Is limited agency a violation of license law? Very likely!

In Utah and other states, limited agency is legal.

However, the most common practice is very likely illegal.

Ways that limited agency is promoted by industry practices

  1. Sharing of commissions
  2. Utah REPC
  3. Sales training
  4. Broker Experience Rules

Why might it be illegal?

Utah law requires that an agent give their client loyalty, in rule R162-2f-401a, which means quote “place the best interests of the principal above any other interest, including the agent’s own”.

If a real estate agent signs an exclusive agreement with a seller to represent them in the sale of their property, they now have this duty of loyalty, to put the interests of the client above the agent’s own interests.

So when an unrepresented buyer comes looking at the property, the seller agent could simply represent the seller, and disclose to the buyer that they are unrepresented. Even better would be to give them written disclosure that they are unrepresented, and include disclosure about all the things that the seller agent will do on behalf of the seller, and not on behalf of the buyer.

When Agents Suggest Limited Agency

So why would the seller agent then instead suggest that the buyer enter a limited agency agreement with the seller agent?

Some of the reasons might include:

  1. The buyer needs advice and help navigating the transaction
  2. The transaction may proceed more smoothly with a single agent coordinating communication
  3. Reduce the number of people involved in the negotiations, and avoid dealing with another agent whose negotiation style differs.
  4. The agent will potentially get paid more, since they are working for both parties. They will not have to share commissions.
  5. Increase the likelihood that the transaction will close.

Who Benefits from Limited Agency?

Let’s look at each of these reasons and see who benefits:

  1. The buyer needs advice and help. If the buyer hires an agent for advice and help, they would benefit most of the agent representing them is able to be totally loyal, and provide their full professional opinion. If the real estate agent already represents the seller, then they would be representing the buyer as a limited agent, which means they would not be able to offer advice on negotiation, or problems that the seller might create. They would not be able to fully disclose everything they know. Also, by necessity, if the agent enters a limited agency agreement with the buyer, they also become a limited agent for the seller, and the seller loses their loyalty, and full disclosure, and confidentiality. I think we can clearly see that this is a net loss for the seller. Remember that the agent was supposed to be putting the seller’s interests above their own? This looks like a clear situation where the agent is putting either their own interest, or the buyer’s interest before their client.
  2. The transaction may proceed more smoothly with a single agent coordinating communication. This could be a benefit to the seller, and to the buyer. But didn’t the seller hire the agent to handle the hiccups in the transaction? Will the seller pay less if the transaction goes more smoothly? In a typical percentage commission representation agreement, this would not change the compensation at all. So this is not really so much a benefit for the seller, as it is for the agent, because they will likely have to do less work in order to earn the commission that they already have a contract to earn.Some agents have suggested that representing both sides takes even more work, because now they need to help the buyer fill out forms, and do inspections, and things like that. But if you remove the ability to give loyal advice for these things, they are mostly paperwork and scheduling, which are all things an unlicensed assistant could do, or a transaction coordinator. If you want to know how much that job is worth, just look at the offered salaries for these positions. I’ll give you a hint, they are much less than the typical real estate agent commission for each transaction. So the suggestion that a real estate agent will work hard it both true, and also worth less, based on the average compensation for these activities in the marketplace.
  3. Reduce the number of people negotiating, making negotiations easier. Negotiation is one of the skills that real estate agents advertise as one of their biggest values. So if we remove the need to negotiate with another skilled negotiator, and put the real estate agent in a limited agency situation, where they are not allowed to be loyal to either side, this significantly reduces the agent’s ability to assist with negotiation. Without being able to give advice to either side, the agent is put in a position of a communication facilitator, but cannot do hardly any negotiation. The seller would be giving up this skill from their agent, so this looks like it would not be in the seller’s best interests. It reduced the work that the agent has to do, and is legally able to do for the client.
  4. The agent will potentially get paid more, and won’t have to share commissions with another agent. This one is clearly in the agent’s best interest. I don’t think there’s any possible way for an agent to claim this is for their client, when they have a clear increase in compensation. It is even more suspect, when you compare the agent getting paid more, to the seller losing the agent’s duty of loyalty, confidentiality, and disclosure. Would you pay someone more, to be less loyal to you? It just makes no sense.
  5. It might increase the likelihood that the transaction will close. Yes, it does seem like this could increase the likelihood that the transaction will close, because we’ll have less negotiation, less concerns brought up by the agent, who must remain neutral, fewer misunderstandings between agents, since there is only one, and possibly a smoother transaction. But at what cost? At the cost of all the benefits of each side having a loyal representative showing them how they might be harmed, how they can avoid issues, and how they can better benefit from the transaction.

