Preview
FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018
FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018
Dual Real Estate Agents and
the Double Duty of Loyalty
Szto*
Mary Szto
The top three issues that cause the most disputes in a real estate transaction
are dual agency, disclosure, and breach of fiduciary duty. This .is is
despite
legislative efforts in the past two decades to clarify and reduce the duties of
dual agents. This article addresses residential dual agency, disclosure about
dual agency, and the fiduciary duty of loyalty.
Home ownership is the chief source of wealth for most Americans.
However, buying a home is one of the most daunting tasks that a modern US
consumer will undertake. Agents play a critical role in facilitating home
sales, especially for first-time home buyers. Around 90% of home sales
involve agents; many of these are dual agents. Driven by economic
exigencies, and abetted by legislation which allows ready written consent to
dual agency, agents simultaneously represent sellers and buyers in an
attempt to save consumers time and earn double commissions.
Unfortunately, many agents and consumers fail to see the heightened duty of
loyalty agents owe in this capacity. This article examines the dual agent's
duty of loyalty and proposes guidelines for itspractice. It is double, not half
the loyalty that one would have with one principal. Unless loyalty to
consumers grows, confusion and disputes will proliferate. However, if a
double duty of loyalty is observed, greater transparency among the agent,
seller and buyer will lead to better pricing and contract terms, and ultimately
a healthier real estate market. Even in jurisdictions which have lowered
standards for dual agents, where lawful, agents can and should exceed these
standards.
Introduction.........................................................................................................2
• Associate Hamline Law School. College.
Professor, B.A., Wellesley M.A.R.,
Westminster Theological Seminary. J.D., Columbia Law School. This is formy
sisterIrene,a model of selflessness
and fidelity. Thank you tomy research
assistantNathan Aquino.
Electronic copy available at: http:
//ssrn.corn/abstract=2016374
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2
The Dual Vulnerability of Consumers and Agents................................................3
The Historic Seller Subagency Model...................................................................18
The Origins of Agency and the Duty of Loyalty..................................................24
A. . Early Cases..............................................................................................26
..............................................................................................26
B. . Restatements of Agency...........................................................................30
Remedies for Violating the Duty of Loyalty ........................................................33
Cautionary Lessons from Recent Dual Agency Cases ..........................................34
A. . Inadvertent Dual Agency..........................................................................35
B. Inadequate Disclosure of Dual Agency .....................................................37
C. Adequate Disclosure but Other Breaches of Duty of Loyalty...................46
D. Statutory Dual Agencies and A Lessened Duty of Loyalty ......................47
E. State Dual Agency Disclosures Compared................................................49
................................................49
1. California........................................................................................50
2. .minnesota
Minnesota .......................................................................................50
3. New York ........................................................................................52
4. Texas ..............................................................................................53
Proposals.............................................................................................................54
Conclusion...........................................................................................................58
INTRODUCTION
REALTORS®'
According to the National Association of (NAR)
2011 Legal Scan: Legal Issues Facing Real-Estate Professionals, the top
three issues that cause the most disputes in a real estate transaction are dual
duty.1
agency, disclosure, and breach of fiduciary duty. This is despite legislative
efforts in the past two decades to clarify and reduce the duties of dual
agents. This article addresses residential dual agency, the fiduciary duty of
loyalty and disclosure about dual agency.
Economic incentives and legislation providing for ready written
See NAT'L ASS'N OF REALTORS, 2011 LEGAL SCAN: LEGAL ISSUES FACING REAL-
ESTATE PROFESSIONALS 77 (2011).
[O]ver 83% placed the issue among theirtop three current issues. Most
(59%) respondents believe that the level of disputes will stay the same
during the next two years; about 30% believe the number of disputes will
increase inimportance over the next two years.Eighty percent ranked the
issueamong their top three potential futureissues.Nearly 45% believe
there isa significantneed fortraining on Dual Agency.
Id.at 5 (citationsomitted).
Electronic copy available at: http:
//ssrn.corn/abstract=2016374
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3
consent inadvertently promote dual agents in residential home sales. Agents
simultaneously represent sellers and buyers in an attempt to save
consumers time and earn double commissions. Unfortunately, many agents
and consumers fail to see the heightened duty of loyalty agents owe in this
capacity. It is double, not half the loyalty that one would have with one
principal. Unless loyalty to consumers grows, confusion and litigation will
proliferate. However, if a double duty of loyalty is observed, greater
transparency among the agent, seller and buyer will lead to better pricing
and contract terms, and ultimately a healthier real estate market.
