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Disclosure Doesn’t Force Relationship

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Question: I am the only broker involved in a transaction. Our company agency policy says that I become a transaction-broker. My listing agreement with the seller says I become a transaction-broker. My Exclusive Right-to-Buy Agreement with the buyer says I become a transaction-broker. If I make a mistake and check the box at the end of the buy/sell contract incorrectly indicating that I am a Seller’s Agent, does that make me a seller’s agent?

Response:  A lot can ride on whether you are an agent or a transaction-broker. If you act as an agent, you owe your client fiduciary duties. If you breach this duty, you forfeit the right to all compensation, regardless of your client’s damages [Moore & Company v. T A L L, Inc., 792 P2d 794 (Colo. 1990)]. However, if you are a transaction-broker, and you breach a duty to the seller, you do not automatically lose the commission. The broker is liable only for the client’s damages [Hoff & Leigh, Inc., 62 P.3d 1079]. Damages to the client may be substantially less than the amount of commission the seller owes the broker. In a recent order in Stearns v. McGuire, No. 02-RB-1912(OES) (D. Colo., July 26, 2004), the court answered the above question “no,” holding that a unilateral disclosure after the end of a contract did not establish an agency relationship in a real estate transaction under Colorado law. Parties must have a written agreement to establish a single party agency relationship, and a unilateral disclosure does not qualify as such a written agreement

Colorado law states that a real estate broker is a transaction-broker and not an agent for either party in a real estate transaction unless the parties establish a single agency relationship through a written agreement [C.R.S. §12-61-803(2)]. Although a broker may act as an agent for either party, the law presumes that a real estate broker is a transaction-broker unless the parties have a written agreement to the contrary [Sussman v. Stoner, 143 F.Supp. 2d 1232 (D. Colo. 2001)]. A transaction-broker assists one or more parties throughout a real estate transaction with communication, advisement, negotiation, interposition, contract terms, and closing without being an agent for the interests of either party [C.R.S. §12-61-802(6)]. Since the transaction broker is not an agent for either party, he or she does not owe a fiduciary duty to either party [Hoff & Leigh, Inc. v. Byler, 62 P.3d 1077, 1078-1079 (Colo. App. 2002)]

In Stearns, the seller asserted that the broker was the seller’s agent. The seller alleged that the broker had breached the duty of disclosure he owed to the seller so the broker should forfeit his entire commission. The broker claimed that he acted as a transaction-broker at all times because the parties did not have a written agreement establishing a single party agency relationship

The buyer and seller entered into the Colorado Real Estate Commission approved contract that included the following disclosure at the end of the form:

BROKER ACKNOWLEDGMENTS. . . Selling Company Brokerage Relationship. The Selling Company and its licensees have been engaged in this transaction as Seller Agent/Subagent. Broker’s Compensation Disclosure. Selling Company’s compensation is to be paid by Seller.” This disclosure followed the parties’ signatures and a line that stated: “End Of Contract.”

The court held that this disclosure was not part of the contract. The disclosure was unilateral because the seller did not acknowledge it by initials or signature. In fact, the seller did not expressly acknowledge or accept the disclosure in any way. Further, the court found that the disclosure was outside the body of the contract because it followed the parties’ signatures and the line indicating the “END OF CONTRACT.” Consequently, the parties did not have a written agreement establishing an agency relationship. The broker acted as a transaction-broker and owed no fiduciary duty to the seller

The seller also tried to argue that the court should treat the broker as the seller’s agent because the seller relied on the disclosure. The seller claimed that he incurred damages because he relied on the disclosure, thinking that the broker was his agent. The court rejected this argument because the court thought it was not reasonable for the seller to have relied on a unilateral disclosure that he did not ratify or acknowledge in any way. The court went on to say that the existence of the statutes requiring a written agreement to establish an agency relationship precluded the seller from reasonably relying on a unilateral disclosure

Finally, the seller argued that the parties had a single party agency relationship because the seller paid the broker a commission. The court also rejected this argument and stated that the payment of commission may not be construed to establish an agency relationship under Colorado law.

The Stearns case is an example (in addition to the examples from the Sussman and Hoff & Leigh cases) of the courts being sympathetic to the concept of transaction-brokerage.

Amanda S.P. Howe is no longer with the law firm of Frascona, Joiner, Goodman and Greenstein, P.C.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.