“Keep it secret – keep it safe.” It’s a classic line uttered by Gandalf in 2001’s The Fellowship of the Ring.
To a science fiction or fantasy fan, Gandalf’s admonition to Frodo regarding the safety and secrecy of the One Ring evokes the burden and obligation placed upon Frodo. If not a sacred obligation, the protection of the Ring placed special and particular obligations upon Frodo. And while, as a real estate licensee, you may not face the burden of delivering the Ring to Mount Doom, you may still face extraordinary obligations resulting from your fiduciary duties.
One of the first things that real estate licensees-in-training learn is that they owe their clients fiduciary duties. The purpose of this article is to provide a refresher about the nature of the fiduciary obligations owed by real estate licensees, to give some claims examples of lawsuits where a licensee has been sued, and provide some risk management tips to help you try and avoid potential pitfalls.
Though it’s easy to say that real estate licensees are fiduciaries, we must ask what exactly that means. What obligations are placed on licensees as fiduciaries, and what types of activities give rise to claims?
The concept of fiduciary obligations is not new – it’s existed for hundreds of years. Essentially, a fiduciary relationship is created where a person is obliged, by contract or otherwise, to act for the benefit of someone else, and the obligation carries some aspect of discretionary power.
Ultimately, in defining the extent of the fiduciary duty, a court will look to issues of vulnerability and dependency.[1] There are many relationships which can give rise to fiduciary obligations – solicitor-client or director-corporation are classic examples.
For real estate licensees, there are several facets of the fiduciary duty that can be distilled into three broad categories:
- a duty of complete disclosure
- a duty of confidentiality
- a duty to avoid conflicts of interest.
In the most basic terms – real estate licensees, as fiduciaries, must act in the best interests of their clients.
Duty of disclosure
The issue of a licensee’s fiduciary obligations has been considered in the context of the duty of disclosure in British Columbia law for more than 30 years.
An interesting case, released in 1987, highlights how the duty exists in real world situations[2]. The matter concerned the purchase of a commercial building in Victoria, BC. The licensee, a dual agent, was to receive 1.75% commission on a sale price of $5.2 million from the seller. During the course of negotiations, the buyer indicated that he would not proceed unless, upon completion, he was given one-half of the total commission.
Upon eventually learning of the agreement between the licensee and the buyer to rebate the portion of commission, the seller refused to pay the entirety of the commission and a lawsuit was commenced. Ultimately, the court of appeal concluded that the licensee had breached her duty to disclose the commission rebate proposal to her principal, the seller. In finding that the licensee was not entitled to any commission, the court stated that:
[27] The agent could have disclosed the proposed arrangements to the vendor and advised him of her concern that unless she reduced her commission, there would be no sale. The vendor then would have a number of choices: he might not proceed with the sale; he might reduce the purchase price and pay a reduced commission; or he might approve the arrangement disclosed by the agent. Her non-disclosure denied her principal the option of acting in accord with one of these choices.
The duty of disclosure has arisen in other varied circumstances, such as the failure of a licensee to disclose that his sister-in-law was the prospective purchaser[3], or a licensee who failed to disclose to a seller that the likely property value of a listed property had increased substantially over a period of several months[4].
Ultimately, the duty of disclosure is a high standard for licensees; it’s been expressed as “The obligation of the agent to make full disclosure extends beyond these three categories and includes ‘everything known to him respecting the subject matter of the contract which would be likely to influence the conduct of his principal.’”[5]
From a risk management perspective, the Real Estate Services Rules are designed to require licensees to disclose if they are going to receive remuneration other than that paid for by the client. But, of course, the fiduciary duty can go further – licensees must disclose any information that they hold that may affect their client’s decisions relating to the property.
Duty of confidentiality
The duty to maintain confidential information on behalf of a client can be a path marked by landmines for a licensee.
A real estate licensee will often receive incredible amounts of information from a client. A listing agent will often come to know facts such as the motivation for selling, the ultimate price desired, etc. As a fiduciary, the licensee must keep those facts confidential. As recently noted, “The duty of confidentiality has long been recognized as a vital element embedded within the fiduciary principle.”[6]
We often hear of situations where a licensee is being asked to provide affidavit evidence to support litigation between a buyer and seller. For example, a seller may have commenced litigation against a buyer who refused to complete. The licensee acting on behalf of the buyer may have detailed knowledge of the reasons for the non-completion.