First we shall examine the dual vulnerability of consumers and agents
in residential sales, including the background of consumers and agents, and
the training and compensation of agents. Then we will view the types of
dual agencies that are used, then look to the origin of agency and the duty of
loyalty in common law. We will survey a few cases to identify the kinds of
dual agency breaches of the double duty of loyalty, and then statutory
reductions since the 1990's in the duty of loyalty for dual agents. We
conclude with proposed guidelines for observing the double duty of loyalty,
and changes to the NAR Code of Ethics and NAR reports. Even in
jurisdictions which have lowered standards of loyalty for dual agents, where
lawful, agents can and should exceed these standards. Single agency is
preferred, but a proper practice of dual agency and the double duty of
loyalty can still yield benefits to agents and consumers if transparent
used.2
exchange of information is used.
THE DUAL VULNERABILITY OF CONSUMERS AND AGENTS
We were interested in a cute home in the neighborhood for sale.
When we called the number in front of the house, the agent said,
"What are you looking for? I can help you with other properties,
too". I wondered whom the agent represented. The seller? Us?
Himself?³
Himself?
²
See Thomas J. Miceli et al.,Restructuring Agency Relationships in the Real Estate
Brokerage Industry: An Economic Analysis, 20 J.REAL ESTATE RES. 31, 32 (2000) ("[A]
reduction in the exchange of information leads tohigher transactioncosts ofcompleting real
estatetransactions,and thereforetoa less efficient
market forhousing.").
St. Paul, Minnesota, June 2011.
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Buying a home is one of the most daunting tasks that a modern
consumer will undertake. Home ownership ideally represents not only a
sanctuary, but also a safe major financial investment. In the US home
Americans.4
ownership is the chief source of wealth for most Americans. Who buys
homes? Who are real estate agents and what do they do? Why are both
home sales and being a real estate agent stressful leading to increased
vulnerability for consumers and agents?
In the Western industrialized world, home ownership ranges
between about 65% to 80% of the nation's population, with 65% being an
median.5
approximate Since 1960 approximately 2/3 of Americans own
homes,6
homes, making the U.S. fall in the middle compared to other Western
countries.7
industrialized countries. But percentages in the U.S. vary widely among
ethnic groups from 71.3% for white owners to 45.7% (Hispanic), 46.3%
owners.8
(African-American), and 53.4% (Asian) for minority owners. Married
home.9
couples in their sixties and early seventies are most likely to own a home.
home.10
Single women under the age of 25 are least likely to own a
As for individuals who have recently purchased homes, over 85%
white/Caucasian.11
are First time home buyers were on average 31 years old
with an income of $62,400, while repeat buyers were on average 53 years
G. William Domhoff, Wealth, Income, and Power, UCSC.EDU,
http://www2.ucsc.edu/whorulesamerica/power/wealth.html (lastupdated Nov. 2011).
People Statistics: Home Ownership (Most Recent) by Country,
NATIONMASTER.COM, http://www.nationmaster.com/graph/peo_hom_own-people-home-
ownership (lastvisitedFeb. 7, 2012).
Historical Census of Housing Tables: Homeownership, CENSUS.GOV,
http://www.census.gov/hhes/www/housing/census/historic/owner.html (last updated Oct.
31, 2011).
See People Statistics: Home Ownership (Most Recent) by Country,
NATIONMASTER.COM, http://www.nationmaster.com/graph/peo_hom_own-people-home-
ownership (lastvisitedFeb. 7, 2012).
Historical Census of Housing Tables: Homeownership by Race and Hispanic
Origin, CENSUS.GOV,
http://www.census.gov/hhes/www/housing/census/historic/ownershipbyrace.html (last
updated Oct. 31, 2011).
Table 992. Homeownership Rates by Age of Householder and Household,
CENSUS.GOV, http://www.census.gov/compendia/statab/2012/tables/12s0992.pdf (last
visited Feb. 7,2012).
°Id.
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 9
(2011).
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$96,600.12
old with an income of First time home buyers were 37% of all
buyers.13
The largest segment of home buyers is the 25 to 34 years
section.14
Sixty four percent of home buyers are couples, but almost twice
do.1s
as many single females purchase homes as single males The typical
seller in 2011 was 53 years old, earned an income of $101,500, had lived in
sale.16
his home for nine years and earned a profit of $26,000 on his
Regarding the proportion of a home's value to a family's overall wealth, in
one survey, the percentages are 95% (black), 96% (Hispanic), and 70%
(white).17
Also, in addition to car ownership, homeownership in a
particular neighborhood is often perceived as the mark of one's socio-
economic status.
The number of home sales is regularly used as an indicator of national
economic health and the devastating real estate bust of 2007-9 has caused
significantly.18
homeowner vacancy rates to increase Homeownership rates
have also fallen, from 69.1% in 2005 to 65.9% for the second quarter of
2011.19
Sadly, in the second quarter of 2011, foreclosed homes were 31% of
²
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 10
(2011)..
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 10
(2011)..
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011
12(2011)
is
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 12
(2011) (listingsingle females as comprising 18% of home buyers and single males as 10%
ofhome buyers).
