Tuesday, 24 October 2017

Disclosure Of Agent's Interest

Written by Posted On Monday, 15 February 2016 20:06

We are used to discussions of disclosures about property: "Does the roof leak?", "How was the slope repaired?", "Did the creek flood in last year's rain?" Etc. Sometimes, though, there are also disclosure issues about agents and even principals.

Suppose, for example, that an agent is representing her son-in-law who is attempting to purchase a home. Does she need to disclose to the seller or the seller's agent that she is related to the prospective buyer in that way?

When we ask whether something needs to be disclosed, must be disclosed, or should be disclosed, we may be asking a question of ethics or a question of law. Depending on which, the answers may be different. (Compare: From the perspective of ethics, it is generally wrong to tell a lie; whereas, except for special circumstances, there is no law against doing so.)

In the real estate context, ethical do's and don'ts can be found in the Code of Ethics of the National Association of Realtors (NAR). Although not all real estate licensees are members of NAR, most active agents are. In belonging to NAR, as well as a local Realtor®association, an agent subscribes to that Code of Ethics.

From an ethics point of view, the answer to the question posed earlier is to be found in Article 4 of the NAR Code of Ethics. It is worth quoting in full: "REALTORS® shall not acquire an interest in or buy or present offers from themselves, any member of their immediate families, their firms or any member thereof, or any entities in which they have any ownership interest, any real property without making their true position known to the owner or the owner's agent or broker. In selling property they own, or in which they have any interest, REALTORS® shall reveal their ownership or interest in writing to the purchaser or the purchaser's representative."

Based on Article 4, the agent would be ethically compelled to disclose that the prospective purchaser she represented was in fact her son-in-law. (Yes, yes, I know that the article says "immediate families", but, through a fine exercise of casuistry, in one of the many Case Interpretations that accompany the Code of Ethics, it is made clear that relationships like in-laws would be covered as well.)

Conversely, according to the Code, such disclosure would have to be made if the agent were related to, or had financial or ownership interest in, the seller.

So, there is the ethics answer, what about the law? In California, the law on this point is curious to say the least. Business and Professions Code section 10177 (o) provides that the Real Estate Commissioner may suspend or revoke the license of any licensee who (a) is the agent of a buyer, and (b) fails to disclose to that buyer the direct or indirect ownership interest in the property of any "…person related to the licensee by blood or marriage, by an entity in which the licensee has an ownership interest, or by any other person with whom the licensee has a special relationship…"

In short, California law is similar to the Code of Ethics with respect to disclosure that must be made to a buyer by a licensee who is acting as an agent for the buyer. Moreover, it is well established in California case law that it is a material fact that must be disclosed to the seller, if the seller's agent is related to or has some financial or ownership interest in the buyer (e.g. if the buyer were an LLC).

But these principles from the law apply to disclosure duties of a principal's agent. What if the agent is the principal, either buying or selling on his own account? California law is silent in this regard.

In California there is no legal requirement that a real estate licensee, acting as a principal, must disclose his or her licensee status. It may be good business practice, but it isn't required. That, I suspect, is going to come as a surprise to some readers.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way. His email address is This email address is being protected from spambots. You need JavaScript enabled to view it..

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Bob Hunt

Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at scbhunt@aol.com.

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