Chapter 4 (Authorized Relationships and Ethics) Flashcards
Authorized Relationships and Ethics
The Law of Agency
When a person delegates authority to someone to act on his or her behalf, an agency relationship has been created. Agency relationships fall within the body of law called law of agency. There are three types of law that society looks to for guidance regarding agency relationships: common law, statutory law, and administrative law.
- Common law (sometimes called unwritten law) is law based on usage, general acceptance, and custom.
It is judge-made law manifested in decrees and judgments of the courts (case law).
Common law originated in England and was later incorporated into the U.S. legal system.
Under the English common law, servants owed absolute loyalty to their masters.
This absolute loyalty is one of the fundamental principles of the agency relationship. Agency law derives from common law.
- Statutory law is written statutes enacted by the legislature.
Chapters 455 and 475 are two Florida statutes enacted by the Florida Legislature pertaining to license law.
- Administrative law is a body of law created by administrative agencies in the form of rules, regulations, orders, and decisions.
Florida Statute 475 empowers the Florida Real Estate Commission to govern real estate practice in Florida.
In addition to the statutory laws of agency, real estate license law and the Florida Real Estate Commission (FREC) rules directly affect and regulate the brokerage relationships among real estate licensees, buyers and sellers, and the public.
Common Law
Judge-made law manifested in decrees and judgments of the courts (case law) as opposed to statutory law.
Statutory Law
Written statutes and rules enacted by the legislature.
Administrative Law
Body of law created by administrative agencies in the form of rules, regulations, orders, and decisions.
Agency Relationships in General Business Dealings
In general, a person who delegates authority to another is called the principal.
A person who accepts the authority (and responsibilities, duties, and obligations associated with that authority) is called the agent.
An agent is the person entrusted with another’s business. An agent is authorized to represent and act for the principal.
The agency relationship creates a fiduciary relationship with the principal.
*A fiduciary acts in a position of trust and confidence for another.
The fiduciary owes complete allegiance to the principal.
A fiduciary relationship contrasts with the common public relationship that exists in normal trading transactions where people with adverse interests deal at arm’s length with one another.
People dealing at arm’s length conduct negotiations on their own behalf without trusting the other’s fairness or integrity and without being subject to the other’s control or influence.
In such cases, the legal doctrine of caveat emptor (let the buyer beware) applies. Agency relationships exist in many business transactions such as between an attorney (agent) and client (principal).
An agency relationship may exist in certain real estate transactions (this will be explained in detail in the following section).
There are three types of agents characterized by the extent of authority delegated to an agent in general business dealings:
(1) universal agent,
(2) general agent, and
(3) special agent.
- A universal agent is authorized by the principal to perform all acts that the principal can personally perform and that may be lawfully delegated to another.
An attorney who manages the trust agreement of a mentally disabled adult is a universal agent for that client (the principal). Duties of the attorney-agent would include, for example, overseeing the principal’s financial affairs, medical care, employment opportunities, and living arrangements.
- A general agent is authorized by the principal to perform acts associated with the continued operations of a particular job or a certain business of the principal.
A property manager, for example, acts as a general agent if authorized to show and rent apartments, collect rents, supervise maintenance and upkeep of the property, handle tenant relations, and perform bookkeeping duties.
A sales associate is a general agent of the employing broker.
- A special agent is authorized by the principal to handle only a specific business transaction or to perform only a specific act.
If you hire a certified public accountant (CPA) to prepare your tax return and, if necessary, to answer any inquiries from the IRS concerning the tax return, the CPA is acting as a special agent for you (the principal).
A real estate licensee may act as a special agent with buyers or sellers.
This occurs when the buyer or seller and the brokerage firm enter into a single agent relationship.
The broker agrees to represent the buyer or seller with regard to a single business transaction.
Not all real estate brokers act as agents of buyers and sellers (see Single Agent Relationship later in this unit).
Universal Agent
An agent authorized by the principal to perform all acts that the principal may personally perform and that may be lawfully delegated.
General Agent
An agent authorized by the principal to handle the affairs related to a business or trade, or to handle all the business at a certain location; for example, a property manager.
Special Agent
An agent authorized by the buyer or the seller to handle only a specific business transaction or to perform a specific act; a broker who has a single agent relationship is a special agent with limited power or authority.
Brokerage Relationships in Florida
Historically, there has been confusion among buyers and sellers regarding what role real estate licensees have in real estate negotiations.
Sellers assumed that real estate licensees represented their interests because sellers traditionally paid the commission.
