Chapter 2 - Laws of Agency and Fiduciary Duties - 17% Flashcards
Law, definition and nature of agency relationships, type so agencies and agents
The California legislature enacted the Agency Disclosure Law in 1988 (the year I started High School) to address misconceptions about the duties licensees owe to members of the public. This case was Easton vs Strassburger.
An AGENT is generally described as one who is authorized to act for or in place of another person. Thus, agent is an individual or Corporation who represents another, called the PRINCIPAL, in dealings with third persons.
Agency in real estate related transactions includes relationships between:
- BROKERS and members of the public (clients or third-party customers, buyers, sellers, landlords, tenants)
- SALES AGENTS and their brokers
- FINDERS and their Brokers or principles
A “finder” is an unlicensed individual who solicits, identifies and refers potential clients, Brokers, agents or principles in exchange for a fee. While these are unlicensed individuals they indeed have a contract. For example Judy reached out to her friend who was a nurse, and the nurse is a finder and refers business. The nurse reports any income she receives on her taxes.
The “representation of others” undertaken by a real estate broker is called an AGENCY. In real estate transactions:
* the AGENT is the real estate broker retained to represent a client for the purposes hired
* the PRINCIPAL is the CLIENT, such as a seller, buyer, landlord, tenant, lender or borrower, who has retained a broker to sell or lease property, locate a buyer or tenant, or arrange a real estate loan with other persons
and
* THIRD PERSONS, also known as CUSTOMERS, are individuals other than the Brokers client, with whom the broker has contact as an agent acting on behalf of their client.
The seller’s broker is an agent for the seller, and is also known within the industry as the LISTING BROKER. The buyer’s broker is known as a BUYERS BROKER. However, peculiar to real estate brokerage, the buyer’s broker is also known as the SELLING BROKER.
Legally, a client’s real estate agent is defined as a “real estate broker who undertakes representation of a client in a real estate transaction.” Thus, a salesperson is legally an “agent of the agent” (their employing broker).
The “buyer’s broker” might find their agency complicated by also having a listing with the seller of the property their buyer is making an offer on. Thus, the broker becomes a DUAL AGENT. The Dual agency relationship arises when a broker represents both parties in a transaction concurrently, for example both the buyer and the seller. The existence of a dual agency needs to be properly disclosed to each client.
Alternatively, a SINGLE AGENT represents only one party, such as an individual buyer or seller.
A SUB-AGENT is an individual who has been delegated agency duties by another agent of the client, not the client themselves.
The Real Estate Law controlling the conduct of participants in the real estate industry is found in the Business and Professions Code. The Department of Real Estate (DRE) oversees, regulates, administers and enforces real estate law as practiced by the licensees. The DRE was formerly known as the California Bureau of Real Estate (CalBRE) prior to July 2018.
The Real Estate Recovery Fund, also known as the Consumer Recovery Account, is available to individuals who have obtained a final court judgement against a real estate licensee for losses caused while acting as an agent and are unable to recover the Judgment from the licensee. The Real Estate Recovery Fund will cover for causes of action arising on or after January 1, 2009, the maximum recoverable is:
$50,000 for each transaction; and
$250,000 for any one licensee.
Agent can’t get back to work until it is paid back plus interest.
Creation of agency and agency agreements
An AGENCY RELATIONSHIP is created in a real estate transaction when a principal employs a broker to act on their behalf. Agency may be created by:
- EXPRESS AGREEMENT, in which an agency relationship is explicitly created either orally or in writing
- IMPLIED AGREEMENT, in which an agency relationship is created by the acts and conduct of the licensee
- RATIFICATION, in which the principal approves of and confirms the agency relationship after it has been created or
- ESTOPPEL, in which the principal leads a third party to believe that another person is their agent through words or actions for example someone is driving around for an open house and lies about being represented by an agent.
An agency relationship may also be created by NECESSITY OR EMERGENCY under extreme, extenuating circumstances. For instance, if a property is damaged by fire while the owner is out of town, another party made temporarily be called in to act as their agent until the owner returns or is able to provide instruction.
To avoid ambiguity and protect their fee, a Brokers representation of a client is properly undertaken on a WRITTEN EMPLOYMENT AGREEMENT signed by both the client and the broker. A written employment agreement is necessary for the broker to have an enforceable fee agreement. This Employment contract is loosely referred to as a LISTING AGREEMENT.
The broker’s agency can also be created by an oral agreement or conduct of the client with the broker or other individuals. However, the arrangements are unenforceable if no written agreement exists.
