The Creation and Termination of Agency Flashcards
An agency relationship is created when one party (principal/client) authorizes another (agent/broker) to act on their behalf and in their best interests.
It is a mutual agreement in which the principal authorizes the agent to represent them and the agent agrees to do so.
This is true, not just for real estate, but in any arena where principals require the representation services of an agent.
Put a Ring on It?
While not as romantic as a personal relationship, an agency relationship should still be entered into with a great degree of caution and care.
This mutual agreement will usually take the form of an oral or written agreement; however, an agency relationship may also be created less formally, as well.
In Arizona, agency agreements for real estate MUST be in writing!
Agency Relationship = Fiduciary Relationship
The term fiduciary, as mentioned in earlier chapters, speaks to the level of trust that is expected in certain relationships — particularly those having financial implications.
Arizona recognizes the agency relationship between a broker and their client (principal) to be a fiduciary one.
Compensation ≠ Agency Relationship
While we’re on the subject of money, it should be noted that compensation does NOT equal agency representation. A broker can potentially be compensated by a number of different people: the client, the customer on the other side of the transaction, another source, or some mix of the above.
In fact, it is more common that a buyer’s agent would receive compensation from the seller (via the proceeds on the property sale) than from their own buyer-client directly. That fact does not, in any way, influence the buyer’s agent obligation to look after the best interests of their client.
The Components of Agency
The creation of agency requires two essential components:
Consent
Control
Consent
Ideally, an agency relationship is created as the result of the mutual consent or agreement between the agent and the client (principal) in which the agent agrees to act on behalf of the client. In most cases, consent precedes the act (but not always). We will discuss these issues of timing and order shortly.
It’s important to note that both the agent AND the principal must give consent to the agency relationship.
Control
Control has to do with the idea that the agent has authority to act on behalf of the client. Written agreements, contracts, and forms all contribute to the support and clarification of this concept of control.
It’s All About the Relationship
Agency can be created in a number of ways and at different points of time in a relationship. Agency can be described in terms of:
The manner in which it is created
The degree of authority and liability it brings
The form that it takes
Additionally, agency creation can morph from one type into another as the relationship between the parties progresses.
The Manner in Which Agency Is Created
Agency can be created:
Orally
In writing
By implication or action
While that is true, it bears repeating that the preferred manner in which agency is created is in writing. It’s also the best way to ensure you’ll receive your earned commissions!
Describing Agency Creation
Express agency can be created in written or oral form. Both forms are considered valid*, with the written form offering more clarity and protection for both parties.
In either case, express agency is created when the principal explicitly appoints the broker/agent to act on their behalf.
*While this is true in a general sense, in the world of Arizona real estate in particular, agency agreements must be in writing!
The Tools of Express Agency
In real estate, the best tools for creating express agency are the listing agreement and the buyer-representation agreement.
Express agency can also come by way of instructions given via email, text, fax, and snail-mail.
Oral Agency Not-So-Fun Facts
Here are a few of the reasons to shy away from oral agency:
It is NOT enforceable against the principal.
It MIGHT BE enforceable against the broker.
It is more likely to lead to complaints and/or lawsuits (than is written agency).
It does not allow a listing agent to use the MLS.
Arizona requires real estate agency agreements to be in writing!
Think Ink
So, although express agency can be created by an oral agreement between parties, it would be wise to get the agreement in writing. And, as I’ll continue to say until I’m blue in my metallic face, for Arizona real estate, you don’t have a choice — agency agreements MUST be in writing!
In real estate agency agreements, the written contract should address the duties of both parties and should sufficiently protect both parties. And it should address the broker’s compensation — when it will be earned and when it will be paid.
The Creation of Express Agency
An implied agency relationship is created by actions, conduct, and words rather than being expressly agreed upon.
Both parties can be held to the duties of an implied agency relationship. This is true for the license holder more so than for the principal.
If you do not wish to act as a party’s agent, you should make that clear.
It is highly recommended to state the terms of the relationship in writing. We can never say that enough, Anthony.
When Relative = Implied
Be aware that the courts could rule that family, friends, and former clients enjoy an automatic implied agency because of previous or ongoing relationships with you.
Whenever you get into a real estate discussion with anyone from these groups, clarify your agency relationship (or lack thereof).
When Implied Agency Leads to Misunderstandings
Implied agency can be created when an agent gives friendly advice to a buyer-prospect or discusses a property without being clear about representation.
If a license holder shows listings from another brokerage, a buyer-agency scenario has likely been informally created — perhaps unintentionally so.
If a licensee is showing listings from their own brokerage, it could be argued that undisclosed dual agency has been created.
Sometimes it is left up to the courts to determine if an agency relationship existed and when it began.