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 77-80
(2011 .
G. William Domhoff, Wealth, Income, and Power, UCSC.EDU,
http://www2.ucsc.edu/whorulesamerica/power/wealth.html (lastupdated Nov. 2011).
8
Press Release, U.S. Census Bureau News, Residential Vacancies and
Homeownership in the Second Quarter 2011 (July 29, 2011), available at
http://www.census.gov/hhes/www/housing/hvs/qtr211/files/q211press.pdf. Between 1996
and 2005, vacancy rates remained under 2%. But in2006, ratesbroke the 2% level,with a
high of 2.9% in2008. The current vacancy rate is2.5%. Id.
Id.
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sales.20
home sales. There have been approximately 2.5 million foreclosures
2007.21
completed since January 2007. These foreclosures have
disproportionately affected minority homeowners. According to the
Committee for Responsible Lending, percentages for homeowners who lost
their homes or were likely to were 17% (Latino), 11% (African American)
white).22
and 7% (non-Hispanic white). African-American borrowers are 76% more
likely to have lost their homes due to foreclosure than non-Hispanic white
likely.23
borrowers, while Latino borrowers are 71% more likely.
Home buyers cite many different reasons for buying a home apart
from the desire to own a home. Among the top reasons are the desire for a
larger or smaller home, a change in the family's situation, availability of the
retirement.24
home buyer tax credit, one's job status requiring a move, and retirement.
Some of these events are by themselves considered traumatic events, making
be.25
the process of buying a home even more taxing than itnormally would be.
But most homeowners eventually find the process worth the trouble,
mind,"
because homeownership provides "a sense of peace of "a feeling of
somewhere,"
having roots and a feeling that they have made "one of the best
make."26
financial investments one can Familial interactions that help form
family bonds often revolve around the home, making the home a significant
place.27'
and important place. A new home can be "simultaneously an investment;
RealtyTrac: Foreclosure Homes Account for 31 Percent ofAll U.S. Sales in.Q2
Q2.2011,
2011,
FORECLOSUREPULSE.COM,
http://www.foreclosurepulse.com/blogs/mainblog/archive/2011/08/24/realtytrac-
foreclosure-homes-account-for-31-percent-of-all-u-s-sales-in-q2-2011.aspx (Aug. 24,
2011, 9:00 PM).
21
DEBBIE GRUENSTEIN BOCIAN ET AL., FORECLOSURES BY RACE AND ETHNICITY:
THE DEMOGRAPHIC OF A CRISIS 7 (2000), available at
http://www.responsiblelending.org/mortgage-lending/research-analysis/foreclosures-by-race-
and-ethnicity.pdf.
²²
Id. at 3.
2³
Id. at 8.
24
See NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2010 19
(2010).
²
See, e.g., Amber Keefer, Top 10 Causes of Stress, LIVESTRONG.COM, (May 4,
2011 , http://www.livestrong.com/article/132015-top-10-causes-stress/.
.com/article/132015-to -10-causes-stress/.
See Cynthia J.Meyer, Stress: There's No Place Like a First Home, 36 FAMILY
RELATIONS 198, 198 (1987).
²7
1d.at 199 (giving such examples as "who prepares dinner on which night, who sits
where during a meal or while watching TV, how thefamily generally spends itsSunday
morning, and what each family member does when he or shewalks in the door aftera day
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a source of shelter; a symbol of love, comfort, warmth, and nurturance;
[and] a way of life and a means through which the owners express their
identities;"
but this must be contrasted with the fact that a home is "the
make."28 ' life-
most costly purchase most families will ever The tense and
changing process of buying a home affects family relationships, with
different families perhaps adopting different coping strategies for handling
transition.29
the transition. Thus, those who assist in the process must also be aware
of the "relationship, psychological, and emotional issues related to home
buying."30
The entire home buying process may take four months or more. On
average, home buyers spend 12 weeks searching for a home and look at 12
homes.31 closing'
With an added 30 days for and any time negotiating a
price with the seller, the entire process can easily exceed four months. The
home.33
average buyer moved 12 miles to their new On the other end of the
spectrum, families relocating to a new location may have to compress their
search to a few days. A company may fly them in for two to three days of
home shopping, and they must make an offer for a home without knowing
which neighborhoods are best suited for them. No matter how long a search
has been, when buyers find what they are looking for, they may sign an
day.34
offer to buy the same Sometimes this is because they are told "the
property will be sold to someone else, the price will increase, or favorable
lost...".35
interest rates will be Sellers, on average, moved 20 miles to their
residence.36
new
work"
at as examples of "ritualswhich give the family a sense of security,continuity, and
bein a group").
Id. at202.
²°
See id. at198.
3°
Id. at202.
31
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 43
(2011).
