of the responsible broker in the same manner as salespersons. (Civil Code §
2079.13(b).)

The existence of an agency relationship invokes a vast and often complicated body of rules and regulations
which govern the rights and duties of principals and agents to each other and the obligations of both principals

and agents to third parties. The following discussion begins with an analysis of the distinctions between general
and special agents and the description of those relationships between parties which are other than agent and
principal.