Agency Relationships
In an agency relationship, the principal authorizes an agent to represent him in dealings with third parties. A real estate broker is her client's agent. The client is the broker's principal.
"An agency relationship arises when one person authorizes anoth
Agent
(The Broker)
"A person authorized to represent another in dealings with third parties."
"Represents the seller/principal's interests in negotiations with potential buyers/third parties"
"The person who's authorized to represent another"
"A real estate bro
Principal
(The Seller)
"The person who authorizes an agent to act on her behalf."
"Who hires the broker to act as her agent."
"The party who authorizes and controls the actions of the agent."
"A principal is bound by acts performed within the scope of an ostensible
Third parties
A person seeking to deal with the principal through the agent"
"Persons outside the agency relationship who seek to deal with the principal through the agent"
"A third party has a duty, when dealing with an agent, to make a reasonable effort to discover
Broker's client
(The seller/principal)
Broker
**See Agent
Seller
**See Principal
Seller/Principal
**See Broker's client
Salesperson
A broker's agent
"A real estate salesperson isn't licensed to represent sellers or buyers directly, without a broker"
"So, strictly speaking, in the eyes of the law it's the broker, not the salesperson, who has an agency relationship with a seller or buye
Real estate agents
In common parlance salespersons as well as brokers are called real estate agents
Agency Law
A body of law that applies to agency relationships in nearly any context"
"An agency relationship has significant legal implications"
"For a third party, dealing with the agent can be the legal equivalent of dealing with the principal. For instance, when
Creating an Agency Relationship
Under general agency law, an agency relationship may be formed in four ways:
1. by express agreement,
2. by ratification,
3. by estoppel, or
4. by implication
"The only requirement is the consent of both parties
Express Agreement
Most agencies are created by express agreement (written or oral) between the principal and agent. Consideration is not required for an agency agreement.
A listing agreement or a buyer agency agreement is an express agreemnt.
Another example is a power of
Ratification
An agency is created by ratification if the principal gives approval after the fact to acts that weren't authorized at the time the agent performed them.
"When the principal gives approval to unauthorized actions after they are performed, creating an agen
Estoppel
An agency may be created by estoppel when a principal allows a third party to believe that an unauthorized person is acting as her agent.
The principal is estopped from denying an agency relationship, because that would be unfair to the third party.
"When
Implication
Based on express authority
"An agency may be created by implication when one person behaves toward another in a way that suggests or implies that she is acting as that other person's agent.
If the other person reasonably believes there is an agency relati
Legal Effects of Agency
Once an agency relationship has been established, the principal is bound by acts of the agent that are within the scope of the agent's actual or apparent authority.
Under general agency law, the principal may be held liable for harm caused by the agent's
Scope of Authority
The extent to which the principal can be bound by the agent's actions depends first of all on the scope of authority granted to the agent.
In California, there are two basic types of agents:
1. general agents, and
2. special agents
General agent
Authorized to handle all of the principal's affairs in one or more specified areas.
He has the authority to conduct a wide range of activities on an ongoing basis on behalf of the principal.
Ex. A business manager who has the authority to handle personne
Special agent
Has limited authority to do a specific thing or conduct a specific transaction.
Ex. An attorney who is hired to litigate a specific legal matter, such as a person's divorce, is a special agent."
"In most cases, a real estate broker representing a seller
Actual vs. Apparent Authority
An agent may have actual authority to perform an action on the principal's behalf, or else may have only apparent authority.
Actual authority
Authority granted to the agent by the principal, either expressly or by implication.
Express actual authority is communicated to the agent in express terms, either orally or in writing.
Implied actual authority is the authority to do what is necessary to
Express actual authority
Is communicated to the agent in express terms, either orally or in writing.
Implied actual authority
Is the authority to do what is necessary to carry out actions that were expressly authorized.
Apparent authority
(Ostensible authority)
(Estoppel)
"Where no actual authority has been granted, but the principal allows it to appear that the agent is authorized, and therefore is estopped from denying the agency. Also called ostensible authority."
"A person has apparent
Vicarious Liability
Under general agency law, a principal may be held liable for torts committed by his agent.