See Frequently Asked Questions (FAQ), HOMEOWNERSHIP-WA.ORG,
-wa.or
http://www.homeownership-wa.org/faq.htm.htm (lastvisited Feb. 7, 2012) (explaining closing
generallytakes atleast 30 days).
33
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 24
(20131
Craig W. Dallon, Theories of Real Estate Broker Liability and the Effectof the
Is"
"As Clause, 54 FLA. L. REV. 395, 442 (2002).
Id.
36
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 88
(2011).
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agent.37
In 2011 89% of buyers surveyed used a real estate This
number has grown steadily over the past decade, with 69% of buyers in
agents.38
2001 and 77% of buyers in 2006 using This has now brought
buyers' sellers'
use of agents in line with use of agents, as 87% of home
2011.39
sellers used agents in This is no doubt related to the complexity
and stress of selling and purchasing a home. Most homeowners do not buy
and sell homes on a regular basis so the consumer's learning curve is steep.
Also, relocating is traumatic. In one account it ranks only behind losing a
stress.40
loved one and divorce in terms of stress. Pop-culture's portrayal of buying
a home as a joyful and painless event may amplify the stress since the
buyer is unprepared for the inevitable strain that does accompany the
process.41 '
process.
Among all the benefits and services agents can provide, what buyers
are most looking for from their agents is assistance in finding the right
home.42
home. Second to this, buyers most want help in negotiating the right
terms.43'
purchase price and terms. By far the most common way consumers find
neighbor.44
an agent is by referral from a friend, relative, or neighbor. When looking
for the right agent, the factor buyers consider most important is that the
trustworthy.45 '
agent be honest and trustworthy. These qualities are at the heart of the
duty of loyalty.
37
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 59
(2013
Id.
39
Id. at106.
4°Lankarge & Nahorney, The Evolution of Home Ownership, HOMEINSIGHT.COM,
http://www.homeinsight.com/details.asp?url_id=7&WT.cg_n=Publications&WT.cg_s=0
&GCID=bhphl (lastvisited Feb. 7, 2012).
41
See Cynthia J.Meyer, Stress: There's No Place Like a First Home, 36 FAMILY
RELATIONS 198, 198 (1987).
4²
Id. at 61.
43
Id.
44
NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 63, 98
(2011) (explaining 41% of buyers find their agents by with
referrals an additional 9% by
having used the agent previously, and that 39% of sellersfound theiragents by referrals
with an additional22% having used the agent previously). The next most common ways
offinding an agent are significantlylower than referrals
and self-referrals.For home buyers,
afterreferralsand agents previously used (a combined 50%), buyers found their agents
through the internet(only 9% of buyers)or met the agent by visiting an open house (only
7% ofbuyers). Id. at 63.
Id. at64.
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The Vulnerability of Agents
Who are real estate agents and what do they do? Brokers are
licensed to manage real estate businesses. Agents must work for a
agents.46
brokerage. Most agents are residential real estate agents. There are
approximately 400,000 active real estate sales agents in the U.S., with an
brokers.47
additional 117,800 real estate brokers. The NAR itself currently lists
members.48
about 1 million members.
The typical agent is a 54 year old married, white woman with at
education.49
least some college education. Sixty three percent of real estate sales agents
women,5o
are while females comprise only 50.8% of the total U.S.
population.51
Minorities tend to be underrepresented in the real estate agent
field, as they are in home buying. In the overall U.S. population, 72.4% of
white,52 white.53
people are while 87% of agents are 12.6% of U.S. citizens
American,54 are.55
are black or African while only 4% of agents 16.3% of
Latino,56 are.57
Americans are Hispanic or while only 5% of agents Th
Asian population is better represented in the industry, as 4.8% of
Asian,58 Asian.59
Americans are while 4% of agents are Two percent of
46
Occupational Outlook Handbook, 2010-11 Edition: Real Estate Brokers and Sales
Agents, BUREAU OF LABOR STATISTICS, http://www.bls.gov/oco/ocos120.htm (last
updated May 17, 2010).
4'
Id.
48
About NAR, REALTOR.ORG, http://www.realtor.org/about_nar (lastvisited Feb. 7,
2012 .
See NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 —
65-73 (2010).
so
NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 68 (2010).
State & County QuickFacts: USA, CENSUS.GOV,
http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012).
State & County QuickFacts: USA, CENSUS.GOV,
http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012).
53
NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 73 (2010).
State & County QuickFacts: USA, CENSUS.GOV,
http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012).
55
NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 73 (2010).
State & County QuickFacts: USA, CENSUS.GOV,
http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012).
57
NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 73 (2010).
State & County QuickFacts: USA, CENSUS.GOV,
http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012).
NAT'L Ass'N OF REALTORS, MEMBER PROFILE 2010 73 (2010).
