Dual Agency: A Hazardous Real Estate Practice

Douglas Whipple

Douglas Whipple

“Dual Agency” is a practice used
routinely in many residential real estate
transactions, and the liability risks often are
not recognized by the parties or the real estate
licensees (both agents and brokers). Many
licensees are ill-equipped to know how to
identify a conflict between the interests of the
buyer and the seller after the Dual Agency
Agreement has been signed and, when such a
conflict happens, how to proceed.

The potential hazard of dual agency
relationships has been recognized in the
industry for years but those warnings have
not necessarily been heeded. According to a
survey of legal issues conducted by the National
Association of Realtors® (NAR) in 2011, 57% of
respondents stated that the issue of dual agency
is the basis for a “moderate” or “high” number
of disputes, and more than 83% placed the issue
among their top three current legal issues. The
survey disclosed a belief that agents and brokers
do not understand dual agency. When the NAR
survey was conducted again in 2013, breach of
fiduciary duty lawsuits accounted for the largest
single number of residential real estate-related
court cases, including conflicts over the duties
owed in a dual agency relationship.

An excellent example of this legal minefield
is the recent case of Martha v. Black v. Stouffer
Realty, Inc. & Relic, Summit Cty. Common Pleas
Case 2010-11-7671. Conflicts arose between the
interests of the seller of a home in Richfield and
the buyer after they had signed a Dual Agency
Agreement. These conflicts served to posture the
Agent on the side of Seller and adverse to Buyer.
Eventually the transaction fell through. Seller,
disgruntled, sued Buyer for breach of contract.
Buyer in turn sued Agent and Broker for fraud,
breach of fiduciary duty and breach of the Dual
Agency Agreement. The jury returned verdicts
against Agent and Broker on all three counts
and the court entered judgment on the three
verdicts. This judgment was affirmed on appeal.
Black v. Stouffer Realty, Inc. & Relic, 9th Dist. C.A.
26550 (Dec. 26, 2013).

The Ohio Department of Commerce Division
of Real Estate publishes a standardized form
that defines “dual agency” and provides a list of
actions that the licensee shall and shall not take,
outlined by R.C. 4735.57(B). A dual agent may
not, among other things, advocate or negotiate
on behalf of either party or engage in conduct
that is biased on behalf of either party.

By signing the Real Estate Purchase
Agreement, Seller and Buyer had expressed their
common objective to conclude the transaction.
Agent thus perceived her fiduciary duty to
the parties as doing whatever was necessary
to consummate the transaction. But a dual
agent’s obligation is more complex than this.
Agent’s misperception resulted in considerable
conflict, trouble and expense for all concerned
— particularly for Agent and her Broker.

The transaction was peppered with mistakes
by Agent from the beginning. Buyer testified
that only after she had submitted her initial offer
on the Purchase Agreement form did Agent
present Buyer with the Dual Agency Agreement
form, stating authoritatively “Oh, I have this
form you have to sign. This is so I represent both
the buyer and seller fairly.” Buyer was under the
impression that signing the document was a
requirement — not a choice.

By this point in time Agent should have
presented Buyer with the “Consumer Guide to
Agency Relationships.” OAC 1301:5-6-05; R.C.
4735.56(D). At trial Agent admitted that failing
to give the Consumer Guide to Buyer until
weeks later was wrongful.

Buyer’s initial offer was $500,000, with the
deal being contingent on her ability to sell her
present home in Green. Seller formulated a
written counteroffer of $515,000, and delivered
this counteroffer to Agent. However, Agent
never presented the $515,000 counteroffer to
Buyer. Agent instead presented a different
counteroffer to Buyer four days later, after
Agent and Seller secretly conferred with each
other. The revised counteroffer provided
for a purchase price of $510,000, with Agent
waiving $5,000 of her commission. It also
provided that the contingency clause would
be removed. When Buyer accepted the
revised counteroffer she did not know that the
original counteroffer had ever existed. Agent
concealed the initial counteroffer from Buyer
and suggested the revised counteroffer so as to
accommodate Seller’s afterthoughts about the
contingency clause.

An agent in a dual agency relationship
may not engage in any act of advising on or
advocating the price of the property — no
matter how well intentioned. Here, Agent
appreciated how important it was to Seller to
remove the contingency clause but ignored
how important the clause was to Buyer. Agent
was duty-bound to convey to Buyer, as Buyer’s
agent, Seller’s original counteroffer. Had
Agent done so, Buyer could have accepted the
purchase price of $515,000 and retained the
ability to terminate the transaction if she was
unable — in a soft housing market — to sell her
present home. Agent presumably understood
that the contingency clause was desirable to
Buyer and undesirable to Seller. Agent believed
that her willingness to waive some of her
commission to facilitate the transaction was
commendable; when in fact any effort by a dual
agent to influence an agreement on the price
terms is prohibited.