However, even though the agency itself may have ended, the duty of confidentiality continues. The licensee for the buyer cannot, without court order or the consent of the buyer, provide any confidential information to the seller or the lawyer acting on behalf of the seller. Licensees may feel that since a lawyer is the one contacting them that they are somehow compelled to give that information. When the situation arises, you should speak with your managing broker and obtain independent legal advice.
From a risk management perspective, where a licensee has confidential information received from a client, there are few circumstances in which that information could be released without consent from the client. The licensee is obligated to hold the information confidential. A listing agent cannot, without consent, disclose a seller’s motivation to sell, or suggest a price that the seller may be willing to accept. Licensees should also remember that the duty of confidentiality does not end when your agency ends.
Duty to avoid conflicts of interest
Licensees owe a duty to place their client’s interests above their own. A recent case demonstrates the problems that can arise when the client and licensee have overlapping interests[7]. A licensee’s company, a mortgage investment corporation, loaned monies to an eventual client. The client, when unable to make payments on the mortgage on the property, decided to sell, and eventually retained the licensee to act as listing agent. Shortly thereafter, the licensee’s mortgage company foreclosed on the mortgage debt, leaving a significant shortfall owing by the client.
The court found that the client did not appreciate the implications of the licensee’s conflict of interest in his role as listing agent, and did not expect that the licensee would use information available to him in his capacity as the listing agent to benefit the associated mortgage company. The court found this to be a classic conflict of interest and thus a breach of fiduciary duty.
The importance of this case is what flowed from the breach of duty. The court found that there were no out-of-pocket damages suffered by the client – ultimately the client had failed to pay the loans and the loss was not attributable to any conduct on the part of the licensee. Nonetheless, the court granted general damages against the licensee in the amount of $15,000, and punitive damages in the amount of $25,000.
Conflicts can, of course, arise in many circumstances. Licensees must ask themselves whether there is some circumstance, obvious or not, that is impeding their ability to act fully in the best interests of their client.
Though dual agency is now significantly restricted in BC, this type of agency by its very nature created conflict issues. Although the limited dual agency agreement amended the fiduciary duties owed, it was often a challenge for licensees to act impartially in the circumstances. Even where dual agency does not exist, a licensee must ensure that they are not putting themselves in any situation where the client’s interests are being subsumed by their own.
What about strata and property managers?
Both property and strata managers are licensees as well, and owe fiduciary obligations to their clients.
One can envision the ways in which their fiduciary obligations may come under scrutiny. For example, a strata or property manager is tasked with finding a contractor to complete repairs on behalf of a strata or landlord. Perhaps a roof needs replacing; perhaps a snow removal contract needs to be entered into; perhaps a new landscaper needs to be found – all circumstances that either a strata manager or property manager has been tasked by their principal to address.
A failure of the strata or property manager to disclose that a potential contractor is a family member would clearly be a breach of fiduciary duty. Similarly, placing a family member as a tenant without full disclosure could be a breach of fiduciary duty on the part of a property manager. Taking a referral or administrative fee from a tenant without disclosing such fee to the landlord would also likely constitute a breach of fiduciary duty.
Conclusion
Fiduciary duties can place onerous obligations on real estate licensees. However, if you keep in mind the underlying principles that establish the duties, then the path becomes clearer.
Ultimately, as discussed above, the essence is that licensees much always place their client’s interests above their own. If you’re in doubt, talk to your managing broker, the practice advisor at BCFSA, or your own lawyer.
[1] Mulligan v. Stephenson, 2016 BCSC 1941 at para 108
[2] Ocean City Realty Ltd. v. A & M Holdings Ltd., 36 DLR (4th) 94 (1987)
[3] Cuttell v. Bentz, 1986 CanLII 882
[4] Re Crackle, 29183 CanLII 296 (BCCA)
[5] Ocean City Realty Ltd. v. A & M Holdings Ltd., 36 DLR (4th) 94
[6] Mulligan v. Stephenson, 2016 BCSC 1941, at para. 113
[7] Mulligan v. Stephenson, 2016 BCSC 1941
