Tuesday, November 1, 2011

Korngold on Real Estate Brokers

Gerald-KorngoldGerald Korngold (New York Law School) has posted Real Estate Brokers are Not 'Fiduciaries': A Call for Developing a New Legal Framework (Real Estate Law Journal) on SSRN.  Here's the abstract:

Clients have brought actions against their real estate brokers seeking compensation for alleged improper behavior in dealing with the clients and their interests. Courts have typically adjudicated these cases by defining the broker as a “fiduciary” and then applying traditional fiduciary doctrines to the broker’s actions. This article argues, however, that real estate brokers are not true “fiduciaries” and do not share much in common with classic fiduciaries such as trustees and executors. For example, real estate brokers have a fundamental, inherent conflict of interest with their seller clients with regard to the terms of the sale, a typical seller should be able to recognize that the broker is operating under an incentive system that is at odds with the seller, the broker does not have legal power over the property and the transaction, and fiduciary models create disappointed expectations in buyers.

Other attempts to define real estate brokers as either “professionals” or “salespersons” create a false dichotomy. In actuality, brokers are both professionals and salespeople. Rules controlling broker conduct must reflect both of these functions in order to be effective. Designating brokers as “fiduciaries” has the deleterious effect of diluting the concept of the fiduciary in American law and creates confusion as to duties that true fiduciaries should observe. Courts should eschew decision by definition, especially when the definition is inappropriate. This article suggests that legislatures and courts should instead adopt a distinct, bespoke set of obligations governing the behavior of real estate brokers based on the reality of the marketplace and legitimate expectations of the parties.

Steve Clowney


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