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agents were previously in the legal field, and it seems safe to assume that
lawyers.60
many of th
Preview
FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 Dual Real Estate Agents and the Double Duty of Loyalty Szto* Mary Szto The top three issues that cause the most disputes in a real estate transaction are dual agency, disclosure, and breach of fiduciary duty. This .is is despite legislative efforts in the past two decades to clarify and reduce the duties of dual agents. This article addresses residential dual agency, disclosure about dual agency, and the fiduciary duty of loyalty. Home ownership is the chief source of wealth for most Americans. However, buying a home is one of the most daunting tasks that a modern US consumer will undertake. Agents play a critical role in facilitating home sales, especially for first-time home buyers. Around 90% of home sales involve agents; many of these are dual agents. Driven by economic exigencies, and abetted by legislation which allows ready written consent to dual agency, agents simultaneously represent sellers and buyers in an attempt to save consumers time and earn double commissions. Unfortunately, many agents and consumers fail to see the heightened duty of loyalty agents owe in this capacity. This article examines the dual agent's duty of loyalty and proposes guidelines for itspractice. It is double, not half the loyalty that one would have with one principal. Unless loyalty to consumers grows, confusion and disputes will proliferate. However, if a double duty of loyalty is observed, greater transparency among the agent, seller and buyer will lead to better pricing and contract terms, and ultimately a healthier real estate market. Even in jurisdictions which have lowered standards for dual agents, where lawful, agents can and should exceed these standards. Introduction.........................................................................................................2 • Associate Hamline Law School. College. Professor, B.A., Wellesley M.A.R., Westminster Theological Seminary. J.D., Columbia Law School. This is formy sisterIrene,a model of selflessness and fidelity. Thank you tomy research assistantNathan Aquino. Electronic copy available at: http: //ssrn.corn/abstract=2016374 FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 2 The Dual Vulnerability of Consumers and Agents................................................3 The Historic Seller Subagency Model...................................................................18 The Origins of Agency and the Duty of Loyalty..................................................24 A. . Early Cases..............................................................................................26 ..............................................................................................26 B. . Restatements of Agency...........................................................................30 Remedies for Violating the Duty of Loyalty ........................................................33 Cautionary Lessons from Recent Dual Agency Cases ..........................................34 A. . Inadvertent Dual Agency..........................................................................35 B. Inadequate Disclosure of Dual Agency .....................................................37 C. Adequate Disclosure but Other Breaches of Duty of Loyalty...................46 D. Statutory Dual Agencies and A Lessened Duty of Loyalty ......................47 E. State Dual Agency Disclosures Compared................................................49 ................................................49 1. California........................................................................................50 2. .minnesota Minnesota .......................................................................................50 3. New York ........................................................................................52 4. Texas ..............................................................................................53 Proposals.............................................................................................................54 Conclusion...........................................................................................................58 INTRODUCTION REALTORS®' According to the National Association of (NAR) 2011 Legal Scan: Legal Issues Facing Real-Estate Professionals, the top three issues that cause the most disputes in a real estate transaction are dual duty.1 agency, disclosure, and breach of fiduciary duty. This is despite legislative efforts in the past two decades to clarify and reduce the duties of dual agents. This article addresses residential dual agency, the fiduciary duty of loyalty and disclosure about dual agency. Economic incentives and legislation providing for ready written See NAT'L ASS'N OF REALTORS, 2011 LEGAL SCAN: LEGAL ISSUES FACING REAL- ESTATE PROFESSIONALS 77 (2011). [O]ver 83% placed the issue among theirtop three current issues. Most (59%) respondents believe that the level of disputes will stay the same during the next two years; about 30% believe the number of disputes will increase inimportance over the next two years.Eighty percent ranked the issueamong their top three potential futureissues.Nearly 45% believe there isa significantneed fortraining on Dual Agency. Id.at 5 (citationsomitted). Electronic copy available at: http: //ssrn.corn/abstract=2016374 FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 3 consent inadvertently promote dual agents in residential home sales. Agents