Who is Your Client?

Quick glimpse of this case: A buyer made an offer which included the right to assign the purchase agreement. Using the phrase “or assignee” might indicate that the buyer is scouting out property for other buyers. The scout ties up the property and then finds a replacement buyer, with the intent of making a profit or a partnership purchase. No problem so far.

This contract between the seller and the scout was ratified and escrow was opened. Shortly thereafter, the scout found a replacement buyer for the property. The scout turned over his purchase rights to this buyer, but never did so with any formal agreement. There was no assignment of the contract. The scout simply substituted the buyer’s name into all disclosure documents and removals of contingencies.

The agent, who had written up the agreement and started the transaction and escrow with the scout, soon knew there was to be a different buyer taking title. The agent, however, continued to deliver disclosures and contingency removals to the scout. The scout forwarded these documents to the assignee buyer. This buyer, relying on the scout, initialed and signed as instructed. The agent had no contact with the buyer at all, conducting business only with the scout.

Now it gets really interesting: The purchase price was lowered during the escrow. Rather than use an Addendum, the agent redrafted page one of the purchase agreement to reflect the negotiated price. The agent took off the scout’s name and put the buyer’s name into the paperwork. Buyer signed. Seller re-signed with the new buyer and escrow continued. The agency relationship paragraph confirmed the agent now represented the newly-named buyer. Keep in mind that the buyer, not the scout, signed this contract. The buyer still had no contact with the agent, relying totally upon the scout for advice and assistance.

The buyer closed escrow, and took title. When later problems surfaced between the buyer and the scout, the agent was brought into the dispute. The agent protested “I never met the buyer, I never sent them anything, and I don’t know anything about them, so I don’t represent them. I only represented the scout buyer.” Would you agree with this defense?

Advisory: There are problems when an agent fills in the “confirmation of agency” paragraph, indicating the fiduciary duty to represent the buyer, but never has contact with them. Agency Law is clear that our duties of “utmost care, integrity, honesty, and loyalty” exist once agency is created. Can we do this if we never have contact with the client? Are we obligated to represent clients we have never met? And if we never have any contact, how could agency be created?

In fact, this transaction demonstrates how paperwork created the agency, not the actions of the agent or client. The fiduciary duties existed from agent to buyer, even though there was no client contact. When the client suffered damages, the agent was implicated.

Summary: This agent did nothing to represent the buyer, even though the agent’s name was on the line. The agent was unable to show there was any care, integrity, honesty, or loyalty given to the buyer. The agent paid dearly for this mistake. In my opinion, the agent was bound to be the fiduciary once the purchase agreement was signed with the agent confirmation.

What if: Yes, you can be involved in a transaction without creating agency, but you must be careful about your words and actions, as well as disavow any agency relationship in the paperwork. If “no agency” is your goal, be very clear.

Final Advisory: If your contract allows the buyer to substitute an assignee, it’s advisable to use a written assignment, or a substitution of contract if all parties agree. Your escrow holder needs to be involved. Get a legal opinion to make sure it’s done properly.

Good luck!
Cari Lynn Pace

Next column: Agent Sued for Not Covering Prelim with Buyer