In spite of my soft spot for Judge Judy and Perry Mason, I’d prefer to stay out of the courtroom, if at all possible!
Avoid Accidents
The last thing you want to do is create accidental agency.
Accidental agency is a form of implied agency. It usually means that a license holder dropped the ball in their communications. More often than not, implied agency results when an agent’s enthusiasm and desire to be helpful has overridden their sense of caution, care, and precision.
The Creation of Implied Agency
Two close relatives of implied agency are ostensible agency and agency by estoppel.
Ostensible agency is created when the actions or words of one or more individuals lead a third party to believe:
Agency exists between two individuals (when it doesn’t) AND
The responsible individuals fail to take action to correct that impression
Ostensible agency can be created:
Prior to any express agency agreement
In the absence of an express agency agreement
After an express agency agreement has terminated
Agency by estoppel is agency that is imposed by law when it is determined that ostensible agency existed.
Agency by estoppel is created AFTER the actions giving the impression of agency have already occurred. It is used to create legal accountability for the individuals responsible.
In other words, agency by estoppel occurs in an environment of ostensible agency.
As a matter of law, the responsible individuals are “estopped” from trying to claim, after the fact, that agency never existed. The responsible individuals can be held liable for injury to a third party.
Three people sit around a table, with one person showing the other two a document.
Ostensible Agency to Agency by Estoppel Timeline:
Ostensible agency is created when the words or actions of two individuals create an impression of an agency relationship.
The two individuals do nothing to correct the impression that an agency relationship exists.
A third party acts on the impression that an agency relationship exists between those two individuals.
That third party makes a claim for damages because they were injured as a result of that impression.
The two individuals are barred from trying to claim, after the fact, that there was not an agency relationship.
Scenario: The Expired Listing Agreement
A listing agreement expires between a seller and an agent. One week later, the agent finds a buyer for the seller’s property.
After closing, the buyer realizes the license holder made a misrepresentation. The buyer then brings suit against the seller based on the misrepresentation of the license holder.
The seller claims that the license holder was not acting as their agent at the time the misrepresentation occurred since the listing agreement had expired before the buyer came along.
After reviewing the circumstances, the court ruled that the seller was liable for the misrepresentation. The judgment was based on the legal principle of agency by estoppel.
In the court’s view, the buyer had reasonable cause to believe the license holder was still acting as the seller’s agent AND the seller hadn’t done enough to prevent that impression.
Ostensible Agency and Agency by Estoppel
An agent can, of course, agree to work for no compensation. This creates gratuitous agency. Although no payment changes hands, the agent is still held to all the duties of an agency relationship.
That’s right, Anthony, agency creation does not require the agent to be paid.
No Good Deed Goes Unpunished
An agent, in trying to do a favor for someone, could end up exposing themselves and their broker to an agency lawsuit.
For example, if the free advice an agent gave a party turned out to be bad advice and the party suffers a loss, the court may find that:
In giving the free advice, agency was created
The agent (and their broker) are negligent and liable
This is why license holders should always get permission from their broker to practice gratuitous agency.
A Common Practice
It is not unusual for an agent to offer some degree of free assistance to a friend, family member, or former client. Anytime a prior relationship exists, there is an increased chance for gratuitous agency (or implied agency).
Make It Official
As with every other agency relationship, it is highly recommended that the agent have all terms and expectations put in writing — maybe even more so when creating gratuitous agency with family and friends, since the likelihood of false assumptions can be greater in these instances.
Gratuitous Agency
Causes for agency termination that fall under the operation of law include:
Performance (fulfillment of purpose)
Expiration
Destruction or condemnation
Death, incapacitation, or bankruptcy
Loss of broker license
That’s a list. I’m a robot. So, naturally, what follows is a closer look at each cause. (You know me too well, Anthony.)
Performance/Fulfillment
Agency can be terminated in a number of ways, but, clearly, the most desirable way to terminate an agency relationship is through performance or the fulfillment of its purpose — which, in real estate, usually happens the day of closing on a property.
Expiration of Term
Expiration of the agency agreement period — whether or not performance or fulfillment of purpose has occurred — will terminate the agreement by operation of law. If the parties wish, the agency relationship can continue, but contracts will have to be updated or replaced accordingly.
Destruction or Condemnation
If the property that the agency relationship is based on ceases to exist, the relationship is dissolved. This is known as destruction or extinction of the property. While often the stuff of adventure movies, this is rarely the cause of agency termination.
The land will typically survive a disaster, but the improvements (e.g., the house) on the land might not.
Earthquakes, floods, tornados, and extremely angry beavers are but a few examples of what might bring this about.