Another problem was the physical appearance
of the Purchase Agreement. Agents often
direct the parties to hand-write their offers
and counteroffers in the margins and spaces
of the original purchase agreement form. The
final version of the Purchase Agreement in this
case was virtually indecipherable due to the
numerous revisions that had been scribbled
throughout the document. The quagmire of
notations created ambiguity as to whether Buyer
was to make a down payment of $148,000 or
only $103,000.

Once the parties agreed to the terms of the
deal in principle Agent could have prepared
and had the parties sign a clean, readable
copy of the Purchase Agreement. This is what
most lawyers would do if finalizing a contract
containing countless revisions. Had Agent
done so the ambiguity would have come to light
and the parties could have resolved it early on.

The ambiguity as to the down payment, which
Agent could have prevented, was a major reason
why Seller sued Buyer for breach of contract.

Agent also crossed the line by trying to
facilitate financing. Because the purchase
of the property was no longer contingent on
the sale of Buyer’s home, Buyer sought to
obtain a mortgage loan. The bank’s appraisal
of the property came back at $25,000 less
than the $510,000 price in the Purchase
Agreement. Agent informed the loan officer
that she disputed the initial appraisal. Agent
requested that the initial appraisal be appealed
and supplied the loan officer with several
additional comps for consideration. But Agent
failed to obtain Buyer’s permission to pursue
this appeal.

As a result of Agent’s appeal, a revised
appraisal established a value of the property
that was even lower than the first appraisal —
$58,000 less than the purchase price. The loan
officer informed Agent that the revised appraisal
was controlling. Agent protested and suggested
that yet a third appraisal be obtained — again
without Buyer’s authorization.

At this point it was in Buyer’s best interest
to abandon the anticipated deal. Buyer had no
motivation to pay $510,000 for property that
appraised for $58,000 less. A loyal advocate
would have helped Buyer find a permissible way
to terminate the contract rather than continue
to pursue the transaction aggressively. The
positions of the parties were irreconcilable;
Seller wanted to keep the deal and Buyer wanted
to kill the deal. Agent could no longer serve the
interests of both sides.

The bank eventually denied Buyer’s loan
application based on the low appraisals. Agent,
still oblivious to the concept of neutrality,
promptly put Seller’s property back on the
market and served as dual agent for Seller and
the eventual purchaser of the property. When
all was said and done, Seller ended up with the
Agent and Buyer ending up with a Summons.
There were many times that Agent should have
informed Seller and Buyer of a conflict and
that she was unable to proceed in a manner
that was unbiased as to both parties. This
case is an important teaching tool for brokers
and agents as to their obligations to both sides
after the Dual Agency Agreement has been
signed. It demonstrates the sobering fact that
the principles of dual agency sometimes require
the licensees to notify the seller and buyer of
their right to terminate or revoke the agency
relationship. See, e.g., R.C. 4735.57(B)(7),
R.C. 4735.71(A) and R.C. 4735.72(E)(1).

Dual agency is not an effortless maneuver to
score a double commission; it fundamentally
changes the agent’s relationship with both
seller and buyer. For prospective sellers
and buyers, this case illustrates why they
should not casually consent to a Dual Agency
Agreement that an agent has asked them to
sign. The case demonstrates that brokers have
a responsibility to ensure that their agents
understand the Dual Agency Agreement well
enough to explain it to sellers and buyers and
to implement it conscientiously.

Lawyers ordinarily refuse to enter into dual
representation relationships with potentially
adverse parties; and once in such a relationship
they proceed with considerable caution. In
matters involving dual agency, the real estate
sales industry would do well to emulate the
laudable principle of restraint that is exercised
by the legal community. Real estate licensees, for
the benefit of their clients as well as themselves,
should not view the Dual Agency Agreement
as a routine practice but, rather, a contract
laden with serious risks that may outweigh its
potential value.

Douglas Whipple has been a civil
trial lawyer for 33 years, providing
legal services to businesses, families
and individuals. He represented the
Buyer in this litigation. Mr. Whipple
is a Life Member of the 8th District Judicial
Conference, and has been a CMBA member since
1982. He can be reached at Whipple Law LLC,
whipple-law.com, (216) 912-8479.