simultaneously represent sellers and buyers in an attempt to save consumers time and earn double commissions. Unfortunately, many agents and consumers fail to see the heightened duty of loyalty agents owe in this capacity. It is double, not half the loyalty that one would have with one principal. Unless loyalty to consumers grows, confusion and litigation will proliferate. However, if a double duty of loyalty is observed, greater transparency among the agent, seller and buyer will lead to better pricing and contract terms, and ultimately a healthier real estate market. First we shall examine the dual vulnerability of consumers and agents in residential sales, including the background of consumers and agents, and the training and compensation of agents. Then we will view the types of dual agencies that are used, then look to the origin of agency and the duty of loyalty in common law. We will survey a few cases to identify the kinds of dual agency breaches of the double duty of loyalty, and then statutory reductions since the 1990's in the duty of loyalty for dual agents. We conclude with proposed guidelines for observing the double duty of loyalty, and changes to the NAR Code of Ethics and NAR reports. Even in jurisdictions which have lowered standards of loyalty for dual agents, where lawful, agents can and should exceed these standards. Single agency is preferred, but a proper practice of dual agency and the double duty of loyalty can still yield benefits to agents and consumers if transparent used.2 exchange of information is used. THE DUAL VULNERABILITY OF CONSUMERS AND AGENTS We were interested in a cute home in the neighborhood for sale. When we called the number in front of the house, the agent said, "What are you looking for? I can help you with other properties, too". I wondered whom the agent represented. The seller? Us? Himself?³ Himself? ² See Thomas J. Miceli et al.,Restructuring Agency Relationships in the Real Estate Brokerage Industry: An Economic Analysis, 20 J.REAL ESTATE RES. 31, 32 (2000) ("[A] reduction in the exchange of information leads tohigher transactioncosts ofcompleting real estatetransactions,and thereforetoa less efficient market forhousing."). St. Paul, Minnesota, June 2011. FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 4 Buying a home is one of the most daunting tasks that a modern consumer will undertake. Home ownership ideally represents not only a sanctuary, but also a safe major financial investment. In the US home Americans.4 ownership is the chief source of wealth for most Americans. Who buys homes? Who are real estate agents and what do they do? Why are both home sales and being a real estate agent stressful leading to increased vulnerability for consumers and agents? In the Western industrialized world, home ownership ranges between about 65% to 80% of the nation's population, with 65% being an median.5 approximate Since 1960 approximately 2/3 of Americans own homes,6 homes, making the U.S. fall in the middle compared to other Western countries.7 industrialized countries. But percentages in the U.S. vary widely among ethnic groups from 71.3% for white owners to 45.7% (Hispanic), 46.3% owners.8 (African-American), and 53.4% (Asian) for minority owners. Married home.9 couples in their sixties and early seventies are most likely to own a home. home.10 Single women under the age of 25 are least likely to own a As for individuals who have recently purchased homes, over 85% white/Caucasian.11 are First time home buyers were on average 31 years old with an income of $62,400, while repeat buyers were on average 53 years G. William Domhoff, Wealth, Income, and Power, UCSC.EDU, http://www2.ucsc.edu/whorulesamerica/power/wealth.html (lastupdated Nov. 2011). People Statistics: Home Ownership (Most Recent) by Country, NATIONMASTER.COM, http://www.nationmaster.com/graph/peo_hom_own-people-home- ownership (lastvisitedFeb. 7, 2012). Historical Census of Housing Tables: Homeownership, CENSUS.GOV, http://www.census.gov/hhes/www/housing/census/historic/owner.html (last updated Oct. 31, 2011). See People Statistics: Home Ownership (Most Recent) by Country, NATIONMASTER.COM, http://www.nationmaster.com/graph/peo_hom_own-people-home- ownership (lastvisitedFeb. 7, 2012). Historical Census of Housing Tables: Homeownership by Race and Hispanic Origin, CENSUS.GOV, http://www.census.gov/hhes/www/housing/census/historic/ownershipbyrace.html (last updated Oct. 31, 2011). Table 992. Homeownership Rates by Age of Householder and Household, CENSUS.GOV, http://www.census.gov/compendia/statab/2012/tables/12s0992.pdf (last visited Feb. 7,2012). °Id. NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 9 (2011). FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 5 $96,600.12 old with an income of First time home buyers were 37% of all buyers.13 The largest segment of home buyers is the 25 to 34 years section.14 Sixty four percent of home buyers are couples, but almost twice do.1s as many single females purchase homes as single males The typical seller in 2011 was 53 years old, earned an income of $101,500, had lived in sale.16 his home for nine years and earned a profit of $26,000 on his Regarding the proportion of a home's value to a family's overall wealth, in one survey, the percentages are 95% (black), 96% (Hispanic), and 70% (white).17 Also, in addition to car ownership, homeownership in a particular neighborhood is often perceived as the mark of one's socio- economic status. The number of home sales is regularly used as an indicator of national economic health and the devastating real estate bust of 2007-9 has caused significantly.18 homeowner vacancy rates to increase Homeownership rates have also fallen, from 69.1% in 2005 to 65.9% for the second quarter of 2011.19 Sadly, in the second quarter of 2011, foreclosed homes were 31% of ² NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 10 (2011).. NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 10 (2011).. NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 12(2011) is NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 12 (2011) (listingsingle females as comprising 18% of home buyers and single males as 10% ofhome buyers). NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 77-80 (2011 . G. William Domhoff, Wealth, Income, and Power, UCSC.EDU, http://www2.ucsc.edu/whorulesamerica/power/wealth.html (lastupdated Nov. 2011). 