Those whom the law charges with a fiduciary duty can pay a stiff price when they breach this duty to their client. A recent case reported from the Franklin County Court of Appeals shows the importance of avoiding the temptation to put a fiduciary’s own interest ahead of that of the client.
Real estate brokers, among others, have a fiduciary duty to their clients. This duty has been defined as an obligation to act primarily for the benefit of another. He who has this duty is one with a special trust or confidence conferred upon him, and it is one that requires action consistent with the concepts of good faith, integrity, and honesty.
In this reported case, the buyer sought to purchase undeveloped ground in Union County, Ohio, and hired a buyer’s broker. After selecting a property, the buyer asked the broker to undertake an appraisal to make sure that the $78,000 offer was consistent with the market value of the property.
This property was listed in the Multiple Listing Service. The listing noted “a $4,000 agent bonus” if the property closed within less than one month.
The broker conducted the appraisal requested by the buyer. However, the broker restricted the study of comparable sales of nearby properties to those that sold for over $62,000. Furthermore, the broker failed to disclose to the buyer the broker’s listing and sale of an adjacent, similar tract of land for a mere $38,000 only one year earlier.
The appraisal, with this arbitrary restriction on comparable properties, established a value on this property that was sufficient to induce the buyer to pay the $78,000 and close this transaction. At closing, the broker pocketed the $4,000 agent bonus.
Not long after closing, the buyer discovered that the seller had purchased this lot sold to buyer for only $50,000, a mere nine days before this broker submitted the buyer’s offer to purchase this property for $78,000. A fair appraisal of the real estate, and the broker’s commitment to the fiduciary interest of the buyer, would have turned up this recent sale of the lot, as well as the earlier sale of the adjacent lot. Had there been an honest appraisal and a full disclosure, the buyer would never have submitted this offer and purchased the property for $78,000, and the broker would, presumably, not have received the $4,000 agent bonus.
Unfortunately, the broker put her own interest before that of the buyer. Upon discovery of the actual value of the property, the buyer filed a complaint against the broker with the Ohio Department of Commerce, Division of Real Estate and Professional Licensing. A hearing was conducted and the hearing officer concluded that the broker had committed three violations of her fiduciary duty, in addition to other violations of statutory requirements.
This decision of the hearing officer was affirmed by the Franklin County Common Pleas Court and then by the Franklin County Court of Appeals. Both Courts cited the statutory obligation of brokers to “use the licensee’s [broker’s] best efforts to further the interests of the client,” and to act in a manner “loyal to the interest of the client.” These requirements for the fiduciary include an obligation to “disclose all known material facts concerning a property on which that licensee is representing a seller or purchaser to avoid misrepresentation or concealment of material facts.”
The broker clearly violated these standards, as the agent bonus and commission evidently was paramount to her. The broker was fined by the regulatory authority and subjected to additional classes in ethics. She will likely be liable for civil damages to the extent that her misrepresentations and nondisclosures harmed the buyer.
This case and the principles enunciated certainly do not apply only to real estate brokers, but to all who assume the role of a fiduciary. Nor are real estate brokers the only fiduciaries subject to the temptation of self-dealing. Whether one is an attorney, accountant, guardian, or one in a similar fiduciary capacity, one must be sensitive to those standards that require that fiduciaries always subordinate their own interests to those of their clients. To discuss this issue, or any issue related to real estate law, contact
Henry Wickham at 614-229-4457.