The agency agreement usually authorizes the real estate licensee to act for the principal. The agent’s fiduciary relationship of trust and confidence means that the real estate licensee owes the principal certain duties. These duties were not simply moral or ethical; they formed the common law of agency and now are the basis for statutory laws governing real estate transactions. Under the common law of agency, an agent owes the principal the duties of care, obedience, loyalty, disclosure, accounting, and confidentiality.
The six common-law fiduciary duties may be remembered by the acronym COLD AC:
- Care,
- Obedience,
- Loyalty,
- Disclosure,
- Accounting, and
- Confidentiality.
Care
Agents must exercise a reasonable degree of care while transacting the business entrusted to them by the principal. Principals expect the agent’s skill and expertise in real estate matters to be superior to that of the average person. The agent should know all facts pertinent to the principal’s affairs, such as the physical characteristics of the property being transferred and the type of financing being used.
If the agent represents the seller, care and skill include helping the seller arrive at an appropriate listing price, discovering and disclosing facts that affect the seller, and properly presenting the contracts that the seller signs. It also means properly marketing the property and helping the seller evaluate the terms and conditions of offers to purchase.
An agent who represents the buyer is expected to help the buyer locate suitable property and evaluate property values, neighborhoods and property conditions, financing alternatives, and offers and counteroffers with the buyer’s interest in mind.
An agent who does not make a reasonable effort to properly represent the interests of the principal could be found by a court to have been negligent. The agent is liable to the principal for any loss resulting from the agent’s negligence or carelessness. The standard of care will vary from market to market and depends on the expected behavior for a particular type of transaction in a particular area.
Obedience
The fiduciary relationship obligates the agent to act in good faith at all times, obeying the principal’s instructions in accordance with the contract. However, that obedience is not absolute. The agent may not obey instructions that are unlawful or unethical. On the other hand, an agent who exceeds the authority assigned in the contact will be liable for any losses that the principal suffers as a result.
Loyalty
The principal’s interests come first, even above the self-interest of the agent. Agents must not consider how the result of negotiations will serve their own interests (for instance, by providing them with a higher commission); each agent must perform all services with the goal of promoting the principal’s interests. By law, in all fifty states, agents are not permitted to buy property listed with them for their accounts or buy or sell property in which they have personal interest unless they have made that interest known to the principal or purchaser and received that party’s consent.
Illinois license law prohibits an agent from acting as a dual agent in any transaction to which the agent is a party (Buyer or Seller). The agent must be particularly sensitive to any possible conflicts of interest.
Disclosure
It is the agent’s duty to keep the principal informed of all facts or information that could affect a transaction. Duty of disclosure includes disclosure of relevant information or material facts that the agent knows or should have known.
The agent is obligated to discover facts that a reasonable person would feel are important in choosing a course of action, regardless of whether those facts are favorable or unfavorable to the principal’s position. The agent may be held liable later for a mistake on these issues.
The Illinois Residential Real Property Disclosure form shifts the responsibility for full disclosure from the real estate agent to the seller.
It requires that sellers of one to four unit residential properties fill out property disclosure forms revealing any material defects they are aware of in the real estate for sale.
The completed forms shall be given to buyers before an offer is made.
If the disclosure form is delivered after the offer has been accepted and if it has any negative disclosures, the buyer has three days to cancel the contract.
Furthermore, if the seller learns of a new problem after a contract is signed and up until closing, disclosure must be made in writing to the buyer. In the latter case, the buyer does not have the power to simply cancel the contract. Compensation may be negotiated or the problem remedied by the seller.
Disclosure forms are usually completed by the seller before he signs the listing agreement or at the time of signing. Regardless of the seller’s completion of the disclosure form, the seller’s agent is required to disclose all material defects known to her, including in cases where the agent knows that the seller has misrepresented the extent or existence of property defects or has not fully disclosed them. An agent for a buyer must disclose deficiencies of a property as well.
Accounting
Most states’ license laws require that agents periodically report the status of all funds or property received from or on behalf of the principal. Similarly, most state license laws require that licensees give accurate copies of all documents to all affected parties and keep copies on file for a period of time.
Illinois licensees are required to deliver true copies of all executed sales contracts to the people who signed them within 24 hours.
In Illinois, all funds entrusted to a licensee must be deposited in a special escrow account by the next business day following the signing of a sales contract or lease.
Commingling such monies with the licensee’s personal or general business funds is illegal. Conversion, the practice of using those escrow funds as the licensee’s own money, is illegal as well.
Licensees should be aware that records of escrow account transactions and reconciliations must be kept on file for at least five years.
Confidentiality
Confidentiality is a key element of fiduciary duties. Client information obtained during the term of the brokerage agreement must be kept confidential. For example, when the principal is the seller, the agent may not reveal such things as the principal’s willingness to accept less than the listing price or urgency to sell, unless the principal has authorized the disclosure. If the principal is the buyer, the agent may not disclose that the buyer will pay a higher price, is under a tight moving schedule, or other facts that might harm the principal’s bargaining position.
These statutory duties, based on (but replacing) common-law duties, are set forth in Article 15 of the Real Estate License Act of 2000.
An agent may not disclose personal, confidential information about her principal. However, known material facts about the property’s physical condition or its environs must always be disclosed.
A material fact is any fact that, if known, might reasonably be expected to affect the course of events.
Under Section 15-15 (2) (C) of the Act, material facts do not include the following when located on or related to real estate that is not the subject of the transaction:
- Physical conditions that do not have a substantial adverse effect on the value of the real estate
- Fact situations
- Occurrences
