Is dual agency bad for agents and their brokers, as well as buyers and sellers? In my previous 3 blogs I told you that dual agency occurs when one agent represents both parties (or when two agents of the same brokerage represent the buyer and seller), and how dual agency is bad for you as a consumer of real estate services.
But not only is dual agency bad for you, it can also be very risky for the agent. An example of the problem can be found in an article written some years ago for real estate agents by Judge Holohan, retired Justice of the Arizona Supreme Court. Judge Holohan explained that even though dual agency is allowed in Arizona, “The prior consent [by the clients] for multiple representation is really an opportunity for the agent to be placed in an impossible position.”
The “impossible position” occurs because it is a legal impossibility to adequately discharge a fiduciary duty to two parties who have opposite interests. This means that a single real estate licensee acting in a dual agency capacity has essentially no defense to a claim for breach of fiduciary duty – because being a dual agent is itself essentially a breach of fiduciary duty!
Or as Judge Holohan put it, the “impossible position” is because a real estate professional “can’t serve two masters.” As a result, even though agents can do dual agency, he cautioned that “what is permitted is not always the wisest course.”
So if sued in Arizona, an agent who is the only representative of the clients will almost always lose, with the only question being how much he or she has lost. Punitive damages may also be available if the damages arise from a breach of fiduciary duty, and punitive damages are not covered by most errors and omissions insurance policies.
And not only is the agent at risk. Typically the designated broker is joined as a co-defendant with the agent in dual agency litigation. The broker is potentially liable for breach of fiduciary duty, as well as failure to reasonably supervise the agent’s activities.
In fact, agency related issues are the number 1 problem of real estate brokerages according to the National Assoc. of Realtors 2011 Legal Scan. The NAR Legal Scan is a biennial research project undertaken by the NAR. The Legal Scan collects information on issues from real estate companies about the legal liability of real estate licensees nationwide. The Scan showed that agency representation issues outranked all other liability generating areas, including the failure to provide adequate property disclosures, ethics, and fair housing laws.
Another reason agents should refrain from dual agency is because it is also bad for the real estate industry as a whole. It makes the public feel that real estate agents are untrustworthy and put their own interest in money over the clients’ best interest. Thus dual agency contributes to, and may be a major factor in, the pervasive lack of trust the public has for real estate licensees.
Note the risk that I am referring to is when one agent represents both parties. Although two separate agents, each representing one side of the transaction who have the same broker, is also considered to be dual agency, from my review of case law across the country, only when there is a single agent do dual agent type issues arise. It appears that when only one agent is involved, the buyers and sellers involved feel betrayed in a way that does not become an issue where each party has their own agent.
In Part 5, I will propose that single representative dual agency be banned, and will discuss a real world replacement designed to satisfy the interests of all the parties involved.