Agency Law

1. Agency Law Version 7.11

2. Learning Objectives Upon completion of this course, participants will be able to: • Understand how common law affects real estate law • Define terms used within this chapter • Identify the six keys of a fiduciary responsibility • Explain the importance of full disclosure

3. Learning Objectives Upon completion of this course, participants will be able to: • Understand the ways an agency relationship can be created or terminated • Explain the differences between the types of agency relationships • Recognize the risks in accepting a dual agency relationship • Discuss how designated agency can be safer than dual agency

4. Learning Objectives Upon completion of this course, participants will be able to: • Discuss the benefits afforded to clients by buyer’s agents • Identify the opportunities of buyer’s agency • Explain the general provisions of a buyer contract • Understand the possibilities for fee arrangements within a buyer agency situation

5. Learning Objectives Upon completion of this course, participants will be able to: • Recognize the variation of real estate disclosure law between states • Understand the broker’s responsibility to decide what type of agency relationship his/her employees may generate • Discuss the importance of broker supervision and training • Identify current trends in the real estate industry

6. The Basics of Agency Law

7. History and Background of Agency Law "What do you mean, you don’t represent me? We have been together 2 weeks, looked at over 20 houses and you are getting a commission when I buy this house! How can you say you are working for the person who owns the house?”  Real estate agents may act as the agent of a seller, a buyer, or in some states, both. An agent may be generally defined as someone who represents another, in dealings with third parties.

8. CommonLaw The principles of agency have their roots in “common law” which developed in England centuries ago based on judicial decisions for the long term benefit of society. Common law today forms the basis of each state’s legal system; except for Louisiana, which is based on the French legal system.  Agency law concerns any “principal-agent” relationship. The law of agency is based on Latin – “Qui facit per alium, facit per se.” This translates to “He, who acts through another, is deemed in law to do it himself.” 

9. Traditional Common Law Agency Duties When trying to remember the agent’s common law duties, we can use the acronym COALD. COALD stands for Care, Obedience, Accounting, Loyalty, and Disclosure. Let’s take a closer look at each of these duties.

10. Care The agent must show “reasonable care and skill.” If an agent is not exercising care in all he or she does, the results could be unfavorable for the agent.

11. Accounting Accounting refers to all money that is handled on behalf of the principal. All funds must be deposited into special escrow or trust accounts and can never be mixed with the agent’s personal funds.

12. Loyalty The agent’s loyalty must be 100% to the principal. The agent must put the principal’s interest above all others. Along with loyalty to a client comes confidentiality.

13. Disclosure An agent must be sure to provide the proper disclosure to the principal in any situation where it is necessary. Failure to provide proper disclosure, even unintentionally, could be considered fraudulent and action could be taken against the agent.

14. Agent Responsibilities to Third Parties An agent’s primary responsibility is to the principal. However, agents are also obligated to deal with third parties, which in most states are called “customers.” An agent works with third parties on behalf of the principal. When dealing with third parties, agents are required by law to act with honesty, integrity and fair business dealings. It is important to remember the laws connected to disclosure when dealing with third parties. Giving false statements or omitting information could lead to loss of commission, or in serious cases, loss of license.

15. Test your Knowledge! A(n) _____ may be generally defined as someone who represents another, in dealings with third parties. • Consumer • Agent • Client • Principal (Answer by clicking in the feedback panel)

16. Fiduciary Responsibilities • The fiduciary duties pick up where the common law duties left off. You will notice that for the most part, the duties are the same, with the exception of confidentiality. Under the common law duties, confidentiality tends to get lumped in with disclosure. The most common fiduciary responsibilities can be summed up as:  • Loyalty • Obedience • Confidentiality • Disclosure • Reasonable care and diligence • Accounting

17. Loyalty Loyalty refers to the fact that the agent must demonstrate loyalty by acting in the best interests of the principal or client. If you take a listing from a seller, you are duty bound to try to get the best deal for your client. You have to work for the best price and terms. You have to investigate all offers received and strive to maximize the benefits to the seller. 

18. Obedience • Obedience means that you as agent are under the control of your principal and must obey their instructions; as long as they are within the law.   • Vicarious Liability:Liability that is imposed for another's acts because of imputed or constructive fault (as negligence). This means that the principal is responsible for the acts of the agent, if the agent is following instructions from the principal.  • Respondeat Superior:A doctrine in tort law that makes a master liable for the wrong of a servant. The doctrine making an employer or principal liable for the wrong of an employee or agent if it was committed within the scope of employment or agency. The definition from Latin translates to “let the superior give answer.” It means that the principal can be held accountable for any harm caused through the use of an agent.

19. Confidentiality Confidentiality means the agent owes a bond of confidentiality to the principal or client. As agent, you may not discuss or reveal facts or information that may harm the interests of your client. For example, as an agent you would be prohibited from revealing personal information about a client’s marital problems, financial problems or need to sell a property. You may not disclose a price that a principal has indicated as acceptable for a sale. 

