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Real Estate Issues, Summer 2001 by Kaplan, Douglas C

PREFACE

Real estate agency is little more than a marketing ploy. It doesn't exist and never has existed. It is the industry's way of playing "Let's Pretend."

Simply put, "agency is a consensual, fiduciary relation between two persons, created by law by which one, the principal, has a right to control the conduct of the agent, and the agent has a power to affect the legal relations of the principal."1

But the real estate agent doesn't operate under the control and direction of the principal and is powerless to legally bind him. As one interested in the transaction (no deal, no fee), the real estate agent cannot render fiduciary services. Without each of the foregoing ingredients, agency does not and cannot exist.

Like the fruit of the poisoned tree, real estate agency has sprouted: buyer's agency, seller's agency, dual agency, limited agency, and designated agency all adding tension to the pretension. Export of this quagmire to the Internet (the new real estate marketplace) results in unimaginable confusion and exposure.

Daily, buyers in 50 states deal with sellers and brokers from all over the country, indeed, the world. Listing brokers are acting under every conceivable Agency relationship. Cooperating brokers, buyers, and sellers may live in states that do not recognize the listing broker's Agency relationship. Or, by statute, they define it differently. Or they make it illegal. Confusion abounds, disappointment is assured, and liability is inevitable. A simple solution, however, can resolve it all.

EVEN THE MIGHTY

A president of the United States was humbled when he deluded himself into believing that his high office would protect him from disclosing embarrassing personal misconduct.

A company, whose very name conjured the image of the automotive tire industry, faced untold litigation and economic travail when the general public discovered that the company had failed to disclose a known peril generated from the manufacture of its tires.

Tobacco, an industry with major economic and political clout on state and federal levels, was traumatized to the tune of billions of dollars in judgments when the public discovered that corporate executives withheld disclosure of the addictive nature of a harmful substance.

Yet mere disclosure is not a solution-whether it be of illicit sex in the White House, defective tires that kill, or commonly used harmful, addictive substances. Why? Because disclosure alone solves nothing. It simply exposes the problems.

Conjure the image of a banner in front of the White House depicting the activity in the Oval Office, or a sign on a tire company stating, "y'all take care," or an inscription on cigarette packs suggesting that they may be dangerous to your health. In the following paragraphs, you will see a real estate brokerage industry beset by serious problems that will not be resolved by disclosure.

THE REAL ESTATE BROKERAGE INDUSTRY FACES TWO MAJOR CRISES THAT WILL, IF LEFT UNATTENDED, BRING IT TO ITS KNEES:

BROKER (LICENSEE)-CLIENT RELATIONSHIP: THE FIRST CRISIS

AGENCY (SMOKE AND MIRRORS)

It does not take a rocket scientist to understand that an agent who must bring you to the closing table in order to earn a fee cannot be your fiduciary and cannot prefer your interests to his own.2 Such a proposal is childish and flies in the face of human nature. The agent gets nothing for his efforts unless he walks his principal through a contract to the closing table. The agent is an interested party in the transaction.

What is stunning is that enterprising lawyers throughout the country are not already defending sellers in lawsuits simply by asking the agent:

"As you are an interested party in the transaction, how can you provide fiduciary agency services to the principal?"

Perhaps, real estate agency has sustained itself like the legendary cartoon character, Wile E. Coyote, who runs off the crest of a mountain and lingers comfortably in midair-that is, until he looks down! The industry has been so married to the fiction of agency and fiduciary duty that the fear exists that a divorce will leave the industry in wrack and ruin. In truth, unless the industry levels with the American public, its future is grim. Indeed, even this bold caption on the masthead of the real estate contract will do nothing to correct the problem:

"Beware! Your agent is not your fiduciary and cannot represent you, as your agent has an independent self-interest in this transaction."

EXAMPLES

Recurring examples of real estate agent's conflicts of interest are endless:

A. Within a few days of the expiration of an exclusive listing, the seller's agent produces a buyer for 15 percent under market. Will seller's agent recommend the sale in order to avoid the loss of the commission that inevitably would occur at the termination of his listing? How would that dilemma impact fiduciary obligations?

B. Seller's agent presents seller with two offers. One is from his own customer and one from another agent. Which is he likely to recommend and what effect would that have on his fiduciary obligation?