Is it Illegal to Enter Limited Agency?

So, is it illegal to be a limited agent? If you represent one side, and then enter limited agency, and reduce your existing agency agreement to a limited agency agreement, then yes, you are likely violating your fiduciary duty to your client, which requires that you be loyal, and that you put your client’s interests above even your own. We have clearly shown that nearly every reason that you would enter limited agency would be a betrayal of that loyalty to your client.

I estimate that 90 to 95% of all limited agency agreements in Utah are formed after the agent has already created an exclusive agency agreement with one of the clients. The most common is that a residential sales agent represents a seller, and when an unrepresented buyer becomes interested in the home, the seller’s agent suggests limited agency to the buyer and seller, most likely violating their duty of loyalty to their seller.

Utah law and many other states require that if you enter limited agency with your clients, that you must disclose and get written authorization from each side, that they do not get your loyalty, that they do not get full confidentiality or disclosure. With this law in place, it is intended that each client that enters limited agency get the opportunity to be fully informed of what they get, and what they don’t get. If an agent tells a client they represent that they want to switch to limited agency, because it will make the transaction go more smoothly, it will reduce the amount of negotiation that will be needed, and it will increase the likelihood that the transaction will close, are they being honest? That’s a good question, because while all of those statements are true on their own, they are most likely hiding the reasons why they are true, which appear to come at the cost of the client’s best interests. Would an agent be in violation of the duty of full disclosure if they convinced a client this way? Definitely something that agents and brokers should consider, and so should the Division of Real Estate investigators, and the real estate attorneys.

What is a Legal Way to Be a Limited Agent?

But wait, what if I don’t have an agency agreement with either client, and then I start out with limited agency between the buyer and seller? Could I then enter a limited agency agreement?

If you don’t already have an agency agreement that requires loyalty to either client, then the situation is more clear. You still need to explain clearly what limited agency means, and what it offers to each client, and what it doesn’t offer. You cannot say the transaction will go smoother, without also disclosing that part of the reason it will go smoother is that no one is loyally advising each side with expert advice. In this situation you avoid the problem of breaking your fiduciary duty, because you don’t have one. But you still must be honest and forthright, and not convey a false idea of how loyal you will be, or that you will be able to use all your skills for their benefit.

How Can We Improve the Industry

Since nearly all of the limited agency agreements in Utah are likely formed from disloyalty to an exclusive representation agreement, it appears that the practice of limited agency is not being done in the way that the law was intended to allow.

One simple change that we can do in Utah is to remove Limited Agency as a default checkbox in the state approved real estate purchase contract, commonly called the REPC. By having that checkbox in a state approved form, we may be promoting the practice as common and normal, which may make agents overlook the risks and requirements involved in the practice.

We can also change broker experience rules so that an agent does not get extra experience points for performing transactions while using limited agency agreements. In fact, after our evaluation from earlier, it may seem prudent to do so, since the agents are typically doing fewer representative actions on behalf of their clients due to the need for neutrality in those situations.

We can change the culture of sharing commissions in a way that gives a financial incentive to agents to seek out limited agency for their clients. The industry has already taken a big step in this direction due to a lawsuit and settlement that took place in 2024. The standard practice from the past of having a double sized commission for an agent that acts as a limited agent between a buyer and a seller had changed, and now the commissions are more clearly defined, and not as easily doubled up. That appears to be a step in the right direction, and it’s a shame that it took a lawsuit to make the change. Hopefully our industry leaders are learning from these changes, and we can continue to move in the right directly.

A more difficult change would be to simply make limited agency illegal for a single agent. Since it appears that most of the limited agency agreement are created in a way that could potentially be illegal already, if it is true that 90% of limited agency agreements come from changing an exclusive agency agreement to a limited agency agreement, then maybe we just need to stop this practice with a new law or rule. This would prevent agents from falling into this trap, and letting their own interests take precedence over their clients.

Real Estate Training Available

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What do you think? What are ways that we can promote loyalty, fiduciary duty, and proper representation for our clients throughout the industry?