The SIX critical elements of a listing agreement used by a seller’s agent are:
- the names of the parties
- the identity of the subject property
- the terms and conditions of the anticipated sale or lease
- the amount of commission to be paid with a statement acknowledging that fee amounts are negotiable and are not fixed by law
- the expiration date of the agency
- signatures of all parties concerned.
Responsibilities of agent to seller/buyer as principal
Two categories of BROKER OBLIGATIONS arise in a transaction including:
- The PRIMARY AGENCY DUTIES of an agent which are owed by a broker and their agents to their principal, known as FIDUCIARY DUTIES, this is the utmost care.
- The GENERAL DUTIES owed by each broker to all parties in the transaction, requiring them to be honest and avoid deceitful conduct.
Under their “fiduciary duties”, a real estate broker needs to provide the utmost level of CARE, HONESTY, LOYALTY, and CONFIDENTIALITY to their principal. As part of this, an agent is required to:
- disclose all MATERIAL FACTS without any misrepresentation about a property or a transaction to their principal (and the third-party customer)
- PRESENT ALL OFFERS RECIEVED to their seller till the close of escrow, unless given specific instruction by the seller to the contrary.
Real Estate licensees often handle other peoples items which have or evidence monetary value, called FUNDS. Funds belonging to others which a broker and their agents handle when acting as agents in a transaction are called TRUST FUNDS. This is anything of monetary value and could be a Rolex watch or a chicken.
CONVERSION is when a broker uses client funds for personal purposes, this is stealing. COMMINGLING is the mixing of personal funds with client or other third-party funds required to be held in trust. For example a broker has Airbnb money coming in and he deposit it into the same trust account. Commingling is not a crime, but the agent should not mix the funds. Commingling is, itself, a violation of the ethics rules and may subject a agent to discipline.
Disclosure of agency
The REAL ESTATE AGENCY DISCLOSURE LAW addresses two separate sets of agency related matters in real estate transactions:
- an AGENCY LAW DISCLOSURE setting out the “rules of agency” which control the conduct of real estate licensees when dealing with the public in an agency capacity.
- An AGENCY CONFIRMATION PROVISION, contained in documents signed by principles used to negotiate the purchase of real estate, declaring the agency relationships undertaken by each of the Brokers with the participants in the transaction.
The “Agency Law Disclosure” needs to be presented to all parties when listing, selling, buying or exchanging (for greater than 1 year) a:
- single family residential property
- multi-unit residential property with more than 4 dwellings, 1-4 units is considered residential, 5+ units is considered commercial
- commercial property
- vacant land
- a ground lease coupled with improvements
- manufactured homes
At its core, the Agency Law Disclosure Form is a restatement of pre-existing agency codes and case law on agency relationships in all real estate transactions. Agency disclosure law requires an agent to provide the Agency Law Disclosure Form as soon as practicable prior to execution of an offer to purchase or lease. The Agency Law Disclosure Form was added in January of 2016.*
Further, the agency relationship is disclosed in the AGENCY CONFIRMATION PROVISION located in all written negotiations to purchase. The agency confirmation provision States the existence or non-existence of each broker’s fiduciary agency with the various parties in the specific transaction engaged in. Each broker identifies the party they are acting on behalf of as their agent in the transaction. Thus, one broker does not state the agency relationship of any other broker involved in the transaction.
Disclosure of acting as principal or other interest
A real estate licensee who acts SOLELY AS A PRRINCIPAL buying or selling property need not disclose the existence of their real estate license. The disclosure of a sales agent or broker license is only required when the licensee hold themselves out as an agent in the transaction with the expectation of a fee, not merely a principal acting for their own account.
However, the drafters of the state exam questions tend to err on the side of caution, and phrase questions covering this issue to encourage disclosure as a matter of prudence, even if it is not legally required.
A CONFLICT OF INTEREST exists for a broker when:
- the broker has a positive or negative bias towards the opposing party in a transaction or person indirectly involved in the client’s transaction
- that bias might compromise the brokers ability to freely recommend action or provide guidance to the party they agreed to represent.
The “conflict of interest” which exists when acting as a dual agent is handled by the timely disclosure to all parties. Disclosure is made prior to providing a buyer with information on a property listed with the broker, or taking a listing from a seller when the broker already represents a buyer who will make an offer.
Disclosure of a conflict, such as a dual agency situation, allows the principles to take the disclosed bias into consideration in further discussion with the broker and in negotiations with the opposing party.
The disclosure and consent to the Dual agency does not neutralize the bias disclosed. However, it does neutralize the element of Deceit which, if left undisclosed, would be a breach of the Brokers fiduciary duty.
