Undisclosed Principal

The meaning of an undisclosed principal in everyday use often refers to a confidential client who intends to keep their identity hidden. Typically, this individual remains in the background in business transactions. By definition, an undisclosed principal can be either an anonymous seller or a buyer in the business dealing in question. 

The undisclosed principal and their business intermediary

An intermediary, agent, or mediator acts on behalf of the undisclosed principal during this process. Often, the go-between doesn’t inform the other party that the real client is in the background, keeping their anonymity. In this case, the business agent has full legal responsibility, and the contract forces them to assume legal ability.

The confidential client in agency law

One can encounter examples for an undisclosed principal in agency law. The client employs an agent who pretends to be the main party, acting for themselves. Subsequently, the third isn’t aware of the existing facts and doesn’t look for the genuine principal in the dispute.

What does undisclosed principal mean in real estate?

An undisclosed principal is one of the most frequently used terms in real estate. Either the property purchaser or the seller can act as undisclosed principal and engage an intermediary local real estate agent. The motives of assuming anonymity can vary. 

A buyer can keep their namelessness when purchasing real estate or land. Yet the seller isn’t willing to sell the property or doesn’t want to sell to a particular buyer. Sometimes, the buyer knows how difficult it is to do business with a hold-out, who, expecting a higher yield, declines to cooperate. 

Buying property as undisclosed principal “pays off”

In other instances, a seller might ask for a more substantial price if they knew the client’s real identity. One could mention the example of an undisclosed principal in the purchase of Walt Disney World in Orange County, Florida, in 1964 and 1965. 

Agents worked incognito, representing Disney’s attorneys, and bought 27,400 acres of ranchland and swamp at the price of 5 million dollars in total. Suppose the sellers had known the principal’s identity. Then, they would have asked for a higher price by all means. However, representing an undisclosed principal can pose various ethical dilemmas for a real estate agent.

The legal definition of an undisclosed principal in the United States

Can an undisclosed principal be held accountable for their actions in the US? According to the Restatement (Third) of Agency § 2.06, an uninformed third party can hold an undisclosed principal liable before the court on the grounds of unauthorized transactions. Accountability applies if the third party made “a detrimental change in position,” even if the agent didn’t have any actual jurisdiction or authority to bring decisions on the client’s behalf. 

However, the undisclosed client “had notice of the agent’s conduct” in the meantime. As a result of the intermediary's acts, the third party can change its stance in the transaction. The undisclosed principal overlooked informing the third party of the facts during this whole time. 

An agent can incur debts on behalf of the undisclosed client despite the latter forbidding them to do so. Still, the principal can be held accountable for this action as long as the third party is convinced that the agent had the authority to receive credit under the same circumstances that the undisclosed client’s identity had been revealed.