Multiple Representation is a potential reality with almost every real estate transaction but generally is not a concern to completing that transaction providing it's understood by all parties and steps are take to avoid any conflict of interest by the brokerage and their representatives. In this post, I'll attempt to clarify the various types of representation relationship which may occur and then describe when and why multiple representations may occur. One of the first steps of any real estate representation relationship is to clarify and agree on the format that relationship will take. There are three available formats a representation relationship can take:
- Multiple Representation
The first two are chosen at the time of entering into a representation contract. The third, multiple representations occur as a result of the events that lead to an offer to purchase a property. Let's take a moment to unpack each of these relationships and understand what each means.
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Client, Customer and Multiple Representation - What does each mean?
A Client relationship, by law, contains a fiduciary responsibility. When you as a buyer or seller choose to enter into a contractual representation agreement you do so with the brokerage not the sales representative. A fiduciary responsibility requires that the brokerage and their representative place the good of the client ahead of their own and as such there are protections afforded the client with respect to confidential information. For example, as a client you may share details of your purchase budget, reason for choosing a certain neighbourhood or personal life situation all of which could be used against your negotiating power while trying to come to a purchase agreement if the other party were to be aware of said detail(s). As a client under contract you can freely share those details with your agent and expect your agent to keep you appraised of any information which will be of benefit to you during the course of your agreement. A customer agreement on the other hand does not afford the same fiduciary responsibility. While this agreement is still a contractual relationship with the brokerage the duty of service is limited to professional conduct. So what happens when one brokerage represents two different parties to the same transaction under client agreements. Since each client has opposing interests and is owed an equal fiduciary responsibility the brokerage has a distinct conflict of interest in that it "cannot serve two masters". This then requires each party to the transaction to agree to multiple representation before any offer to purchase is presented and reviewed. Now remember this occurs anytime two parties are under client representation with the same brokerage, not just the same representative. This is because it's assumed that everything known about a client by one sales person is known about that client by everyone at the brokerage (imputed knowledge) although in practise, this is not usually the case, it does require some changes to the normal course of a deal in order to ensure no conflict of interest is present. The first change we need to understand is the limiting nature of the fiduciary responsibility because of multiple representation. Disclosure of facts pertaining to one party such as the amount the sellers are willing to accept, if the buyers will pay more, the parties motivations and advice on whether a seller should accept a certain offer are no longer able to be conveyed by each sales representative to their respective clients. Unless otherwise agreed to, the ability to communicate offers via fax or email as available in the standard agreement of purchase and sale is no longer allowed. Before any offer can be presented or reviewed all parties must agree to and understand the limitations of multiple representation by written consent. If one client refuses to provide such consent the brokerage must release one of the clients from their contractural agreement as a client. Often the brokerage will refer the released party to another brokerage for representation. Offers along with subsequent confirmations must be delivered directly to the other party. It's recommended that each party also have their individual lawyers review all documents and who can inturn point out any concerns to each client.
How did we end up here?
Multiple representations often arrises with different sales representatives within the same brokerage each representing clients who either have an equal interest in purchasing a property or where one client is a buyer and the other is a seller. Multiple representations could also arise when a potential buyer sees a for sale sign on a property they have an interest in purchasing. They may contact the listing agent or brokerage because of the yard sign. If they sign a client representation and subsequently wish to make an offer on that property multiple representations would occur. However, if the sales representative (brokerage) was to instead have them sign a customer agreement, no multiple representations would occur given no conflict in fiduciary duty. Multiple representations are a real possibility in almost any real estate transaction. It does have some limiting factors and must certainly be promptly disclosed with business conducted impartially but it should not impair the ability of a real estate transaction to reach completion. The most important factor is that both clients are properly educated by their respective brokerage representatives and are comfortable with the limitations imposed on their client agreement. Ask questions and get answers which you are comfortable with. Seek independent legal review of any documents to ensure impartiality and once satisfied, follow through with the completion of the transaction. Further Reading Toronto Star Article, May 22, 2015, RECO Buyer Representation Brochure