Termination of agency
Agency is terminated on:
- the COMPLETION of the purpose of the employment, such as the closing of escrow
- the MUTUAL CONSENT of both the agent and principal
- the EXPIRATION of its term, such as on the running of the time period given on an exclusive listing
- the EXTINCTION of its subject, such as the destruction of the subject property, like fires
- the DEATH or INCAPACITY of the agent or principal, For example if the broker dies the deal dies, but if the agent dies then the deal continues because the agent is an ‘agent of the agent/broker’ and the broker can pick up where their agent left off.
- the agents or principals RENUNCIATION of the agency, which may expose the renouncing party to liability for damages.
Commission and fees
A COMMISSION, also known as a FEE paid for real estate services rendered, is an agent’s compensation for performing the duties of the agency. In real estate practice, the commission is generally structured as a percentage of the selling price of property or a percentage of rent an income property produces. Example a commission is a fee, someone else is paying a fee because they are paying me.
FEE = ME
Fee amounts are negotiable and are not fixed by law.
However, fees are commonly structured as 6% of the price received for a property, to be split between the buyer’s and seller’s brokers (then further divided among their agents.) For example on a $300,000 sale, with 6% Commission, that would be a total of $18,000, split in two, $9,000 going to each broker. the broker will been split usually 80/20 from there.
Responsibilities of agent to non-client third parties
An agent owes a GENERAL DUTY to be honest and avoid deceitful conduct owed to all parties in the transaction, and disclose any material facts that are or should be known to the agent. A third party in a transaction is known as the CUSTOMER. An agents principal, to whom the agent owes a specific FIDUCIARY DUTY, is known as the CLIENT.
For example, a seller’s agent owes a general duty of good faith and fair dealing to the buyer – (but a fiduciary duty to their client seller). A buyer’s agent owes general duty to the seller – but a fiduciary duty to their client buyer.
A dual agent, acting on behalf of both the buyer and the seller concurrently, owes a fiduciary duty to both parties. Under a dual agency, both parties are entitled to advice from the agent, although the agent may not pass on “confidential pricing information” to the opposing parties.
advance fees
Advance fees - a fee paid in advance of any services rendered. Sometimes unlawfully charged in connection with that illegal practice of obtaining a fee in advance for the advertising of property or businesses for sale, with no intent to obtain a buyer, by persons representing themselves as real estate licensees, or representatives of licensed real estate firms.
agency
Agency - the relationship between a principal and the principles agent which arises out of a contract, either expressed or implied, written or oral, the principal employing the agent to do specified activities dealing with third parties.
agency creation
Agency Creation - An agency is created by express appointment when the principal appoints the agent by express agreement with the agent. This express agreement may be an oral or written agreement between the principal and the agent. … The one exception is where an agent is appointed to execute a deed on behalf of the principal.
Agency Law Disclosure
Agency Law Disclosure - a restatement of agency codes and cases which establishes the conduct of real estate licensees. It is delivered to all parties in targeted transactions.
agency termination
Agency Termination occurs when -
- the COMPLETION of the purpose of the employment, such as the closing of escrow
- the MUTUAL CONSENT of both the agent and principal
- the EXPIRATION of its term, such as on the running of the time period given on an exclusive listing
- the EXTINCTION of the subject property, such as the destruction of the subject property, like fires
- the DEATH or INCAPACITY of the agent or principal, For example if the broker dies the deal dies, but if the agent dies then the deal continues because the agent is an ‘agent of the agent/broker’ and the broker can pick up where their agent left off.
- the agents or principals RENUNCIATION of the agency, which may expose the renouncing party to liability for damages.
altering contract
Altering Contract - Alteration of contract is the modification of the terms of a contract with the assent of both parties. Effect of alteration of a contract is that a new contract is formed, to be supported by a good consideration.
Civil Rights Act
Civil Rights Act - a federal law enacted in 1968 which provides broad protections to numerous classes of individuals in the United States against discriminatory activities.
commingling
Commingling - the mixing of personal funds with client or third-party funds held in trust.
conflict of interest
Conflict of interest - when a broker or agent has a positive or negative bias toward a party in a transaction which is incompatible with the duties owed to their client.
contingency
Contingency - a condition that needs to be met before escrow can proceed to closing.
conversion
Conversion - the unlawful appropriation of another’s property, as in the conversion of trust funds.
Appropriation is the action of taking something for one’s own use, typically without the owner’s permission.
“the appropriation of real estate trust funds”