20. Disclosure • Disclosure laws require that an agent must make a full disclosure, in a timely fashion, of all known facts that are “material” to the transaction.  • Material:  • Of, relating to, or consisting of physical matter • Being of real importance or consequence • Being an essential component • Being relevant to a subject under consideration • Being such as would affect or be taken into consideration by a reasonable person in acting or making a decision Disclosure is required, even if the effect is adverse and might result in quashing the deal. Disclosure is required even if the information is discovered after a purchase contract is signed.

21. Duty of Care Reasonable care and diligence must be employed by the agent. Expectations of the agent exceed simply finding a buyer. The agent is considered to be qualified to exercise judgment and be knowledgeable about the title and physical considerations of the property. 

22. Accounting Accounting for monies or contracts received on behalf of a client or principal is part of the agent’s fiduciary responsibilities. Monies received by an agent as earnest money for a deposit according to a purchase contract are to be held in trust for the principal and delivered in a reasonable time. Brokers who retain trust funds must do so in a trust account that is separate from their own accounts.

23. Trust Accounts In most states it is mandatory that all brokers maintain a separate account in a financial institution in that state as a trust account in which all down payments, earnest money deposits, advance listing fees or other trust funds received by the agent must be deposited unless everyone with an interest in the funds has agreed otherwise in writing. In some states brokers are only allowed to use interest bearing accounts. In others, only noninterest bearing account may be used. The biggest hazard of dealing with trust accounts is the commingling of funds. The commingling of funds involves mixing of funds to be deposited in the trust account mingling with the broker's personal funds.

24. Test your Knowledge! An agent should always obey the instructions of their client, unless: • The instructions are illegal • The action doesn’t make sense • The instructions make the sale difficult • The agent doesn’t agree with the client (Answer by clicking in the feedback panel)

25. Break Time! Version 7.11

26. Developing Agency Relationships

27. Creation of Agency • An agency relationship is a moral and legal obligation between two parties. It takes two to tango! Both parties must agree to it, and both accept obligations under the relationship.  Here are some types of Agency Relationships: • Expressed Agency • Implied Agency • Agency by Estoppels • Agency by Ratification

28. Expressed Agency Expressed Agency – An actual agency created by the written or spoken words of the principal authorizing agent to act.

29. Implied Agency Implied Agency – An implied agency may occur unwittingly or unknowingly. It arises from actions, not words.

30. Agency by Estoppels Agency by Estoppels – An agency that is not created as an actual agency by a principal and an agent but that is imposed by law when a principal acts in such a way as to lead a third party to reasonably believe that another is the principal’s agent and the third party is injured by relying on and acting in accordance with that belief.

31. Agency by Ratification Agency by Ratification – There is no formal definition of this in the Merriam-Webster’s Dictionary of Law. Suppose you were an agent for a buyer, you approached an owner who was trying to sell his property privately and got permission to show it to your buyer. If your buyer then made an offer that was accepted, the seller would enter into an agency by ratification when he signed the purchase agreement.

32. Misconceptions about the Creation of Agency Misconception Number One: The agent who is showing you a property automatically represents you. Misconception Number Two: In order to create an agency relationship, a client must provide immediate compensation. Misconception Number Three: The party that pays the fees determines agency relationships.

33. The Effects of Agency Relationships New real estate professionals may not immediately recognize their career as one of the most lawsuit-laden fields in the country. The chances of real estate professionals being sued is quite high due to the various forms of legal liability to which they are exposed.

34. Contract Liability The listing agreement between a real estate broker and a seller typically requires the broker to exercise his or her “best efforts” to find a buyer for the seller. But the term “best efforts” is entirely too open to interpretation, so if the seller believes that a busy broker has not actually exercised his or her “best efforts” to locate a suitable buyer, the real estate broker may be looking at a lawsuit seeking damages for the delay in selling the real estate that is attributable to the broker or agent’s failure to exercise his or her best efforts. Even if the broker wins, he or she may still have to pay legal fees, and the time and worry spent on the lawsuit could keep him or her from other clients that need attention.

35. Tort Liability: Negligence and Fraud Anyone could be held liable for negligence in just about anything they do that involves a risk. For example, if you are riding your bike and you cause a fender-bender because of your careless riding, you could be sued for committing a “tort.” The critical difference in tort liability between the average person and skilled professionals is known as “standard of care.” As an ordinary bike-riding citizen, you would be held to an ordinary standard of care; breach of this care would subject you to any damages caused by your carelessness. In the case of real estate professionals, brokers are held to a particularly high standard of care (ordinary care is not enough) when it comes to their professional activities, and can be sued for malpractice (think doctors) if they fail to meet this standard.

36. Licensing Regulations As you are certainly aware, real estate professionals need to be licensed; in order to obtain a license, they need to subscribe to certain professional standards of conduct, breach of which could subject them to liability. Many of these standards are imposed by statute as opposed to rules set forth by the Commission or an association. The biggest difference (in some states) between an association rule and a public statute is that if a professional violates a private rule, he or she usually will be liable only to revocation of license, whereas if the professional violates a statute, he or she can be sued for damages suffered by a seller or buyer.