However, the payment of commission or the promise of compensation alone is not what determines whether a brokerage relationship exists.
A brokerage relationship can be accidently (inadvertently) created by a licensee’s actions and words.
For example, referring to a prospective purchaser as “my buyer” or “my client” may imply that the licensee is representing the buyer when in actuality the brokerage is representing the seller.
Because of this confusion, the Florida legislature passed the Brokerage Relationship Disclosure Act.
The Brokerage Relationship Disclosure Act is intended to inform and educate the public regarding the types of authority (brokerage relationships) that can be granted to a broker and the duties brokers have in each type of brokerage relationship.
Brokerage Relationship Options
Licensees have three basic options in all real estate transactions concerning the role the real estate brokerage firm will assume for buyers and sellers:
- The brokerage firm may work as a transaction broker for the buyer and/or the seller.
- The brokerage firm may work as a single agent of either the buyer or the seller (but not for both buyer and seller in the same transaction).
- The parties may agree that the brokerage firm will not represent the buyer or the seller at all.
This situation is called no brokerage relationship.
The brokerage firm simply facilitates the transaction.
In Florida, a real estate licensee may enter into a brokerage relationship either as a transaction broker or as a single agent with prospective buyers and sellers.
Alternatively, the customer may desire not to be represented in any capacity by the brokerage firm.
For example, property owners who have found buyers for their own homes (for-sale-by-owners, also called FSBOs) may want a knowledgeable real estate firm to handle the paperwork regarding the transaction.
However, an FSBO seller may not need or desire the broker to represent or negotiate on the seller’s behalf.
In such cases, FSBOs may elect no brokerage relationship with the brokerage firm.
It is illegal in Florida for a real estate licensee to operate as a dual agent.
*The term dual agent means a broker who represents as a fiduciary both the prospective buyer and the prospective seller in a real estate transaction.
When a broker represents a buyer or a seller as a fiduciary, the broker is in a relationship of trust and confidence between the broker as agent and the seller as principal or the buyer as principal.
A fiduciary relationship is created when a real estate broker accepts employment as a single agent of the seller or the buyer.
In an agency relationship, the broker owes fiduciary duties to the principal.
Florida real estate license law prohibits a broker from creating a fiduciary relationship with both the buyer and the seller.
Residential Transactions
Chapter 475 mandates certain duties and obligations in each type of brokerage relationship.
These duties and obligations apply to all real estate transactions.
However, written disclosures are required only when dealing in residential real estate sale transactions.
A residential sale is defined as the sale of improved residential property of four or fewer units, the sale of unimproved residential property intended for use as four or fewer units, or the sale of agricultural property of 10 or fewer acres.
Furthermore, the disclosure requirements do not apply to:
nonresidential transactions;
the rental or leasing of real property, unless an option to purchase all or a portion of the property improved with four or fewer residential units is given;
auctions;
appraisals; and
dispositions of any interest in business enterprises or business opportunities, except for property with four or fewer residential units.
Note that licensees are no longer required to give customers a written disclosure when a transaction broker relationship is chosen.
Residential Sale
Defined in Florida license law to mean the sale of improved residential property of four or fewer units, the sale of unimproved residential property intended for use as four or fewer units, or the sale of agricultural property of ten or fewer acres.
Transaction Broker Relationship
Under Florida law, *it is presumed that all licensees are operating as transaction brokers unless a single agent or no brokerage relationship is established, in writing, with the customer.
A transaction broker is a broker who provides limited representation to a buyer, a seller, or both in a real estate transaction, but who does not represent either party in a fiduciary capacity or as a single agent.
In this relationship, the seller (or the buyer) is considered to be a customer of the real estate broker and not a principal.
In a transaction broker relationship, the buyer or seller (customer) is not responsible for the acts of a licensee.
Chapter 475 defines customer to mean a member of the public who is or may be a buyer or a seller of real property and may or may not be represented by a real estate licensee in an authorized brokerage relationship.
Therefore, the seller (or the buyer) who chooses limited representation is a customer under the transaction broker relationship.
A licensee may enter into a transaction broker relationship with both parties (buyer and seller) in a real estate transaction.
The seven duties of the transaction broker in this limited form of representation are as follows:
- Deal honestly and fairly.
Licensees owe a duty of good faith and honesty to customers.
A broker’s customers are entitled to rely on any material statement related to a real estate transaction that is made by a licensee.
- Account for all funds.
The broker must account for all funds entrusted to him or her with regard to a real estate transaction.
Such holdings are considered trust funds or escrow funds.
