Professional Liability For Real Estate Agents

Lawsuits against real estate agents may be based on a number of different claims. Such claims may include allegations of misrepresentation, negligence, lack of disclosure, secret profits, conflict of interest, etc. As such, it’s important for both the real estate agent and the client to understand what the law expects of real estate agents.

Real estate agents owe contractual and fiduciary duties to their clients. If agents breach their duties, through negligence or other breach, they can be liable for damages. In certain circumstances, real estate agents can also be liable to the opposing party in a real estate transaction. With this in mind, agents must exercise diligence in the performance of their work. By understanding their legal and professional responsibilities, real estate agents can mitigate the risk of working in a highly litigious area.

Breach of fiduciary duty

The fiduciary relationship

The case law suggests that real estate agents are generally considered to be fiduciaries of their clients. This leads to the following questions: what is a fiduciary? How do I know whether I am acting as a fiduciary in a specific client relationship? What obligations flow from being a fiduciary? Unfortunately, the term “fiduciary” is “one of the most ill-defined, if not altogether misleading terms in our law.”¹

The term “fiduciary” often applies to one who holds anything in trust for another.² A person is in a fiduciary relationship with another when he or she has “rights and powers which he is bound to exercise for the benefit of that other [person].”³ The Courts have recognized that certain classes of relationship give rise to the presumption of a fiduciary relationship, including the relationship between agents and their clients.⁴ The Supreme Court has determined “that in most, perhaps almost all, situations, real estate (agents) owe their (clients) a fiduciary duty.”⁵

To complicate matters, the presumption that real estate agents are fiduciaries is rebuttable. This means that the appearance of a fiduciary relationship between a real estate agent and client is not necessarily determinative. To determine whether a real estate agent owes a fiduciary duty to a client, a court will analyze the substance of the relationship between the parties.⁶

Proving or disproving a fiduciary relationship

The test for whether a real estate agent is in a fiduciary relationship with a client is as follows:

1. The fiduciary has scope for the exercise of some discretion or power.
2. The fiduciary can unilaterally exercise that power…so as to affect the beneficiary’s legal or practical interests.
3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding discretion or power.⁷

The determinative factor for whether a fiduciary relationship exists is the “measure of the confidential and trust-like nature of the particular advisory relationship, and the ability of the plaintiff to establish reliance in fact.”⁸ This means that a fiduciary relationship between a client and real estate agent can arise as soon as an agent receives confidential information from the client (which, for example, includes the prices that the client is willing to receive or pay in a real estate transaction).⁹

It is also important to note that the case law suggests that a fiduciary relationship can arise in circumstances that may not seem obvious, including: where an agent acts on an unpaid basis, where an agent is engaged in a joint venture with their clients and even where there is no express agreement between agent and client.¹⁰

Fiduciary Duties

Real estate agents, when acting as fiduciaries, must act in the best interests of their client and remain completely loyal. In particular, a fiduciary must not act in any way that would cause his or her duty to the client to conflict with his or her own self-interest. Similarly, fiduciaries cannot use their position for personal gain. This means that an agent must not permit his or her own interests or the interests of third parties to interfere with their client’s interests unless the client has provided the agent with their informed consent.

(i) Conflict of interest

Agent’s purchase of clients’ properties

A conflict of interest will arise whenever an agent seeks to buy a client’s properties regardless of whether the property is purchased directly or indirectly or for commercial or personal use. The Real Estate and Business Brokers Act, 2002 provides that an agent trying to buy or sell property must provide written notice to all of the other parties to the agreement.¹¹ The notice should contain full disclosure of all facts within the agent’s knowledge that either do affect or will affect the value of the property at issue.¹²

Agent’s purchase of property in which clients are interested

A real estate agent who purchases property will be required to prove that the vendor had full knowledge of the agent’s actions and the potential for profit from the sale.¹³ In one case, a real estate agent who purchased land that his client was interested in was liable for failing to disclose to the vendor that the land purchased could be subdivided and resold at a profit.

Dual Agency

If a real estate agent or a brokerage firm act for both parties to a transaction, a court will assume that there is a conflict of interest because the parties’ interests are adverse. To avoid breaching their fiduciary obligations, real estate agents must disclose when they are representing both sides of the transaction and obtain the informed consent of each party to the dual agency.