37. Constructive Notice and Imputed Notice The sharing of information is crucial in the agent/client relationship. Agents and clients need to build a certain level of trust between them, and sharing information is a great way to do so. Constructive notice actually can be described as giving notice without giving notice. Instead of handing a person notice of some fact, the person giving notice could post it on a bulletin board that the public is likely to see, or put the notice in a periodical with a large circulation in the area. Unless otherwise agreed to in writing, a principal does not have knowledge or notice of any facts known by an agent or subagent of the principal that are not actually known by the principal. The same goes for any knowledge or notice of any facts known by a subagent that are not actually known by the licensee. This does not in any way limit the knowledge imputed to a real estate broker of any facts known by an associate real estate broker or real estate salesperson licensed to such broker.

38. Test your Knowledge! An agency that is created because the agent’s actions can insinuate their intentions create such a relationship is an: • Expressed agency • Implied agency • Agency by estoppel • Agency ratification (Answer by clicking in the feedback panel)

39. Details of the Types of Agency • Here is a quick look at all the various types of agency that may occur in real estate. Then we will look at each in detail on the following slides. • Single Agency • Seller Agency • Buyer Agency • Dual Agency • Sub-Agency • Intermediary • General Agency

40. Single Agency Single Agency: In the arrangement you work for only one party – take your pick. If you are the agent for the seller, you represent only that person. You then work with buyers, or their agents. Or, obviously, you may decide to represent a buyer and proceed in the best interests.

41. Seller Agency Seller Agency: Seller agency has traditionally been the most common type of agency. The agent proclaims allegiance to the seller and works on that person’s behalf. Such agents are free to work with buyers, as long as the buyer understands whom the broker represents.

42. Buyer Agency Buyer Agency: If a single agency broker represents a buyer in a single transaction, the broker is an agent for the buyer at that time. However, there are some brokers who represent only buyers and are called buyer’s brokers. To avoid conflicts of interest it is important that proper disclosure of the broker’s role be made clear.

43. Dual Agency Dual Agency: It is possible, in some states for the broker to represent both the buyer and the seller. The broker then must pursue the fiduciary interest of both parties. This is possible under the law in some states if both parties are made aware of the relationship and the agent obtains a declaration of “informed consent” from both parties. Dual agency is a situation fraught with peril and generally should be avoided.

44. Designated Agency Designated Agency: Similar to dual agency, a designated agency is only legal in certain states. Many states have adopted this practice as a way to allow a single firm to handle a transaction in-house and avoid breaking the laws against dual agencies. Essentially, the firm appoints two separate agents to be “designated” to two separate clients: the seller and the buyer.

45. Sub-Agency Sub-Agency: Listing agents routinely employ other agents to help sell the property, and the commission is shared. Subagents are agents of the agents and are bound by the same fiduciary duties. Likewise, listing agents are responsible for the actions of their subagents. Like any other agency relationship, the type of agency will depend on how it’s created. It must occur with the consent of both parties, either expressed or implied.

46. General Agency General Agency: A general agent’s duties can vary depending on the wishes of the principal. Usually a general agent is employed to carry out all matters related to a certain business.

47. Test your Knowledge! An agency that is created because the agent’s actions can insinuate their intentions to create such a relationship is an: • Expressed agency • Implied agency • Agency by estoppel • Agency ratification (Answer by clicking in the feedback panel)

48. Termination of Agency Expiration: Expiration of the agreement is a common means of termination. Most states require a time certain on listing agreements. It is also the case on most agreements to represent a buyer. At the end of the period, the principal’s liability for the actions of the agent expires, along with most obligations of the agent. The fiduciary obligations of the agent end, but certain aspects of confidentiality may continue. If you, as the listing agent, are privy to private information such as the lowest price a seller would accept, you could not take advantage of that if you brought a buyer around later on.  Completion: Completion of the goal of the agreement could also end the relationship. Once you sell the listing, close it, and get your commission, the agency will expire.

49. Termination of Agency Agreement: An agency may also be dissolved by agreement of the parties. A real estate agency relationship is a contract for services to be performed. Perhaps the situation changes and a seller decides he will not take a job transfer and will stay in the house. Maybe the two parties just don’t get along or there are irreconcilable misunderstandings or disagreements. Sometimes the best course of action is an amicable agreement to call the whole thing off. Abandonment: An agency may also be terminated by abandonment. This is a unilateral decision by one of the parties. It would be a breach of contract and may result in a suit for damages being instituted by the other party. The classic example would be where a seller refuses to accept a purchase offer brought by the listing agent, who has a buyer ready, willing and able to meet all the terms of the listing agreement. The broker may then sue for the commission that was due. 

50. Termination of Agency Agency Coupled with an Interest: An exception would be an agency coupled with an interest. This is defined by Merriam-Webster as an agency in which the agent has an interest in the property regarding which he or she is acting on the principal's behalf. If you are part owner of the property, the principal may not unilaterally terminate the listing agreement.  Performance is Impossible: An agency may be terminated when further performance is impossible. This would result, for example, from the death of either party. Also, it could occur if the property were to be destroyed by fire, earthquake or other natural disaster. Termination by Force of Law: If the purpose of the agency becomes illegal due to the law change, the agency is terminated. Agency can also be terminated if one of the parties involved files for bankruptcy.