Money and valuables entrusted to a broker must be kept separate from the broker’s funds.
The broker is not entitled to any trust or escrow funds until the transaction is concluded at a title closing.
Brokers are required to keep complete records of all transactions and funds as well as to make available to the Department of Business and Professional Regulation (DBPR) such books, accounts, and records as will enable the DBPR to determine whether the broker is in compliance with Chapter 475.
- Use skill, care, and diligence in the transaction.
The broker, for example, must keep informed of current zoning and other developments that may affect the value of the property and must use diligence in facilitating the transaction.
Questions sometimes arise regarding whether certain information concerning the seller or previous occupants of a property must be disclosed to prospective buyers.
Federal fair housing law and the Florida statutes specifically mandate that the fact that an occupant of real property is infected or has been infected with human immunodeficiency virus (HIV) or diagnosed with acquired immune deficiency syndrome is not a material fact in a real estate transaction.
This is personal medical information and must not be disclosed without prior authorization.
Furthermore, Florida statute mandates the fact that a property was, or was at any time suspected to have been, the site of a homicide, suicide, or death is not a material fact in a real estate transaction.
A cause of action will not arise against a property owner or a real estate licensee for failure to disclose any of the information or events listed above.
- Disclose all known facts that materially affect the value of residential real property and are not readily observable to the buyer.
Licensees have a duty to disclose to buyers all known facts that materially affect the value of residential property.
For example, a licensee is obligated to inform the buyer if there are cracks in the tile floor under the wall-to-wall carpeting caused from the foundation settling.
- Present all offers and counteroffers in a timely manner.
Unless a party has previously directed the licensee otherwise in writing, the licensee must present all oral and written offers and counteroffers in a timely manner even if a valid contract exists.
- Exercise limited confidentiality, unless waived in writing by a party.
This limited confidentiality will prevent disclosure that the seller will accept a price less than the asking or listed price; that the buyer will pay a price greater than the price submitted in a written offer; of the motivation of any party for selling or buying property; that a seller or buyer will agree to financing terms other than those offered; or of any other information requested by a party to remain confidential.
- Perform any additional duties that are mutually agreed to with a party.
A real estate licensee must be careful not to accept duties beyond the scope of limited representation.
To do so might create an unintended fiduciary relationship with a customer.
For example, a transaction broker may not promise complete allegiance to a customer because to do so could be interpreted by a court of law to have created a fiduciary relationship.
In a transaction broker relationship, the parties to a real estate transaction are giving up their rights to the undivided loyalty of a licensee.
This aspect of limited representation allows a licensee to facilitate a real estate transaction by assisting both the buyer and the seller.
However, a licensee will not work to represent one party to the detriment of the other party when acting as a transaction broker to both parties.
Real estate licensees are no longer required to give customers a written transaction broker notice.
However, licensees must still fulfill the duties of a transaction broker when that form of representation is selected.
The seven duties listed above apply to all real estate transactions (residential and otherwise) when the parties have agreed to a transaction broker relationship.
Single Agent Relationship
*A broker who represents either the buyer or the seller (but not both) and has a fiduciary relationship with the party represented.
A seller (or a buyer) may want to be represented by a real estate broker.
In this case, the real estate broker is a single agent who represents the seller as a fiduciary in selling the home or the buyer in finding a home.
The Florida real estate license law defines a single agent as a broker who represents, as a fiduciary, either the buyer or the seller, but not both, in the same transaction.
In a single agent relationship, the seller (or the buyer) is the principal and the real estate broker is the agent.
The term principal is used to mean the party with whom a real estate licensee has entered into a single agent relationship.
Subagents are persons authorized to assist and represent the agent.
A subagent has the same duties as the agent.
A broker’s sales associates are general agents of the broker and subagents of the broker’s principals.
For example, in a single agent relationship, the broker is an agent of the principal.
The broker’s sales associates and broker associates are subagents of the broker’s principals.
Sales associates and broker associates owe the same fiduciary obligations to the broker’s principals as does their broker.
Note that this is true regardless of whether the associates, for tax purposes, are employees or independent contractors of the broker.
The Nine Duties
The nine duties a real estate licensee owes to a buyer or seller who engage the real estate brokerage as a single agent are as follows:
- Deal honestly and fairly. See Topic 4.4:
Transaction Broker Relationship for explanation.
- Loyalty.
The agent as fiduciary in a real estate transaction must avoid any situation that might breach the duty of undivided loyalty to the principal.