"Under general agency law, a principal may be held liable for her agent's negligent or wrongful acts"
"Thus, a real estate broker can be held liable for the acts of
Tort
A tort is a negligent or wrongful act that causes an injury or financial harm to another person.
"A negligent or intentional wrongful act involving breach of a duty imposed by law (as opposed to breach of a contractual duty).
It's a mistake, accident, or
Imputed Knowledge Rule
Under general agency law, a principal is held to have notice of information that is in the possession of the agent.
"Under general agency law, a principal is considered to have notice of information that the agent has, even if the agent never actually tel
Duties in an Agency Relationship
An agent owes certain duties to her principal, and both the agent and the principal have certain responsibilities to third parties.
Agent's Duties to the Principal
An agency relationship is a fiduciary relationship."
"The other party has a legal right to rely on the fiduciary, and the law holds the fiduciary to high standards of conduct."
"He owes the principal the fiduciary duties of utmost care, integrity, honest
Fiduciary relationship
A person who stands in a special position of trust and confidence in relation to someone else.
Utmost Care
An agent owes the principal the duty to use utmost care and skill in a transaction.
If the agent harms the principal through carelessness or incompetence, the agent will be liable to the principal.
"An agent must carry out his duties with utmost care and
Integrity & Honesty
An agent must always act ethically and honestly when dealing with the principal.
The agent must account for trust funds held on the principal's behalf, and must avoid commingling trust funds with her own funds.
"An agent must meet the highest standards of
Trust funds
Account for any funds or other valuable items she receives on behalf of her principal
Commingling
Illegally mixing deposits or monies, collected from a client, with one's personal or business account.
Taking money out too soon or putting it into escrow too late (10 banking days).
Loyalty
An agent owes a duty of loyalty to his principal.
He must not take any action that is detrimental to the principal's interests, such as disclosing confidential information or collecting a secret profit.
The agent must obey the principal's instructions and
Confidential information
Information gained during or relating to the representation of a client, agency
"Confidential information learned in the course of an agency relationship must be protected even after the agency has ended.
Secret profits
Loyalty to the principal also means that the agent mustn't make any secret profits from the agency.
Any financial gain must be disclosed to the principal.
Ex. It would be a breach of fiduciary duty for a broker to list a property for less than it's worth
Obedience
Another aspect of the duty of loyalty is obedience.
The agent must obey the instructions of the principal and carry them out in good faith.
The agent's acts must conform to the purpose and intent of the instructions.
A broker can be held liable for any l
Disclosure of Material Facts to the Principal
An agent has a duty to disclose any material facts she's aware of to the principal.
A material fact is one that could affect the principal's decision in the transaction.
A real estate agent representing a seller must inform the seller of all offers to pur
Material facts
Information that could affect a party's decisions in a transaction, such as information that has a substantial negative impact on the value of the property, or that indicates one of the parties may not be able to perform as agreed."
"Any fact that could
Present all offers
A real estate agent must present all offers to the seller, regardless of how unacceptable a particular offer may appear to be.
The principal, not the agent, decides whether or not to accept a particular offer.
The agent should never hesitate to inform th
Property's true value
A seller's agent is also required to inform the principal of the property's true value.
It isn't improper for a real estate agent to buy the principal's property with the principal's knowledge and consent, and then resell the property for a profit.
But t
Relationship with a buyer
The seller's agent must inform the principal if the agent has any relationship with a buyer�before the principal decides whether to accept the buyer's offer.
If the buyer is a friend, relative, or business associate of the agent, or a company in which th
Dual agency
In addition, the agent is required to reveal a dual agency.
There is a dual agency when a real estate broker is employed by both the seller and the buyer in the same transaction.
In California, dual agency is legal in a real estate transaction as long as
Agent's Duties to Third Parties
A real estate agent owes a third party a duty of reasonable care and skill and a duty of good faith and fair dealing.
"Courts have held real estate agents to increasingly higher standards in their interactions with third parties
In addition, in residenti
Reasonable Care and Skill
An agent must use reasonable care and skill in providing services to third parties as well as to the principal.
If the agent's negligence or incompetence harms a third party, the agent may be liable.