Condemnation
Condemnation sounds almost as dramatic, but what it actually refers to is the seizure of private property by government through the use of a legal concept known as eminent domain.
The government compensates the owner for the loss of ownership and control of the property, which renders any existing private purchase contract void.
Death, Incapacitation, or Bankruptcy
Death or incapacitation of either party will usually result in the termination of agency.
If a broker passes away or becomes incapacitated, all agency agreements of that broker would be rendered null and void. Every salesperson employed by that broker would need to find a new sponsoring broker in order to continue working with existing clients.
On the other hand, if something were to happen to the sponsored salesperson, their broker would simply need to reassign a new licensee to the relationship to act on the broker’s behalf. This is because agency agreements are entered into with the broker and not the salesperson. Existing agreements would remain in force.
If something were to happen to the principal, both the broker and the licensee would be out of luck.
Bankruptcy by the broker or client can result in the termination of the agency relationship. When a seller files for bankruptcy, they typically lose control of the property, and the courts decide what will be done with it.
Loss of Broker License
Regardless of the cause, the deactivation or revocation of a broker’s license invalidates all active written agreements that are in place at the time.
Agency Termination by Operation of Law
Agency Termination by Acts of the Parties
Now, let’s turn our attention to the causes of agency termination that are considered acts of the parties. They include such actions as:
Mutual agreement
Revocation
Renunciation
Breach of agreement
And because you’ve grown soooo accustomed to it, here’s a bit more on each action on the list…
Mutual Agreement
Both parties may agree to end the agency relationship at any time. Mutual agreement or mutual rescission are the terms used when both parties make this decision, mutually agreeing to end the agency relationship.
In truth, the two parties will probably not decide to terminate the agency relationship on their own at exactly the same time. Usually, however, once the idea is brought up by one party, the second party also quickly determines that terminating agency is the best idea.
When a mutual agreement to rescind the contract does happen, both parties are released from liability for breach of contract. That is why mutual agreement is thought to be the best form of early termination of agency.
And, for the protection of all parties, it is always wise to put the mutual agreement to terminate agency in writing.
Revocation A client (principal) may, at any time, fire their agent, usually by way of written notice. This client-initiated termination is known as revocation.
The right to unilaterally revoke or terminate agency does NOT necessarily mean the client will not incur liability for that decision.
If the agency agreement signed by the client contains a specific termination date, the client may be found in breach of contract. If the agency agreement is open-ended (legal in some states), client liability is usually limited to reimbursing the broker for any expenses incurred on behalf of the client.
Renunciation
An agent may, at any time, decide to leave an agency relationship.
The correct term for this is renunciation. An agent will usually give written notice of the renunciation, and the agent could be liable for damages if renouncing a contract containing a specific termination date. (As with revocation, if the agency agreement is open-ended, a broker can usually renounce the agreement without liability.)
More often than not, an agent will have a pretty significant reason for rescinding an agency agreement.
Note: Since the broker is technically the agent of the principal (special agency is created at the broker level), only the broker can officially end an agency agreement with the principal. So, if an associated licensee wanted to terminate an agency relationship and the broker did not, the broker could technically assign a different sponsored licensee to represent the principal.
Reasons to Leave
Here are just a few of the many reasons a broker might decide to renounce an agency agreement (with either sellers or buyers):
Client has an abusive attitude.
Client bails on showing appointments.
Client wants to skirt fair housing laws.
Client is not negotiating in good faith.
Whatever your reasons, Anthony, make sure you document everything that leads you to the decision to renounce an agency agreement.
Pieces of paper with a magnifying glass and exclamation mark implying danger.
Breach of Agreement
If either party fails to uphold their obligations or duties as outlined in the contract without cause, they are considered to have breached the agreement and are potentially liable for resulting damages. Let’s consider the two different types of breaches below:
Actions of the Client
A client can breach an agreement by doing such things as being uncooperative (e.g., a seller refusing to make a home available for viewings) or failing to keep commitments (e.g., backing out on a signed offer). Depending on the degree of harm incurred, the client’s agent or other parties to an agreement might have cause to pursue damages.
Actions of the Agent
If the agent is not actively pursuing the goals of the agency agreement, they have breached the agreement via what is known as abandonment, and the principal can likely terminate the agreement with cause. This is true whether the agent’s acts are ones of commission or omission.
Agent breach of contract should never happen. If an agent no longer wishes to remain in an agency agreement, they should approach the client and pursue mutual rescission. Failing that, they can renounce the agreement.
In every case, the agent should communicate their intentions.
While it’s true that either party in an agency relationship can terminate the agreement at almost any time, they better have a good reason for doing so.