8 Press Release, U.S. Census Bureau News, Residential Vacancies and Homeownership in the Second Quarter 2011 (July 29, 2011), available at http://www.census.gov/hhes/www/housing/hvs/qtr211/files/q211press.pdf. Between 1996 and 2005, vacancy rates remained under 2%. But in2006, ratesbroke the 2% level,with a high of 2.9% in2008. The current vacancy rate is2.5%. Id. Id. FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 6 sales.20 home sales. There have been approximately 2.5 million foreclosures 2007.21 completed since January 2007. These foreclosures have disproportionately affected minority homeowners. According to the Committee for Responsible Lending, percentages for homeowners who lost their homes or were likely to were 17% (Latino), 11% (African American) white).22 and 7% (non-Hispanic white). African-American borrowers are 76% more likely to have lost their homes due to foreclosure than non-Hispanic white likely.23 borrowers, while Latino borrowers are 71% more likely. Home buyers cite many different reasons for buying a home apart from the desire to own a home. Among the top reasons are the desire for a larger or smaller home, a change in the family's situation, availability of the retirement.24 home buyer tax credit, one's job status requiring a move, and retirement. Some of these events are by themselves considered traumatic events, making be.25 the process of buying a home even more taxing than itnormally would be. But most homeowners eventually find the process worth the trouble, mind," because homeownership provides "a sense of peace of "a feeling of somewhere," having roots and a feeling that they have made "one of the best make."26 financial investments one can Familial interactions that help form family bonds often revolve around the home, making the home a significant place.27' and important place. A new home can be "simultaneously an investment; RealtyTrac: Foreclosure Homes Account for 31 Percent ofAll U.S. Sales in.Q2 Q2.2011, 2011, FORECLOSUREPULSE.COM, http://www.foreclosurepulse.com/blogs/mainblog/archive/2011/08/24/realtytrac- foreclosure-homes-account-for-31-percent-of-all-u-s-sales-in-q2-2011.aspx (Aug. 24, 2011, 9:00 PM). 21 DEBBIE GRUENSTEIN BOCIAN ET AL., FORECLOSURES BY RACE AND ETHNICITY: THE DEMOGRAPHIC OF A CRISIS 7 (2000), available at http://www.responsiblelending.org/mortgage-lending/research-analysis/foreclosures-by-race- and-ethnicity.pdf. ²² Id. at 3. 2³ Id. at 8. 24 See NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2010 19 (2010). ² See, e.g., Amber Keefer, Top 10 Causes of Stress, LIVESTRONG.COM, (May 4, 2011 , http://www.livestrong.com/article/132015-top-10-causes-stress/. .com/article/132015-to -10-causes-stress/. See Cynthia J.Meyer, Stress: There's No Place Like a First Home, 36 FAMILY RELATIONS 198, 198 (1987). ²7 1d.at 199 (giving such examples as "who prepares dinner on which night, who sits where during a meal or while watching TV, how thefamily generally spends itsSunday morning, and what each family member does when he or shewalks in the door aftera day FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 7 a source of shelter; a symbol of love, comfort, warmth, and nurturance; [and] a way of life and a means through which the owners express their identities;" but this must be contrasted with the fact that a home is "the make."28 ' life- most costly purchase most families will ever The tense and changing process of buying a home affects family relationships, with different families perhaps adopting different coping strategies for handling transition.29 the transition. Thus, those who assist in the process must also be aware of the "relationship, psychological, and emotional issues related to home buying."30 The entire home buying process may take four months or more. On average, home buyers spend 12 weeks searching for a home and look at 12 homes.31 closing' With an added 30 days for and any time negotiating a price with the seller, the entire process can easily exceed four months. The home.33 average buyer moved 12 miles to their new On the other end of the spectrum, families relocating to a new location may have to compress their search to a few days. A company may fly them in for two to three days of home shopping, and they must make an offer for a home without knowing which neighborhoods are best suited for them. No matter how long a search has been, when buyers find what they are looking for, they may sign an day.34 offer to buy the same Sometimes this is because they are told "the property will be sold to someone else, the price will increase, or favorable lost...".35 interest rates will be Sellers, on average, moved 20 miles to their residence.36 new work" at as examples of "ritualswhich give the family a sense of security,continuity, and bein a group"). Id. at202. ²° See id. at198. 3° Id. at202. 