H. Glenn Boggs is a professor in the Department of Risk
Management/Insurance, Real Estate and Business Law, College of Business, Florida State
University.
In recent years, the U.S. real estate brokerage industry has experienced dynamic change in the
area of agency law and practice. Professional and educational literature on the subject
abound and significant lawsuits on this issue have been litigated. Not unexpectedly, state
legislatures and administrative rulemakers have addressed and readdressed the subject; yet
resolution of the complex and competing issues in this subject area remain far from complete.
Perhaps like a volcano preparing to erupt, what we have seen so far in the agency area has been
only preliminary smoke and tremors while the main flow of molten lava remains to come.
At the center of the agency vortex is the subject of the duties owed by real estate licensees to their
principals and also to parties opposite from their principals. The relatively recent advent of buyer's
brokerage in the real estate marketplace has been one of the catalysts of change. Another cause
of change has been the increase in litigation in which brokers have been alleged to be in violation
of their agency/fiduciary duties. Some of these lawsuits have resulted in very substantial
judgments against brokers found to be liable.[1]
Against this background, one of the ideas receiving consideration for possibly reorienting the
agency relationships of real estate brokers is the facilitator concept. The brokerage
industry's major national trade association, the National Association of Realtors (NAR), initiated a
study group in July, 1991 to comment on some of these issues. According to its March,
1992 report, the NAR Presidential Advisory Group on Agency was formed to ". . . conduct an
in-depth study of alternative agency relationships, identify any impediments and recommend
structural and policy changes to remove these impediments where appropriate." After holding a
series of hearings around the country in 1991 and early 1992, the study group reviewed the
literature and developed several findings of fact and recommendations. [2]
The group also commented on future developments that it contemplated in the industry. The
"future developments" area of the report centered on the facilitator concept. The NAR study
group did not recommend adoption of the facilitator concept, instead it believed that ". . . many of
the implications of this concept and its future development remain unknown and require further
study." The group also listed the advantages, disadvantages, and impediments it observed
regarding real estate facilitators. [3] One helpful part of the report was a
glossary which sets outwhat may become standard definitions for a variety of real estate terms.
For "facilitator" the glossary states:
Until very recently, the use of the middleman technique in modern real estate practice has been
uncommon. For example, John W. Reilly, in his 1987 book, Agency Relationships in Real
Estate [p. 171], had this to say about middlemen:
In this case, the trial court found that the broker, Property House, had no "discretionary
authority" to act for the seller and that the broker had acted ". . . solely as a middleman and was
not precluded from receiving compensation from both parties to the transaction." The appellate
court would have none of this, however. It said:
A person who assists the parties to a potential real estate transaction in communication,
interposition and negotiation, to reach agreement between or among them, without being an
advocate for the interests of any party except the mutual interest of all parties, to reach
agreement. Also known as an intermediary.[4]
Background and Development
If the broker or agent is a mere middleman whose business it is to bring the parties together, that
they may make their own bargain, there is no valid reason why he may not stipulate for
commissions from each party.[7]
Likewise, a New York case, Knauss v. Gottfried Krueger Brewing Co.[8]
(also decided in 1894) is cited to explain:
To be a mere middleman the agent must not be invested with the least discretion, and the first
employer must have no right to rely on obtaining the benefit of his judgment.[9]
Notice that the middleman described in these cases is not a dual agent as we understand that term
today, because the middleman is not the agent of either party. Accordingly, a middleman
should not owe a fiduciary duty to either party, which is in direct contrast to the typical dual
agent, who owes a fiduciary duty to both buyer and seller.
One limited exception to the rule that a broker cannot collect a fee from both parties without
their prior approval is the so-called middleman exception. The middleman exception, in which the
broker merely brings the parties together to negotiate their own contract, does not apply if the
broker exercises any discretion or authority to negotiate for the principal. . . [authorities cited]. If
the broker is involved in promises of service, representations, preparation of escrow documents,
advice and assistance, the broker is an agent and not a middleman. In actual practice, true
middleman status occurs only in rare situations. One example of a middleman is a "broker's
broker," that is, a broker who puts the seller's broker and the buyer's
broker in touch with each other.
The idea of a real estate broker operating as a "mere middleman" without a fiduciary duty to
either party has been unusual enough in recent years that modern courts presented with
a broker seeking to operate in this fashion may reject the concept unless new legislation provides
authorization. They may find it foreign to and out of accord with typical real estate
licensing laws, which have usually been founded on "protection of the public" principles. For
example, a modern case in this area is Property House, Inc. v. Kelley [10]
(decided in 1986 in Hawaii).
Even if Property House acted merely as a "middleman" in this transaction, we choose not to
recognize a "middleman" exception to the real estate broker's duty of full disclosure. The
disclosure and consent requirements, while certainly not burdensome, serve to reduce the risk of
misconduct by an intermediary. By keeping all parties fully informed, they reduce the potential
for misunderstanding and dispute.
