Buyer's Brokers and the Duty of Loyalty

Stewart E. Sterk is the Editor-in-Chief of this newsletter.

What obligations does a buyer's broker have to different clients interested in purchasing the same property? When faced with that question in Rivkin v. Century 21 Teran Realty LLC, the Second Circuit certified the question to the New York Court of Appeals. The Court of Appeals addressed the issues last April (10 N.Y.3d 344), and the Second Circuit closed the book on the case in July (535 F.3d 105). Rivkin answered at least one significant question surrounding the obligations of a buyer's broker, but the Court of Appeals opinion raised new questions whose resolution will await future litigation (or legislation).

Defining Obligations

Real estate brokers of every sort act as intermediaries between sellers and buyers. Historically, courts have looked to the law of agency to define the obligations of brokers, and the law of agency incorporates fiduciary duties, including the duty of loyalty. Fleshing out the content of fiduciary duties in the real estate broker context, however, presents a challenge. Real estate brokers do not have a single principal; they are agents for many different principals, creating significant potential for conflict.

The common law cleanly handled one potential conflict: the conflict between a broker's representation of the seller and the broker's representation of the buyer. Common law has historically conceptualized real estate brokers as agents of the seller, owing no fiduciary duties to the buyer. This conceptualization, however, is at odds with the understanding of many potential buyers, especially buyers of residential homes, who believe that brokers are acting on their behalf.

Buyer's Brokers

The law adapted to this mismatch between legal concepts and buyer understandings in two ways. First, some buyers who understood that traditional brokers represented the seller's interest began to engage agents to act on their behalf ' to act, in effect, as “buyer's brokers.” By contract, these buyer's brokers assumed fiduciary duties to buyers. Second, state statutes, including New York's Real Property Law, Section 443, imposed disclosure requirements on all brokers.

Thus, Section 443(3) requires both seller's agents and buyer's agents to provide to potential buyers a disclosure form that indicates whether the agent is acting on behalf of the seller or the buyer.

The statutory disclosure form provides that “[a] buyer's agent has, without limitation, the following fiduciary duties to the buyer: reasonable care, undivided loyalty, confidentiality, full disclosure, obedience and duty to account.” The form also makes clear that a buyer's agent does not represent the seller's interest. But the form does not discuss how the buyer's agent satisfies the duties of undivided loyalty, confidentiality, and full disclosure, when the agent represents more than one potential buyer. And neither the statute nor the form details the obligations of a corporate broker that acts through a number of individual agents.

Some of these issues arose in the Rivkin case. Oleg Rivkin approached Teran Realty, LLC, through one of its associate brokers, about purchasing a summer home. Rivkin met with the associate broker, made a written offer to the listing broker to purchase the subject property for $75,000, and simultaneously signed an acknowledgment that he had read a disclosure statement describing the broker as a “buyer's agent” and detailing the agent's duties to the buyer. The following day, a principal in Teran Realty, on behalf of another client, made a higher offer to the listing broker for the same property. The seller accepted the higher, competing offer, and Rivkin brought a diversity action in federal court against his associate broker, the brokerage firm, and the firm's principals, alleging breach of fiduciary duty. The district court dismissed the action, but Rivkin appealed, leading the Second Circuit to certify the following question to the New York Court of Appeals: “Did any or all of [defendants] breach a fiduciary duty to Rivkin by failing to disclose, in any form, [defendants'] representation of a competing buyer for the property Rivkin sought to buy?”

The Court of Appeals answered that question in the negative. It did so by distinguishing between the duties owed by an individual agent and the duties owed by the agent's firm. Judge Susan P. Read's opinion emphasized that when two buyer's agents affiliated with the same firm act on behalf of separate buyers, there is “no incentive for these agents to represent their clients less than zealously” because they only earn commissions for sales to their own clients. Judge Read also emphasized the realities of a real estate marketplace in which mega-brokerage firms have become routine, and noted that “would-be buyers are very well aware that they are competing with other potential buyers, including those represented by other agents affiliated with the firm that they have been retained.”

At the same time, however, Judge Read's opinion addressed an issue not raised by the Rivkin case, and suggested that an individual agent “may not represent multiple buyers bidding on the same property without making disclosure and obtaining consent.” This dictum may prove troublesome in future cases, because the court's opinion does not indicate what a buyer's broker is supposed to do in this situation of potential conflict. Suppose, for instance, a buyer's broker places a bid on the subject property on behalf of Buyer A. The broker has also been representing Buyer B with respect to other properties. When Buyer B asks about the subject property, what is the broker to do?

The Rivkin opinion suggests that the broker cannot represent Buyer B with respect to the subject property. But is the broker required to, or permitted to, tell Buyer B that she is representing Buyer A with respect to that property? Doesn't the disclosure conflict with the duty of confidentiality the broker has in respect to Buyer A?

Further, when the broker informs Buyer B that she can't represent him, may she (and must she) disclose that fact to Buyer A? Disclosure may prejudice Buyer B, but failure to disclose threatens to prejudice Buyer A.

Conclusion

Curiously, the Court of Appeals has addressed an analogous problem with respect to a seller's agent, and has resolved the issue quite differently. In Sonnenchein v. Douglas Elliman-Gibbons & Ives , 96 N.Y.2d 369, 375 the court held that a broker owes no duty to refrain from offering the properties of all of its principals to a prospective customer. That is, a seller's broker can represent multiple sellers in transactions with a single buyer; by contrast, Rivkin appears to suggest that a buyer's broker cannot represent multiple buyers in transactions with a single seller. Of course, there may be differences between the two situations (particularly with respect to the “uniqueness” of each seller's property), the court's opinion in Rivkin does not suggest how that difference ' or any other difference ' explains the divergence between the Sonnenschein holding and the articulated prohibition in Rivkin. That explanation awaits subsequent litigation.

Stewart E. Sterk is the Editor-in-Chief of this newsletter.