31 NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 43 (2011). See Frequently Asked Questions (FAQ), HOMEOWNERSHIP-WA.ORG, -wa.or http://www.homeownership-wa.org/faq.htm.htm (lastvisited Feb. 7, 2012) (explaining closing generallytakes atleast 30 days). 33 NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 24 (20131 Craig W. Dallon, Theories of Real Estate Broker Liability and the Effectof the Is" "As Clause, 54 FLA. L. REV. 395, 442 (2002). Id. 36 NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 88 (2011). FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 8 agent.37 In 2011 89% of buyers surveyed used a real estate This number has grown steadily over the past decade, with 69% of buyers in agents.38 2001 and 77% of buyers in 2006 using This has now brought buyers' sellers' use of agents in line with use of agents, as 87% of home 2011.39 sellers used agents in This is no doubt related to the complexity and stress of selling and purchasing a home. Most homeowners do not buy and sell homes on a regular basis so the consumer's learning curve is steep. Also, relocating is traumatic. In one account it ranks only behind losing a stress.40 loved one and divorce in terms of stress. Pop-culture's portrayal of buying a home as a joyful and painless event may amplify the stress since the buyer is unprepared for the inevitable strain that does accompany the process.41 ' process. Among all the benefits and services agents can provide, what buyers are most looking for from their agents is assistance in finding the right home.42 home. Second to this, buyers most want help in negotiating the right terms.43' purchase price and terms. By far the most common way consumers find neighbor.44 an agent is by referral from a friend, relative, or neighbor. When looking for the right agent, the factor buyers consider most important is that the trustworthy.45 ' agent be honest and trustworthy. These qualities are at the heart of the duty of loyalty. 37 NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 59 (2013 Id. 39 Id. at106. 4°Lankarge & Nahorney, The Evolution of Home Ownership, HOMEINSIGHT.COM, http://www.homeinsight.com/details.asp?url_id=7&WT.cg_n=Publications&WT.cg_s=0 &GCID=bhphl (lastvisited Feb. 7, 2012). 41 See Cynthia J.Meyer, Stress: There's No Place Like a First Home, 36 FAMILY RELATIONS 198, 198 (1987). 4² Id. at 61. 43 Id. 44 NAT'L ASS'N OF REALTORS, PROFILE OF HOME BUYERS AND SELLERS 2011 63, 98 (2011) (explaining 41% of buyers find their agents by with referrals an additional 9% by having used the agent previously, and that 39% of sellersfound theiragents by referrals with an additional22% having used the agent previously). The next most common ways offinding an agent are significantlylower than referrals and self-referrals.For home buyers, afterreferralsand agents previously used (a combined 50%), buyers found their agents through the internet(only 9% of buyers)or met the agent by visiting an open house (only 7% ofbuyers). Id. at 63. Id. at64. FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 9 The Vulnerability of Agents Who are real estate agents and what do they do? Brokers are licensed to manage real estate businesses. Agents must work for a agents.46 brokerage. Most agents are residential real estate agents. There are approximately 400,000 active real estate sales agents in the U.S., with an brokers.47 additional 117,800 real estate brokers. The NAR itself currently lists members.48 about 1 million members. The typical agent is a 54 year old married, white woman with at education.49 least some college education. Sixty three percent of real estate sales agents women,5o are while females comprise only 50.8% of the total U.S. population.51 Minorities tend to be underrepresented in the real estate agent field, as they are in home buying. In the overall U.S. population, 72.4% of white,52 white.53 people are while 87% of agents are 12.6% of U.S. citizens American,54 are.55 are black or African while only 4% of agents 16.3% of Latino,56 are.57 Americans are Hispanic or while only 5% of agents Th Asian population is better represented in the industry, as 4.8% of Asian,58 Asian.59 Americans are while 4% of agents are Two percent of 46 Occupational Outlook Handbook, 2010-11 Edition: Real Estate Brokers and Sales Agents, BUREAU OF LABOR STATISTICS, http://www.bls.gov/oco/ocos120.htm (last updated May 17, 2010). 4' Id. 48 About NAR, REALTOR.ORG, http://www.realtor.org/about_nar (lastvisited Feb. 7, 2012 . See NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 — 65-73 (2010). so NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 68 (2010). State & County QuickFacts: USA, CENSUS.GOV, http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012). State & County QuickFacts: USA, CENSUS.GOV, http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012). 53 NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 73 (2010). State & County QuickFacts: USA, CENSUS.GOV, http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012). 55 NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 73 (2010). State & County QuickFacts: USA, CENSUS.GOV, http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012). 57 NAT'L ASS'N OF REALTORS, MEMBER PROFILE 2010 73 (2010). State & County QuickFacts: USA, CENSUS.GOV, http://quickfacts.census.gov/qfd/states/00000.html (lastupdated Jan. 17, 2012). NAT'L Ass'N OF REALTORS, MEMBER PROFILE 2010 73 (2010). FILED: WESTCHESTER COUNTY CLERK 07/14/2018 08:37 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 39 RECEIVED NYSCEF: 07/14/2018 2-28-12 DUAL REAL ESTATE AGENTS AND THE DOUBLE DUTY OF LOYALTY 10 agents were previously in the legal field, and it seems safe to assume that lawyers.60 many of th