Chapter 11 - Agency Flashcards
The most primary of relationships in real estate brokerage is that between
broker and client, the relationship known in law as the agency relationship.
law of agency, defines and regulates the legal roles of
the agency relationship.
The laws of agency are distinct from laws of contracts, although
the two groups of laws interact with each other. For example, the listing agreement – a contract -establishes an agency relationship.
The essence of the agency relationship is
trust, confidence, and mutual good faith
In an agency relationship, a principal hires an agent as a
fiduciary to perform a desired service on the principal’s behalf
As a fiduciary, the agent has a
legal obligation to fulfill specific fiduciary duties throughout the term of the relationship.
The principal, or client, is the party
who hires the agent. The agent works for the client. The principal may be a seller, a buyer, a landlord, or a tenant.
The role of the agent is the
fiduciary of the principal, hired to perform the authorized work and bound to fulfill fiduciary duties. In real estate brokerage the agent must be a licensed broker.
customer or prospect is a
third party in the transaction whom the agent does not represent. The agent works with a customer in fulfilling the client’s objectives. A seller, buyer, landlord, or tenant may be a customer. A third party who is a potential customer is a prospect
According to the level of authority delegated to the agent, there are three types of agency:
universal, general, and special.
Universal agency
In a universal agency relationship, the principal empowers the agent to perform any and all actions that may be legally delegated to an agency representative. The instrument of authorization is the power of attorney
General agency
In a general agency, the principal delegates to the agent ongoing tasks and duties within a particular business or enterprise. Such delegation may include the authority to enter into contracts
Special, or limited, agency
Under a special agency agreement, the principal delegates authority to conduct a specific activity, after which the agency relationship terminates. In most cases, the special agent may not bind the principal to a contract.
In most instances, real estate brokerage is based on
a special agency. The principal hires a licensed broker to procure a ready, willing, and able buyer or seller. When the objective is achieved, the relationship terminates, although certain fiduciary duties survive the relationship.
An agency relationship may arise from an
express oral or written agreement between the principal and the agent, or from the actions of the parties by implication.
Written or oral listing agreement
The most common way of creating an agency relationship is by listing agreement, which may be oral or written.
A listing agreement establishes an agency
for a specified transaction and has a stated expiration
Implied agency
An agency relationship can arise by implication, intentionally or unintentionally. Implication means that the parties act as if there were an agreement.
Full performance of all obligations by the parties terminates an agency relationship. In addition, the parties may terminate the relationship at any time
by mutual agreement
Involuntary termination. An agency relationship may terminate contrary to the wishes of the parties by reason of:
death or incapacity of either party
abandonment by the agent
condemnation or destruction of the property
renunciation
breach
bankruptcy
revocation of the agent’s license
The agency relationship imposes fiduciary duties on
the client and agent, but particularly on the agent. An agent must also observe certain standards of conduct in dealing with customers and other outside parties.
Skill, care, and diligence. The agent is hired to do a job, and is therefore
expected to do it with diligence and reasonable competence
Competence is generally defined as
a level of real estate marketing skills and knowledge comparable to those of other practitioners in the area.
The duty of loyalty requires the agent to
place the interests of the client above those of all others, particularly the agent’s own.
Obedience. An agent must comply with the client’s
directions and instructions, provided they are legal.
An agent must hold in confidence
any personal or business information received from the client during the term of employment
The confidentiality standard is one of the duties that extends
beyond the termination of the listing: at no time in the future may the agent disclose confidential information.
An agent must safeguard and account for all
monies, documents, and other property received from a client or customer. State license laws regulate the broker’s accounting obligations and escrow practices.
An agent has the duty to inform the client of all
material facts, reports, and rumors that might affect the client’s interests in the property transaction.
Critical material facts for disclosure include:
*the agent’s opinion of the property’s condition
information about the buyer’s motivations and financial qualifications
discussions between agent and buyer regarding the possibility of the agent’s representing the buyer in another transaction.
adverse material facts, including property condition, title defects, environmental hazards, and property defects
The traditional notion of caveat emptor– let the buyer beware– no longer applies unequivocally to real estate transactions. Agents do have certain obligations to customers, even though they do not represent them. In general, they owe a third party:
honesty and fair dealing
reasonable care and skill
proper disclosure
An agent who fails to live up to prevailing standards may be
held liable for negligence, fraud, or violation of state real estate license laws and regulations.
Intentional misrepresentation. An agent may intentionally or unintentionally defraud a buyer
by misrepresenting or concealing facts. While it is acceptable to promote the features of a property to a buyer or the virtues of a buyer to a seller, it is a fine line that divides promotion from misrepresentation
Negligent misrepresentation. An agent can be held liable for failure to disclose
facts the agent was not aware of if it can be demonstrated that the agent should have known such facts.
Misrepresentation of expertise. An agent should not act or speak outside the
agent’s area of expertise. A customer may rely on anything an agent says, and the agent will be held accountable.
The obligations of a principal in an agency relationship concern the following:
-availability
-information
-compensation
A breach of duty by the agent may result in:
rescission of the listing agreement (causing a loss of a potential commission)
forfeiture of any compensation that may have already been earned
disciplinary action by state license law authorities, including license suspension or revocation
suit for damages in court
The primary forms of agency relationship between brokers and principals are:
single agency, dual agency, and subagency
Single Agency
The agent represents one party in a transaction
Seller agency
In the traditional situation, a seller or landlord is the agent’s client. A buyer or tenant is the customer.