Good Faith & Fair Dealing
An agent owes third parties the duty of good faith and fair dealing.
The agent must not make false or misleading statements, even if it would benefit her principal.
"Real estate agents are legally as well as ethically required to treat third parties fairl
Actual fraud
Any intentional material misrepresentation may constitute actual fraud
Constructive fraud
Even an unintentional misrepresentation could be considered negligence or constructive fraud
Latent defects
A seller and a seller's agent have a duty to disclose material facts about the property, including any latent defects.
Latent defects are problems a buyer would not discover in a casual inspection.
A latent defect is a hidden defect, one that isn't discov
Stigmatized Properties
There are some facts that don't have to be disclosed to a prospective buyer (or tenant), because the information could unfairly stigmatize the property.
California law specifically provides that property owners and real estate agents do not have to discl
Duty to Inspect
At one time, agents representing the seller were required only to pass on the seller's information about the property to prospective buyers; the law didn't require them to inspect the property and look for problems.
Today, however, California law specifi
Transfer Disclosure Statement
In a residential transaction, the buyer is entitled to a real estate transfer disclosure statement.
The form is filled out by the seller, the listing agent, and the agent who obtains the offer.
It is the responsibility of the agent who obtains the offer t
Other State Property Disclosure Requirements
In addition to a transfer disclosure statement, a number of other disclosures may be required by California law in a particular transaction.
Some concern the property's physical condition, others are required because of the property's location.
Like the
Natural Hazards Disclosure
A natural hazards disclosure statement is used to disclose whether a home is in an area or zone designated as especially subject to flooding, wildfires, or earthquakes; in the vicinity of an airport; or within one mile of a farm.
The disclosure form can
Earthquake Guide
Whether or not the property is in an earthquake fault zone, buyers purchasing a home built before 1960 using light-frame construction must be given a booklet called
A Homeowner's Guide to Earthquake Safety
If improvements suggested in the booklet haven't
Taxes and Assessments
If residential property is subject to special taxes under the Mello-Roos Community Facilities Act or subject to assessments for bonds issued under the Improvement Bond Act of 1915, the seller must make a good faith effort to obtain a disclosure concernin
Transfer Fees
Sometimes a subdivision's CC&Rs provide that when property in the subdivision is sold, the buyer will be charged a transfer fee to fund maintenance of subdivision amenities, improvements, or open space.
If so, the seller must disclose the amount and othe
Sex Offender Information Website
A residential purchase agreement must contain a notice that the California Department of Justice has made information about registered sex offenders available to the public on a website.
This is often referred to as the Megan's Law disclosure.
Drug Labs
After determining that property has been contaminated by methamphetamine activity, the local health department will issue an order prohibiting use or habitation of the property.
If it is put up for sale before the department declares that it is clean and
Miscellaneous
Sellers are also required to inform buyers:
if the property is within one mile of an ordnance location
(an area that was once used for military training, and which may contain live ammunition);
if there are window security bars, and how the safety releas
Lead-based Paint Disclosures
Transactions that involve housing built before 1978 are subject to a federal law concerning lead-based paint, a health hazard to children.
The law requires a seller or landlord to disclose the location of any lead-based paint he is aware of in the home o
Breach of Duty
If a real estate agent breaches a duty either to her principal or to a third party, the injured party may file a tort suit against the agent.
The court may order the agent to pay compensatory damages.
Whether or not there is a lawsuit, the Department of R
Terminating an Agency Relationship
Once an agency relationship has terminated, the agent is no longer authorized to represent the principal.
Under general agency law, an agency may be terminated either by acts of the parties or by operation of law.
Termination by Acts of the Parties
The ways in which the parties can terminate an agency relationship include:
-mutual agreement,
-revocation by the principal, and
-renunciation by the agent.
Mutual Agreement
The parties may terminate the agency by mutual agreement at any time. If the original agreement was in writing, the termination agreement should also be in writing.
Principal Revokes
The principal may revoke the agency by firing the agent whenever he wishes.
(Remember that an agency relationship requires the consent of both parties.)