A plain reading of HRS 467-14(4) [the applicable state law on licensing and regulating real estate brokers and salesmen] indicates no exception for transactions in which a real estate broker acts purely as a middleman. Nor is there any evidence, as there was in Tyrone v. Kelley . . ., that the legislature intended to exempt licensed real estate brokers acting merely as middlemen from the purview of the real estate licensing laws.Cases like Property House, Inc. v. Kelley indicate that the courts are likely to be unsympathetic to the concept of a "middleman" in real estate brokerage transactions when deciding cases under real estate licensing and regulatory statutes, unless specific statutory authority for the concept is adopted.Property House owed a duty to Roy Kelley to disclose its dual representation. Its failure to do so deprives it of its right to compensation from the sellers. We reverse the trial court's judgment on Count II. [11]
Modern court decisions have done more than simply prevent real estate brokers from being "mere middlemen" in transactions, as, generally, the cases have tended to superimpose common law rules of agency on the real estate brokerage business. This has meant that brokers owe a fiduciary duty to their principal, and that principals can be legally bound by and potentially libel for certain acts of their agents. [12] Agents have also had court-imposed duties placed on them regarding their treatment of parties opposite from their principals. [13] Initially, the duties to parties opposite from the principal were fairly straightforward, including requirements like honesty, candor, and fair dealing. [14] In the course of time, however, some court decisions have expanded the scope of these duties to the point at which they have become very difficult, if not nearly impossible, for brokers andsalespersons to cope with.
For example, consider the 1984 California case of Easton v. Strassburger [15], which has been widely cited in the literature. Briefly, the facts were that the buyer purchased "a 3,000 square foot home, a swimming pool and a large guest house" for $170,000 in mid-1976. Subsequent to the purchase there were earth slides at the premises causing the foundation to settle, leading to "cracks in the walls and warped doorways." The damage to the structure was so severe that one estimate of the current value of the property was "as low as $20,000." Repair cost estimates "ranged as high as $213,000." There had been a couple of minor earth slides in 1973 and 1975 before the sale, but the sellers did not mention this. [16]
In light of these facts, it comes as no surprise that the buyers filed suit--naming the sellers, the builders and all the real estate brokers involved in the deal as defendants. To simplify the legal result, only the rule of law applied to the listing broker, Valley Realty, the seller's agent, will be discussed further. Recall that the defendant broker owed a fiduciary duty to the seller, was employed to sell this property on terms as favorable to the seller as possible and was being sued by the buyer.The question before the court boiled down to the issue of how the seller's agent should properly behave toward the buyer. The buyer, of course, complained that the seller's agent had not warned about the soil conditions. Naturally the broker contended that as a seller's agent, its loyalty was to the seller and it had no duty to undertake inspections for the buyer. [17]
To the probable surprise and, perhaps, dismay of the real estate brokerage industry, the appellate court ruled for the buyer. The court expanded a broker's duties to the party opposite from the principal by stating:
The issue, then, is whether a broker is negligent if he fails to disclose defects which he should have discovered through reasonable diligence. Stated another way, we must determine whether the broker's duty of due care in a residential real estate transaction includes a duty to conduct a reasonably competent and diligent inspection of property he has listed for sale in order to discover defects for the benefit of the buyer. [18]
In sum, we hold that the duty of a real estate broker, representing the seller, to disclose facts, as that fundamental duty is articulated in Cooper and Lingsch, includes the affirmative duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal. [19]In the aftermath of a decision like this, put yourself in the shoes of a broker representing the seller. You would be obliged to say something like this, "Now that we have your listing, we'll be doing all we can for you to sell your property, but first we have to do a "competent and diligent" inspection to find any problems "materially affecting the value or desirability of the property" so we can tell buyers about them. Probably your seller's reaction would be less than enthusiastic!
More Input from the National Association of
Realtors
None of the nine elements recommended for a legislative framework actually embraced the
concept of a brokerage "facilitator" or "middleman." This is because Recommendation #1
from NAR's November, 1993 Facilitator/Non-Agency Concept Report declined to endorse this
concept. The Recommendation stated, "NAR should not further develop or promote the pure
non-agency facilitator concept. It is not the intent of NAR to characterize the facilitator concept
as unprofessional." Remember that the use of a true middleman or facilitator would mean the
elimination (or at least the reduction) of the fiduciary duty flowing from the agent to principal
(and perhaps the duty to the opposite party as well). This, of course, has the effect of reducing
services received by the public from the brokerage industry. If fully understood, this would
probably be perceived negatively by consumers--unless there was something else added to
sweeten the deal for the public, like perhaps a commission rate reduction by brokers using this
new approach. In any case, a recommendation for the facilitator/middleman approach was not
endorsed by the November, 1993 NAR report.