Buyer agency
Recently, it has become common for an agent to represent a buyer or tenant. In this relationship, the property buyer or tenant is the client and the property owner is the customer.
In a subagency, a broker or licensed salesperson works as
the agent of a broker who is the agent of a client.
Outside “co-brokers” and agents
It is common practice for brokers and salespersons to “cooperate” with a listing broker in finding buyers or tenants
The broker’s salespersons
All of the listing broker’s salespeople who have agreed to work for the broker to find a customer are subagents of the listing broker and owe the fiduciary duties to the broker and, by extension, to the broker’s client
Dual agency means
representing both principal parties to a transaction. The agent represents both buyer and seller or tenant and owner.
Dual agency contains an inherent
conflict of interest. Since many of an agent’s fiduciary duties can only be rendered to one party, dual agency is, by definition, difficult, if not impossible.
In states that permit dual agency, the agent must meet strict
disclosure requirements, and principals must agree in writing to proceed with the dual agency relationship
The parties to a transaction may create a dual agency by
giving written consent in disclosure forms, confirmation forms, and sale contract forms. Disclosed (voluntary) dual agency
Implied and undisclosed dual agency.
If a broker or agent acts in any way that leads a customer to believe that the agent is representing the customer
Duties of a disclosed dual agent
A dual agent’s first duty is to disclose the agency relationship to both principal parties or to withdraw from one side of the duality. After disclosing, the agent must obtain the written consent of both parties.
Duties of the transaction broker, or facilitator. In the role of transaction broker, the broker’s duties and standards of conduct are to
account for all money and property received or handled
exercise reasonable skill and care
provide honesty and fair dealing
present all offers in a timely fashion
assist the parties in closing the transaction
keep the parties fully informed
advise the parties to obtain expert advice or counsel
disclose to both parties in residential sale transactions all material facts affecting the property’s value
protect the confidences of both parties in matters that would materially disadvantage one party over the other
Duties not imposed on the transaction broker. Since there are no fiduciary duties binding the transaction broker, the broker
is held to standards for dealing with customers as opposed to clients.
As another response to the problem of ‘who works for whom,’ some states have recently moved in the direction of disallowing
subagency
Disclosure removes confusion about
who an agent is working for. It may obviate complaints arising from customers and clients who feel they have been deceived
Specifically, the requirement to disclose aims to:
notify clients and customers about whom the agent represents
inform clients and customers of the fiduciary duties and standards of care the agent owes them
inform prospective clients and customers that they have a choice in how they are represented
obtain acknowledgement and acceptance of the disclosure from the principal parties
an agent who intends to represent a seller or owner must
disclose the import of the proposed agency relationship in writing before the listing agreement is executed. The agent must inform the seller or landlord in writing that the agent will be representing the client’s interests as a fiduciary, and will not be representing the interests of any potential buyer.
A listing agent must disclose in writing to a buyer or tenant that the
agent represents the owner in the transaction. This disclosure must occur before or at the first “substantive contact” with the customer prospect
“substantive contact” between listing agent and customer occurs whenever the agent is:
showing the prospect a property
eliciting confidential information from a prospect regarding needs, motivation, or financial qualification
executing a contractual offer to sell or lease
Interaction between a seller’s agent and a customer is not always substantive. Possible instances that might be excluded from the requirement of disclosure are:
attendance at, or supervision of, an open house, providing the agent does not engage in any of the contacts described above
preliminary “small talk” concerning price ranges, locations, and architectural styles
responding to questions of fact regarding advertised properties
If an agent becomes involved in a substantive contact over the phone or in a such way that it is not feasible to make written disclosure, the agent
must make the disclosure orally and follow up with a written disclosure at the first face-to-face meeting
An agent who plans to represent a buyer or tenant must disclose
the import of the proposed agency relationship in writing before the representation agreement is executed.
A buyer agent must disclose the agency relationship to the seller or seller’s agent on
first contact. Substantive contact is assumed.
An agent who desires to operate in a dual agency capacity must obtain the
informed written consent of all parties. Subsequent contracts should confirm the disclosure. “Informed written consent” means both parties have read, understood, and signed an acceptable disclosure form.
State regulations prohibit a dual agent from making certain disclosures. For instance, a dual agent, unless expressly instructed by the relevant party, usually cannot disclose:
to the buyer that the seller will accept less than the listed price
to the seller that the buyer will pay more than the price submitted in a written offer to the seller
the motivation of any party concerning the transaction
that a seller or buyer will agree to financing terms other than those offered
A principal empowers an agent to conduct the ongoing activities of one of her business enterprises. This is an example of
general agency.
In an agency relationship, the principal is required to
provide the agent with the needed information so that the agent can complete the required tasks.
A principal discloses that she would sell a property for $150,000. During the listing period, the house is marketed for $180,000. No offers come in, and the listing expires. Two weeks later, the agent grumbles to a customer that the seller would have sold for less than the listed price.The agent has
violated the duty of confidentiality
A principal instructs an agent to market a property only to families on the north side of town. The agent refuses to comply. In this case,
the agent has not violated fiduciary duty