The overriding rule is that a broker may not adopt an attitude that is adverse to the interests of the principal or act for himself or herself or some other person whose interests are contrary to those of the principal.
Loyalty (faithfulness) requires the broker to always place the principal’s interests above those of other persons with whom the broker deals.
Courts have ruled (case law) that for brokers to be loyal to their principals, they cannot exercise duties in such a manner as to profit themselves or anyone else at the expense of the principal.
The duty of loyalty includes, for example:
obtaining the most favorable price and terms for the principal;
acting on behalf of the principal;
not acting for parties with adverse interest in the same transaction;
never concealing the identity of the purchaser to induce the principal to sell;
disclosing to the principal if the agent becomes personally interested in the principal’s property; and
never advancing the agent’s or another person’s interest at the expense of the principal.
- Confidentiality.
Much of the information a broker gains while employed by the principal is confidential.
An agent may not reveal to a third party, without the principal’s permission, personal or private information that might lessen the principal’s bargaining position.
For example, a licensee may not tell a buyer that a seller is forced to sell owing to poor health or loss of a job without the principal’s permission.
Brokers may not divulge confidential information learned during the course of the single agency even after the transaction is concluded and the agent-principal relationship is ended.
A broker is never free to use confidential information to the disadvantage of or reveal any harmful or unfavorable information about a former principal.
- Obedience.
An agent is obligated to act in good faith according to the principal’s lawful instructions.
The broker-agent is at all times obligated to act in conformity with the principal’s instructions as long as those instructions are legal and relevant to the contractual relationship. If a broker feels that carrying out the principal’s legal directions will harm the principal, then the broker must promptly inform the principal of all known facts along with the broker’s opinion. However, if the principal will not change the instructions, the broker must either carry them out or withdraw from the relationship.
Brokers may not violate the law.
For example, if a principal instructs a listing broker not to show the property or sell to a member of a particular minority or ethnic group, the broker may not obey the principal’s instructions because doing so would violate the law. In such an instance, the broker must inform the principal that to restrict certain groups of people from seeing or purchasing a listed property is a violation of the fair housing laws.
- Full disclosure.
It is a broker-agent’s duty to keep the principal fully informed at all times of all the facts or information that might affect the transaction or the value of the property. An agent is obligated to disclose facts regarding a property’s true worth. Agents may be held responsible for material facts they should have known and communicated to their principal but did not. Also, broker-agents must inform their seller principals, for example, of the buyer’s financial condition, the status of the earnest money deposit, or if a personal relationship exists between the agent and the buyer. All material facts must be revealed to the principal even if the disclosure of such facts might cause the transaction to fail.
Full, fair, and prompt disclosure also includes notifying the principal if the broker is personally interested in buying the listed property. In such an event, the broker must clearly terminate the agent-principal relationship and inform the principal of all facts regarding the property that the broker has learned while in an agent’s capacity. Otherwise, the broker could buy from the principal and subsequently sell at a higher price and keep the profit (“overage,” “secret profit,” or “secret commission”). To do so could be construed as fraud, misrepresentation, concealment, and/or dishonest dealing and could expose the broker to liability to both seller and buyer for the full amount of the secret profit. It might further give rise to disciplinary proceedings against the licensee.
- Account for all funds. See Topic 4.4:
Transaction Broker Relationship for explanation.
- Skill, care, and diligence in the transaction.
A broker’s obligations extend beyond merely selling a listing or locating a suitable property for a buyer. A real estate broker holds himself or herself out to the public as specially qualified by reason of experience, ability, and knowledge.
If a broker’s principal is a buyer, then the broker should attempt to obtain the property at the lowest price possible.
If the broker’s principal is a seller, then the broker should try to get the seller the most favorable price. This includes researching a property thoroughly to advise the seller of a reasonable listing price.
Brokers should discuss with their principals any anticipated tax consequences and advise them to seek expert tax advice when appropriate. The duty of using skill, care, and diligence does not end with the signing of a contract.
It continues via numerous services by the agent until the transaction is closed. If an agent does not perform with the required degree of skill, care, and diligence, the agent becomes liable to the principal for the damages the principal may have sustained and may be disciplined by the FREC.
8. Present all offers and counteroffers in a timely manner. See Topic 4.4: Transaction Broker Relationship for explanation.
- Disclose all known facts that materially affect the value of residential real property and are not readily observable to the buyer. See Topic 4.4: Transaction Broker Relationship for explanation.
The nine duties listed above apply to all real estate transactions (residential and otherwise) when the parties have agreed to a single agent relationship.