However, in some cases revoking an agency breaches a contractual agreement, and the principal may be
Agency coupled with an interest
When an agent holds a personal interest in the subject matter of the agency, it's called an agency coupled with an interest. An agency coupled with an interest can't be revoked.
"An agency coupled with an interest can't be revoked.
An agency is coupled wi
Agent Renounces
An agent can renounce the agency at any time.
Like revocation, renunciation may be a breach of contract, in which case the agent could be liable for the principal's damages resulting from the breach.
But since an agency contract is a personal services con
Termination by Operation of Law
An agency relationship may terminate automatically by operation of law.
This may occur because of expiration of the agency term; fulfillment of purpose; death or incapacity; or extinction of the subject matter.
Several events terminate an agency relations
Expiration of Agency Term
An agency terminates automatically when its term expires.
If an agency agreement didn't include an expiration date, it will be deemed to expire within a reasonable time.
(How much time a court would consider reasonable will vary, depending on the type of
Fulfillment of Purpose
An agency relationship terminates when its purpose has been fulfilled.
For example, if a broker is hired to sell the principal's property and the broker does so, the agency is terminated by fulfillment.
Death or Incapacity
An agency is terminated before it expires if either the agent or the principal dies.
An agency also terminates if either party becomes mentally incompetent.
Generally, the agent has no authority to act after the death or incapacity of the principal, even
Extinction of Subject Matter
The subject matter of a real estate agency is the property in question.
If the property is in any way extinguished (for example, sold or destroyed), the agency automatically terminates.
Real Estate Agency Relationships
A typical residential real estate transaction is likely to involve more than one real estate agent.
Someone who wants to find a home in a particular area contacts a real estate broker's office in that area.
One of the salespersons who works for that brok
Real estate agent
Real estate agent is the generic term used to refer to real estate licensees.
Real estate brokers are the only real estate agents who are authorized to represent a buyer or a seller directly; real estate salespersons act on behalf of their real estate br
Client
A client is a person who has engaged the services of a real estate agent.
A client may be a seller, a buyer, a landlord, or a tenant.
Customer
A real estate agent who is representing a seller or a landlord will sometimes refer to a potential buyer or tenant as a customer.
Listing agent
Either the salesperson who lists a seller's property or the broker that salesperson works for may be referred to as the listing agent.
"The agent who takes the listing on a property, and who may or may not be the agent who procures a buyer."
"Either the l
Selling agent
Either the salesperson who procures a buyer for a listed home or the broker that salesperson works for may be referred to as the selling agent.
"The agent who procures a buyer for a property, and who may or may not have taken the listing."
"Either the sel
Cooperating agent
A cooperating agent is someone other than the listing agent who tries to find a buyer for the property.
A cooperating agent who succeeds in procuring a buyer is the selling agent.
"Any agent other than the listing agent who attempts to find a buyer for a
In-house sale
A sale in which the buyer and the seller are brought together by salespersons working for the same broker.
Cooperative sale
A sale in which the listing agent and the selling agent work for different brokers.
Agency Relationships:
A Historical Perspective
In the 1980s, various organizations, including the Federal Trade Commission, the National Association of Realtors�, and the Association of Real Estate License Law Officials, conducted studies of agency representation in real estate transactions.
They con
Unilateral Offer of Subagency
The unilateral offer of subagency was once a standard provision in MLS listing forms.
It held that a cooperating agent from the multiple listing service who found the buyer was a subagent of the listing broker's principal, and therefore represented the se
Subagent
Aan agent of an agent offer of subagency in a timely fashion and then enter into a separate written agreement with the buyer.
This was rarely done; so in nearly all transactions, all of the licensees involved represented the seller.
Inadvertent Dual Agency
An inadvertent dual agency may be created by implication; for example, when a real estate agent who's representing the seller acts as if he's representing the buyer. Unintentionally, the agent's behavior makes him a dual agent.
However, even though the su
Cooperation & Compensation
In the 1990s, as new legal requirements and various other considerations made real estate transactions more complex, buyers became more interested in having their own agents to represent them.
