CLIENT/PRINCIPAL DUTIES TO LICENSEE
Just as the Agent owes certain duties to the principal, the principal has responsibilities toward the Agent. The principal’s primary duties are to comply with the brokerage agreement and cooperate with the Agent. The principal must not hinder the Agent and must deal with the Agent in good faith. The principal also must compensate the Agent according to the terms of the brokerage agreement, which in most cases will be a written one, with Sponsoring Broker designation of the Licensee handling the Landlord or Tenant or sell or buyer.
LICENSEE DUTIES TO CLIENT/PRINCIPAL – FIDUCIARY
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; the 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 leased if representing a Landlord and the type of property being sought, rent, size of unit, etc. if representing a Renter or Tenant.
If the Agent represents the Landlord, care and skill include helping the Landlord arrive at an appropriate rental price, discovering and disclosing facts that affect the Landlord, and properly presenting the contracts (leases) that the Landlord may sign. it also means properly marketing the property and helping the Landlord evaluate the terms and conditions of any changes in the lease requested by the Renter, incentives given to the Renter, move in or move out dates, security deposit terms. Etc.
An Agent who represents the Renter or Tenant is expected to help the Renter or Tenant locate suitable property and evaluate property values, neighborhoods and property conditions, rent comparisons and Landlord negotiations with the Renter/Tenant’s interest in mind.
An Agent who does not make a reasonable effort to properly represent the interests of the principle could be found by a court who have been negligent. The Agent is liable to the principle 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 principles 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 contract will be liable for any losses that the principal suffers as a result.
However, if the principal wants to discriminate on the basis of race, which is always illegal, the Agent must not follow the principles instructions and should withdraw from the agency. Violating fair housing laws is illegal, and an Agent has the duty of obedience to his or her client. So, the Agent can neither obey the client nor break the law. In effect, the Agent cannot carry out his or her legal duties to the client.
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 the Agent with a higher commission). Each Agent must perform all services with the goal of promoting the principal’s best interests.
Illinois license law prohibits an Agent from acting as a dual Agent in any transaction to which the Agent is a party. Also, undisclosed dual agency is prohibited by the Licensing Law under penalty of loss of license. In the case where the Leasing Agent is representing the Landlord, the Leasing Agent should make it clear to the potential Renter that he or she is the representative of the Landlord and provide the Renter with a “No Agency” disclosure form. See “Dual Agency” below.
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. There are certain disclosures which must be made by the Landlord to potential Renters/Tenants. These disclosures will be discussed in a future chapter.
Disclosure forms are usually completed or distributed by the Leasing Agent to potential Renters before or at the time of giving a copy of the lease to the potential Renter to sign. Regardless of the Landlord, Property Manager, or Leasing Agent completion of the disclosure form, the Landlord’s Agent is required to disclose all material defects known to her, including in cases where the Agent knows that the Landlord has misrepresented the extent or existence of property defects or has not fully disclosed them. An Agent for a Renter/Tenant must disclose deficiencies of a property as well.
Accounting – Illinois State license laws require that Agents periodically report status of all funds or property received from or on behalf of the principal. Similarly, Illinois 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 (5 years for all Real Estate Documents).
Illinois Licensees are required to deliver true copies of all executed leasing contracts to the people who signed them within 24 hours. In Illinois, all funds entrusted to a Licensee (generally security deposits in the case of some residential leases) 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 – A key element of fiduciary duties. Client information obtained during the term of the brokerage agreement, and forever afterward, must be kept confidential. For example, when the principal in an agency agreement is the Landlord, the designated Agent may never reveal such things as the principal’s willingness to accept less than the rental price or urgency to rent, unless the principal has authorized the disclosure. If the principal in an agency agreement is the Renter, the Agent may not disclose that the Renter will pay a higher price, is under a tight moving schedule, or other facts that might harm the Renter’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, as amended in 2020. According to this statute, the Agent must:
- Perform the terms of the brokerage agreement between a Sponsoring Broker and the client.
- Promote the best interests of the of the client by:
- Seeking a transaction at the price and terms states in the brokerage agreement or at a price and terms otherwise acceptable to the client.
- Presenting all offers to and from the client on a timely basis, unless the client has waived this duty.
- Disclosing to the client material facts concerning the transaction of which the Licensee has actual knowledge, unless that information is confidential information.
- On a timely basis, accounting for all money and property received in which the client has, may have, or should have had an interest.
- Obeying specific directions of the client that are not otherwise contrary to applicable statutes, ordinances, or rules, and
- Acting in a manner consistent with promoting the client’s best interests as opposed to a Licensee’s or any other person’s self-interest.
- Exercises reasonable skill and care in the performance of brokerage services.
- Keep confidential all confidential information received from the client; and
- Comply with all the requirements of the Act and all applicable statutes and regulations, including fair housing and civil rights.
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 1545(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