This omission has not stopped some states from enacting the concept anyway. For example, the
1994 Florida Legislature enacted a new law creating a "transaction broker." As the following
definition makes clear, a "transaction broker" [21] is another name for a
facilitator or middleman. According to the definitions section of the statute, the term "transaction
broker" means:
.
At least two other states in addition to Florida are experimenting with this type of brokerage. For
example, a Georgia law which became effective on January 1, 1994 creates the concept of a
"limited agent," which according to the statute is explained as:
All three of these states (Florida, Georgia and Colorado) experimenting with the "middleman"
concept in real estate brokerage made this change effective in 1994. Investigation of
the legal ramification of these legislative changes is on the proverbial "cutting edge." Finally,
there may be other states in addition to the three examined here which have also included this
concept in a new statute--or, as is very likely, there may be additional states that will adopt the
concept in the future.
. . . a broker who facilitates a brokerage transaction between a buyer and a seller. The
transaction broker does not affirmatively represent either the buyer or seller as an agent, and no
fiduciary duties exist except for the duty of accounting and the duty to use skill, care, and
diligence. However, the transaction broker shall treat the buyer and seller with honesty
and fairness and shall disclose all known facts materially affecting the value of the property in
residential transactions to both the buyer and seller. The broker's role as a transaction broker
must be fully disclosed in writing to the buyer and seller.
The new Florida law also defined a fiduciary as:
. . . a broker in a relationship of trust and confidence between that broker as agent and the seller
or buyer as principal. The duties of the broker as a fiduciary are loyalty, confidentiality,
obedience, full disclosure, and accounting and the duty to use skill, care, and diligence. [22]
A simple comparison of these two definitions shows that the duties not undertaken by a
transaction broker are loyalty, confidentiality, obedience, and full disclosure. Nevertheless,
the Florida transaction broker remains under a duty of accounting, and use of skill, care, and
diligence. Since this law is new, it remains to be seen how the courts will apply its
requirements to actual cases
A broker who performs services under a brokerage engagement for another is a limited agent,
unless a different legal relationship between the broker and the person for whom the broker
performs the service is intended and is reduced to writing and signed by the parties. . . .
Except as set out in this chapter, a limited agent shall not be deemed to have a fiduciary
relationship with any party or fiduciary obligations to any party but shall only be responsible for
exercising ordinary care in the discharge of its specified duties under the brokerage
engagement. [emphasis added] [23]
In addition, Colorado's General Assembly created a "transaction-broker" in a new law, effective
on January 1, 1994. According to the Colorado statute, a transaction-broker is
defined as:
a broker who assists one or more parties throughout a contemplated real estate transaction . . .
without being an agent or advocate for the interests of any party to such transaction. . . .
(emphasis added) A broker shall be considered a transaction-broker unless:
In a later section of the statute (12-61-807), a fairly detailed list of the "obligations and
responsibilities" of a transaction broker are specified. It is noteworthy that the law specifically
states that, "A transaction-broker has no duty to conduct an independent inspection of the
property for the benefit of the buyer or tenant. . . ." This provision seems very likely to have
been designed as an anecdote to the Easton v. Strassburger case from California which was
discussed earlier.
1.
For a discussion of related issues, see 34 Columbia L. Rev. 552; 20 Marq. L. Rev. 163; & 35 Yale L.J. 503; 63 ALR 3d 1211 and Timmerman v. Ankron, 487 SW 2d 567. (These authorities are cited in Real Estate Law, Werner and Kratovil, 10th ed., 1993, at p. 121.) Also see, "Undisclosed Dual Agency Results in Court Judgement," Advise and Counsel, Summer 1992, Vol. II, No. 2.2.
The six recommendations from the Report were:
3.
National Association of Realtors, Presidential Advisory Group, Report on Agency, Mar. 1992, p. 13.4.
Ibid., p. 16.5.
14 A.L.R. 464.6.
114 N.C. 597, 19 S.E. 628 (1894).7.
114 N.C. 603 (1894).8.
142 N.Y. 70, 36 N.E. 867 (1894).9.
Ibid.10.
715 P.2d 805 (1986).11.
Ibid., pp. 811 and 812.12.
See, "Who's My Boss?" (Agency in Real Estate), Jules Schneider and Bill Tune, Gorsuch Scarisbrick, Publishers (1989) at Chapters 2 & 3.13. See Zichlin v. Dill, 25 So.2d 4 (Fla. 1946).
14. 15. 16. 17. 18. 19. 20.
21.
See Chapters 94-119 and 94-337, Laws Florida (enacted by the 1984 Session of the Legislature.)
22.
23.
24.