In response to the growing popularity of buyer agency, many m
Disclosure Laws
In an effort to reduce confusion over agency representation, California and many other states passed agency disclosure laws�laws that require real estate agents to disclose to both the buyer and the seller which party they are representing in a transacti
Types of Agency Relationships
In California, real estate agents can have the following types of agency relationships with their clients:
-seller agency,
-buyer agency, or
-dual agency
Seller Agency
A seller's agent promotes the seller's interests by marketing the property and negotiating with prospective buyers on the seller's behalf.
"A seller agency relationship is ordinarily created with a written listing agreement.
The listing broker is the sell
Seller's Agents & Buyers
Throughout a transaction, a seller's agent must use his best efforts to promote the interests of the seller.
Yet the seller's agent may also provide some services to a prospective buyer.
Ex. The seller's agent may help a buyer who doesn't have her own ag
Buyer Agency
A seller's agent may prepare an offer to purchase and perform other services for a buyer without violating his duty of loyalty to the seller.
"The traditional seller agency arrangement (in which the real estate licensee who helps buyers look for a home is
Advantages of Buyer Agency
Being represented by a buyer's agent gives a buyer the advantages of loyalty and confidentiality, objective advice, help with negotiating, and access to more homes.
"The chief advantages of buyer agency include:
-loyalty and confidentiality,
-objective ad
Compensation Doesn't Affect Agency
Although a buyer's agent is often compensated through a commission split with the listing agent, this doesn't create an agency relationship between the buyer's agent and seller.
"When a buyer purchases listed property, the buyer's agent is usually paid th
Limited dual agency.
Because it's impossible to fully represent the interests of both parties at the same time, dual agency is sometimes referred to as limited dual agency.
Disclosed Dual Agency
Dual agency is legal in California.
A dual agent represents both the seller and the buyer in the same transaction.
The agent must do nothing that would harm the interests of either party, and may not reveal either one's confidential information to the ot
Agency Disclosure Requirements
To avoid some of the confusion about who is representing whom, California law requires real estate agents in residential transactions to make agency disclosures to their clients and customers.
This requirement applies to transactions that involve propert
Agency disclosure form
The agency disclosure form is a general information form that explains the duties of a seller's agent, a buyer's agent, and a dual agent.
The listing agent must give the form to the seller before the listing is signed. The selling agent must give the form
Agency confirmation statement
The agents must inform the buyer and seller which party or parties the agents are representing in this transaction.
These specific disclosures must be confirmed in writing. The confirmation statement is typically included in the purchase agreement.
The ag
The Broker/Salesperson Relationship
Under the California Real Estate Law, a real estate salesperson can't act directly as the agent of a principal in a real estate transaction.
Rather, the salesperson acts as the agent of her broker, and it's the broker who acts as the principal's agent.
(
Independent Contractor vs. Employee
For certain purposes, when one person hires another to work for him, the worker is classified either as the hirer's employee or as an independent contractor.
An independent contractor is hired to perform a particular task and generally uses his own judgm
Independent contractor
Independent contractors generally set their own schedule and are paid by the job or by commission.
The person who hires an independent contractor is more concerned with the result than how it's accomplished.
"A person who contracts to do a job for another
Employee
Employees generally work on a schedule set by their employer, for an hourly wage or a salary.
Their work is closely supervised and controlled by the employer.
"Someone who works under the direction and control of the employer."
"An employee, on the other
Supervision and Liability
The California Real Estate Law states that while a salesperson may be treated either as an independent contractor or as an employee for tax purposes, that distinction won't affect the requirements or liabilities established in the Real Estate Law.
Thus, r
Broker/Salesperson Contracts
California law requires a broker to have a written agreement with each licensee who works for her.
(Ex. The CAR Independent Contractor Agreement form)
The agreement must be signed by both parties.
The agreement should include all the basic terms of the re
Fiduciary
Someone who holds a special position of trust and confidence in relation to another.
Ostensible authority
**See Apparent Authority
Secret profit
Any profit an agent receives as a result of the agency relationship and doesn't disclose to the principal.
