When may a real estate broker be held liable for acts of an agent? For most purposes, real estate agents associated with a brokerage firm operate independently from the firm. In other words, they are not required to work any particular hourly schedule, and they decide for themselves what opportunities to pursue. Generally this means that for many purposes, such as taxes, the agent is an independent contractor with the brokerage firm, and not an employee of it. However, for some purposes the agent may be considered an employee of the brokerage.
This distinction can be important if an agent is negligent in connection with a sale. It also can be important if the agent has made any promises in order to facilitate the sale. Sometimes the promises don’t work out as planned.
For example, an agent may suggest to a seller that it would be helpful for marketing purposes if the seller were willing to provide seller financing for part of the sale price. This is sometimes referred to as seller take back financing or seller carry back financing. In this type of financing, the seller usually will receive a promissory note from the buyer, along with a deed of trust securing the promissory note. The deed of trust usually is recorded following the recording of a deed of trust to a financial institution for the cash portion of the purchase price. This might be referred to as a second-mortgage loan, because it is recorded later than the first mortgage.
A seller may be reluctant to accept an agent’s advice to accept carry-back financing. Of course it is in the agent’s interest that a sale go through. But at the same time, the agent likely has fiduciary duties to the seller. Nonetheless, the agent may in good faith be of the opinion that there is little risk under the circumstances of the proposed transaction. Perhaps the agent will be so confident that he or she executes a guaranty of the carry-back financing. This means that if the buyer defaults, the agent will be responsible for making good on the amount of the second mortgage.
Let’s assume that the buyer does default on the second. Let’s also assume that the value of the property has become lower than it was at the time of the sale. The seller then looks to the agent to honor his guaranty and make good on the loan. What if the agent is unavailable or doesn’t have the funds necessary to pay off the note? Is the brokerage firm with which the agent is associated liable to the seller for the amount involved?
The short answer to this is “yes.” This is because for situations such as this, the law considers the agent to be an employee of the brokerage firm, and not a mere independent contractor. So the brokerage can be held vicariously liable to the seller if the agent breaches the promises made in his guaranty. Exposure to this sort of risk means that real estate brokerage firms must carefully educate their agents about what they can and cannot do, and must also maintain awareness of the agents' acts and proposed transactions. It also demonstrates the importance to a brokerage firm of maintaining a good insurance policy against this type of thing. Otherwise, the firm may find itself liable for something about which it never was aware, long after the events took place.