(ii) Duty not to engage in secret profits

When acting as a fiduciary, a real estate agent cannot make secret profits or receive compensation from anyone but their client, unless they have received their client’s informed consent.¹⁴ This prohibits an agent from receiving:

• Payments from the other party: a real estate agent must not accept commissions or other remuneration from both parties to a transaction unless the client receives full disclosure and consents to the payment.

• Payments from a third party: a real estate agent must not receive a secret profit from someone who is providing services: either relating (e.g., a home inspector, appraiser, or mortgage lender) or incidental to the transaction (e.g., a moving company, a renovation contractor, or a home decorator).

Negligence

Real estate agents owe their clients a duty of care to act in a manner that fulfills the standard of care expected of real estate professionals. That means that a real estate agent must use the skill, competence and care expected of a real estate agent. Where an agent’s conduct fails to meet this requirement, the real estate agent may be liable for any damages suffered by the clients flowing from the real estate agent’s negligence.

(i) Duty of care

The duty of care to a client covers everything that is done (or that ought to be done) by the real estate agent for the client. The duty of care arises out of the agreement between the client and agent, as well as the agent’s role as the client’s advisor.¹⁵ O.J. No. 3377 (Ont. C.A.) at para. 25]

(ii) Standard of care

To determine whether a real estate agent has satisfied the standard of care, the agent’s conduct is measured against the conduct of a reasonably careful person in the same profession.¹⁶ To avoid liability, the agent must prove that he or she exercised the standard of care expected of a reasonably careful agent in the same circumstances.¹⁷ To determine whether a real estate agent’s conduct was reasonable in the circumstances, a court can look to industry practices, customs and statutory or regulatory standards.¹⁸ However, where a real estate agent holds himself or herself out as possessing special skills and expertise, the standard of care is higher and assessed with reference to a similarly skilled agent.¹⁹ It is also important to note that the standard of care does not change where an agent provides services to a client on an unpaid basis.²⁰

(iii) Requirement to independently investigate

Real estate agents have an obligation to independently verify any information that their clients will rely upon when determining whether to buy a property. This means that a real estate agent can be held liable for providing erroneous advice, if the advice is based on “uninformed positions, or if the agent or broker has failed to undertake any, or sufficient, research, investigation or consultation.”²¹

A recent case is illustrative of this point. In the Davenport case, a purchaser was concerned about whether a property had enough parking to support his dental practice.²² The purchaser’s agent made written inquiries of the vendor’s agent to confirm that the site had sufficient parking. While the vendor’s agent responded in the affirmative, the purchaser’s agent did not take any further steps to determine the lot size or availability of parking spaces. The purchaser subsequently discovered that the vendor had entered into a Boulevard Parking Agreement with the City of London that allowed him to park four vehicles on the west side of the property which encroached on City owned land. Ultimately, the Court held that both the purchaser’s agent and the vendor’s agent acted negligently and were liable to the purchaser.²³

Liability to the other party

In the course of real estate transactions, agents are frequently in contact with the opposing party. Real estate agents should be aware that they may owe a duty of care not only to their client but also to the other party.

(i) Duty of care

The duty of care owed by a real estate agent to the other party in a real estate transaction is more limited than the duty owed to a client. The case law suggests that an agent is obliged to disclose to an opposing party any material facts or major defects known to the agent at the time of the transaction.²⁴

(ii) Seller Property Information Sheet (SPIS)

Where a property has visible defects, the vendor’s agent should be particularly careful when relying on their client’s assessment of the property when advising the purchaser. In the Krawchuck case, the property at issue had visible defects, and the vendor’s agent, on the advice of the vendor, relayed to the purchaser that the house had been previously repaired and without problems for 17 years.²⁵ This information was also set out in the vendor’s SPIS. The purchaser waived the right to a professional home inspection. Shortly after possession, the purchaser discovered that there was ongoing settling that threatened the integrity of the entire house.

The vendor’s agent admitted in discovery that she did not have any expertise as a home inspector. Given her lack of expertise, the Court of Appeal held that the agent should have considered whether the vendor was mistaken in his impression that the property had been repaired and recommended “in the strongest terms” that the purchaser obtain a home inspection.²⁶

It is also important to note that the SPIS is not required in Ontario. If a vendor decides to provide an SPIS, the vendor’s agent should advise the vendor of the importance of providing accurate and complete information.²⁷ Moreover, if the vendor’s agent assists with the completion of the SPIS, they must exercise reasonable care and skill in ensuring its accuracy.²⁸