A Rebel Without a Cause
Termination without cause can create liability, depending on the language of the written agency agreements. Remember, agency agreements are contracts. And most contracts have protective language that addresses early termination.
Termination in the Real World
It is rare that a broker pursues damages resulting from client-initiated early termination. The sheer hassle of it and the negative PR are two pretty strong deterrents — even if the broker’s right to do so is pretty clear.
More often than not, the broker licks their wounds and moves on to their next opportunity.
Stop Means Stop
Once a principal expresses a desire to end an agency relationship, the agent must immediately comply. This is true whether or not their reasons are valid.
MLS listings and other marketing must be discontinued, and lockboxes and yard signs need to be removed from the property.
Formalize It with Forms
Just as it’s good practice to formalize the creation of an agency relationship in writing, you should do the same when terminating an agency relationship.
Your sponsoring broker or the local association of REALTORS® may have termination documents already created for this purpose.
Termination Fees
It is important that the termination document accurately reflects the termination charges and fees outlined in the original listing agreement (another good reason to get all of these documents in writing). Any deviation from those charges and fees should be specifically agreed to by the client and listed in the termination document.
Final Thoughts on Causes for Termination
There are some duties that just won’t die, Anthony. I tried calling them “zombie duties” for a while, but, unfortunately, it didn’t catch on in the real estate world. No matter. Just remember that the fiduciary duties of confidentiality and accounting live on long after the agency relationship has terminated.
Confidentiality
Any confidential information that an agent learns of during an agency relationship with a principal must remain confidential forever.
How does an agent know what sorts of things are to be held in confidentiality? Well, one good guideline is that information about the property is usually fair to share, whereas information about the client is not.
Here are a few examples of things that should be held in confidence even after the termination of agency:
Seller motivation for selling
Highest offer buyer is willing to make
Lowest offer seller would consider
Offer history on the property
Buyer or seller financial standing
Again, you can see that most of these focus on the clients rather than the property.
Accounting
Along with the duty of confidentiality, the duty of accounting survives agency termination.
That’s right. Even after agency termination, license holders are required to account for all funds, records, or property that clients have entrusted to them during their agency relationship.
Duties That Survive Termination
Congrats, Anthony. You’ve finished the last chapter of the level. I knew you could do it!
Before you go, let’s review some of the important terms, concepts, and principles you’ve just learned.
Key Terms
Here are the key terms you learned in this chapter:
estoppel
the legal principle that prevents an individual from asserting something contrary to that which was implied by previous words or deeds by that individual
implied agency
agency that is created by the actions, conduct, and words of either or both parties without ever being expressly requested
ratification
an unauthorized action taken on behalf of a principal which is accepted and legitimized after the fact by the principal
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter:
Agency Creation
The creation of agency requires two essential components:
Consent
Control
Agency can be described in terms of:
The manner in which it is created
The degree of authority and liability it brings
The form that it takes
Express agency can be created in written or oral form.
Arizona requires real estate agency agreements to be in writing.
An implied agency relationship is created by actions, conduct, and words rather than being expressly agreed upon.
Accidental agency is a form of implied agency.
Agency by ratification is created when an agent takes an unauthorized action on behalf of a principal which is accepted after the fact.
Ostensible Agency to Agency by Estoppel Timeline:
Ostensible agency is created when the words or actions of two individuals create an impression of an agency relationship.
The two individuals do nothing to correct the impression that an agency relationship exists.
A third party acts on the impression that an agency relationship exists between those two individuals.
That third party makes a claim for damages because they were injured as a result of that impression.
The two individuals are barred from trying to claim, after-the-fact, that there was not an agency relationship.
Gratuitous Agency
Although no payment changes hands, the agent is still held to all the duties of an agency relationship.
Agency Creation Recap
Recaps the ways agency can be created: express, implied, by ratification, ostensibly, by estoppel, and gratuitously.
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Termination Umbrellas
There are two primary umbrella classifications for agency termination.
Operation of law: Circumstances or changes affecting the contract that result in automatic agency termination
Acts of the parties: Any action from one or more of the parties that results in the termination of the agreement
Agency Termination by Operation of Law
Causes for agency termination that fall under the operation-of-law include:
Performance (fulfillment of purpose)
Expiration
Destruction or condemnation
Death, incapacitation, or bankruptcy
Loss of broker license
Agency Termination by Acts of the Parties
The causes of agency termination by acts of the parties include such actions as:
Mutual agreement
Revocation
Renunciation
Breach of agreement
Agency Termination Recap
Recaps the two ways agency can be terminated: by operation of law or by acts of the parties
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Duties That Survive Termination
The duties of confidentiality and accounting live on long after the agency relationship has terminated.
Chapter Summary