1. An agency relationship can be created in any of the following ways, except:
A. written agreement
B. oral agreement
C. ratification
D. verification
D. verification
2. An agency relationship requires:
A. consideration
B. the consent of both parties
C. an enforceable contract
D. None of the above
B. the consent of both parties
3. Garcia acted on behalf of Hilton without her authorization. At a later date, Hilton gave her approval to Garcia's actions. This is an example of:
A. express agreement
B. ratification
C. estoppel
D. assumption of authority
B. ratification
4. A seller lists his home with a broker at $390,000; he asks for a quick sale. When the listing broker shows the home to a buyer, he says the seller is financially insolvent and will take $375,000. The buyer offers $375,000 and the seller accepts. The br
C. violated his duties to the seller by disclosing confidential information to the buyer
5. Stark lists his property with Bell, a licensed broker. Bell shows the property to her cousin, who decides he would like to buy it. Which of the following is true?
A. Bell can present her cousin's offer to Stark, as long as she tells Stark that the pros
A. Bell can present her cousin's offer to Stark, as long as she tells Stark that the prospective buyer is one of her relatives
6. An agency relationship can be terminated by:
A. renunciation without the principal's consent
B. incapacity of either party
C. extinction of the subject matter
D. All of the above
D. All of the above
7. A real estate agent tells potential buyers: "This is a great old house. They just don't make them like they used to." In fact, the house isn't especially superior to most modern houses. This statement would probably be considered:
A. a misrepresentatio
D. puffing
8. In most cases, a listing broker:
A. is authorized to enter into contracts on behalf of the seller
B. is considered a special agent
C. Both of the above
D. Neither of the above
B. is considered a special agent
9. Dual agency is:
A. no longer legal in California
B. legal as long as both principals consent to the arrangement in writing
C. legal as long as the agent receives equal compensation from both principals
D. encouraged by many professional associations as
B. legal as long as both principals consent to the arrangement in writing
10. Able listed Glover's property. Able:
A. can't give a buyer any information about Glover's property without being considered a dual agent
B. may give a buyer information about Glover's property without owing agency duties to the buyer
C. must sign a di
B. may give a buyer information about Glover's property without owing agency duties to the buyer
11. A principal may be held liable for:
A. the actions of his broker
B. the actions of his broker's salesperson
C. his own actions
D. All of the above
D. All of the above
12. Which of the following is not a benefit of buyer agency?
A. The agent owes fiduciary duties to the buyer
B. The buyer gets the benefit of objective advice
C. Since the agent represents both parties, the buyer has access to information about the seller
C. Since the agent represents both parties, the buyer has access to information about the seller's bottom-line sales price
13. A buyer's agent accepted compensation from the seller. This arrangement:
A. violated the agent's fiduciary duties to the buyer
B. didn't affect her agency relationship with the buyer
C. is legal only if the compensation wasn't based on the property's
B. didn't affect her agency relationship with the buyer
14. Disclosure of and consent to a dual agency:
A. must be in writing
B. is required only in an in-house transaction
C. should come after the parties sign the purchase agreement
D. must be given to the buyer only after presenting the written offer to purc
A. must be in writing
15. A dual agent must:
A. keep each party's negotiating position confidential
B. disclose all information to both parties, no matter how confidential
C. act only as a facilitator, with no agency duties to either party
D. refer all conflicts of interest to
A. keep each party's negotiating position confidential
Power of attorney
A power of attorney is a document in which a principal appoints an attorney in fact to carry out specified actions on her behalf.
Property Inspection
An agent representing the seller in a residential transaction must perform a visual inspection of the property.
Any defects that the agent finds must be disclosed to the buyer.
Termination by the parties
An agency relationship may be terminated by mutual consent, or the principal may revoke the agency, or the agent may renounce the agency. Unilateral termination may be a breach of contract.
IRS Requirements
A real estate salesperson is usually an independent contractor in relation to the broker.
To be considered an independent contractor by the IRS, the salesperson must have a written contract to that effect and must be compensated primarily by commission.
Broker as independent contractor
A real estate broker is virtually always an independent contractor in relation to the client.
Broker/salesperson agreement
State law requires a broker to have a written and signed agreement with every salesperson who works for her. It must include the basic terms of the relationship, such as the duties of the parties, the form of compensation, and grounds for terminating the