Breach of Fiduciary Duty in Real Estate Transactions

Originally published by Cris Feldman.

A fiduciary duty is a legal obligation wherein one party must act in the best interest of another. The obligated party is known as the fiduciary and is entrusted with the care of the other party’s finances or property. When a breach of this trust occurs, it can have serious legal implications. Understanding how this type of breach can occur in the real estate industry is important to protecting one’s assets and finances.

When it comes to real estate, in the event a real estate professional is acting as an “agent,” he or she owes their client a fiduciary duty. Though commonly referred to as real estate agents, it is actually rare for real estate deals to involve real estate professionals acting within the legal definition of an agent.

Most states have enacted laws requiring a specific signed document to give a real estate professional agent status. In Texas, the Texas Real Estate Commission (TREC) has specific rules in place governing a real estate broker or salesperson acting as an agent or fiduciary of another. Certain laws – like the Texas Real Estate License Act, the Inspector Act, the Residential Service Company Act, and the Timeshare Act – helped codify and solidify these rules.

Real Estate Breaches of Fiduciary Duty

Even with these laws and regulations in place, a breach of fiduciary duty can still occur. When a real estate professional is granted agent status, their fiduciary duty requires them to be honest and candid with the buyer. The agent will spend a majority of the buying or selling process working independently of the client by negotiating with other parties, coordinating inspections, and reviewing documents. The real estate agent is ultimately required to act as a proxy for the client by making decisions for them and reporting information in an open and honest manner.

A breach occurs when an agent decides to act for his or her own personal benefit instead of in the best interest of their client. Breaches of fiduciary duty in real estate can occur when:

• The agent receives secret profits or fees not disclosed to the client
• The agent fails to inform a seller of other offers on the table after an offer has been accepted
• The agent fails to advise a buyer of any material defects to the property
• There is dual representation or facilitating a sale of a property by acting as the real estate agent for both the buyer and seller without their knowledge
• The agent provides the client’s personal information to the other broker without the client’s permission
• The agent declines or accepts an offer without the client’s approval

Each breach can have a serious financial impact on the client and can cause irreparable damage, including a client stuck with a house full of defects or a client with their personal details disclosed to unknown people or entities.

In the event a breach occurs, there are several available legal remedies, including:

Rescission

When a real estate agent breaches their fiduciary duty, the client can ask the courts to rescind the contract and restore them to their status prior to entering the agreement. This can involve the return of property to the seller and a refund of the purchaser’s money.

Forfeiture of Commission

A real estate agent is entitled to payment if they breach their fiduciary duty. Because of this, an agent can be required to refund any compensation received.

Damages

A breach of fiduciary duty by a real estate agent can damage their client. If so, the agent must compensate their client for those damages. In the event the agent of a seller of a property failed to present a better offer than what was accepted, the agent would be required to reimburse the seller for the difference between the lower and higher offers.

Houston Breach of Fiduciary Duty Attorneys

Failing to fulfill a fiduciary duty can have serious legal consequences. Any time a fiduciary profits through self-dealing or causes a loss to another party, he or she can be held accountable for their actions. At Feldman & Feldman, our commercial litigation attorneys understand the complexities and nuances of the fiduciary relationship; and we represent clients in pursuing and/or defending against these claims. Contact the attorneys at Feldman & Feldman today to discuss your needs.

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