Real Estate License Exam - Level 6: Law of Agency

The general public participates in real estate transactions through four types of roles:

1) Principal 2) Client 3) Customer 4) Third party

Financial Differences between Employee and Independent Contractor

-Generally, employees have income, Social Security, and Medicare taxes withheld and receive unemployment taxes on wages -Generally, independent contractors have no taxes withheld or unemployment taxes paid

3 major requirements for a real estate license

1) 75 hours of instruction 2) pass the real estate exam 3) obtain sponsorship of an active, experienced real estate broker

A punishable misrepresentation deals with.. (3)

1) A significant defect 2) An omission of a known defect 3) A defect significant enough to change a buyer's opinion on the property

Termination of agency is performed in two major ways:

1) Acts of the parties (mutual agreement, revocation, renunciation, breach of agreement) 2) Operation of law (performance, expiration, destruction or condemnation, death, incapacity or bankruptcy, or loss of broker license)

Ostensible agency and agency by estoppel - Both are created when the actions of an agent lead a third party to believe:

1) Agency exists between a principal and the agent (when it doesn't) AND 2) The principal fails to take action to correct that impression at the time

These are the four components required to form an agency relationship:

1) Agent 2) Principal 3) Mutual agreement 4) Fiduciary obligation

The elements of an antitrust violation are (4):

1) An agreement 2) Between competitors 3) Imposes a restraint 4) Restraint is unreasonable

2 possible usages of principal

1) As an individual who authorizes an agent to represent their interests as a client in a real estate transaction 2) As any major party to a real estate transaction (buyer, seller, landlord, tenant)

The IRS now uses these three categories to more simply classify control and sort out that long, 20-factor list in determining whether an individual is an employee or an independent contractor:

1) Behavioral 2) Financial 3) Type of Relationship

3 characteristics of a special agency

1) Broker acts on behalf of client for specific actions 2) Limited agency 3) Non-binding: cannot make binding decisions for principals

Agency created at the broker level has several implications, such as (2):

1) Commission: The commission rate is negotiated between the principal and the broker 2) Listings: If a salesperson switches brokerages, their clients remain with their previously sponsoring broker, as their agency relationships were with that sponsoring broker.

2 types of customers in a real estate transaction

1) Customer on the other side of the transaction example: If you are representing the seller in a real estate transaction, the buyer who has signed an agency agreement with another license holder is on the "other side of the transaction" and is considered a customer to you. 2) Customer a license holder might work with directly example: A buyer asks you to show them available properties to purchase but does NOT sign a buyer representation agreement with you. You agree to show the customer some properties in hopes that they will eventually sign a representation agreement with you. (Not usually advised.)

While not very common, a few operation-of-law reasons for agency termination include.. (3)

1) Destruction or condemnation (of the property) 2) Death (broker or principal), incapacitation (broker of principal), or bankruptcy (seller) 3) Loss of broker license

License holders owe all parties (customers, third parties, and clients) at least the following two duties

1) Duty of Honesty: License holders are expected to never mislead parties to a transaction. This includes not giving false promises and always disclosing any material fact to a transaction — especially regarding property condition. 2) Duty of Fairness: License holders are expected to act in a manner that is fair to all parties. This includes always disclosing their agency relationships so that it is clear who they are representing.

Agency Termination Categories (8)

1) Fulfillment or completion of purpose 2) Agreement expiration 3) Mutual agreement 4) Revocation 5) Renunciation 6) Operation of law (death, incapacity, bankruptcy) 7) Operation of law (destruction or condemnation of property) 8) Breach of agreement

Customer Examples (4)

1) If you are the listing agent, the buyer is a customer to you. 2) If you are the buyer's agent, the seller is a customer to you. 3) If you are the landlord's agent, the tenant is a customer to you. 4) If you are the tenant's agent, the landlord is a customer to you.

Why say no to oral agencies? (3 reasons)

1) It is harder to enforce against the principal 2) It is more likely (than written agency) to lead to complaints and/or lawsuits 3) It does not allow a listing agent to use the MLS

Whether the written agency agreement is with a buyer or seller, the matter of how and when the broker is to be compensated needs to be addressed. Six guidelines for compensation:

1) It is negotiable between parties 2) Its terms need to be in writing AND signed by the parties 3) It can be based on any lawful condition 4) It does NOT have to be a commission (percentage) but can take some other permitted form (more on this later) 5) It must indicate timing of payment (more on this later) 6) It can come from BOTH buyer AND seller (with informed consent of all parties)

OLD CAR

1) Obedience (do what the client says) 2) Loyalty (protect the client's best interests) 3) Disclosure (present all offers and material facts) 4) Confidentiality (protect client's private information) 5) Accounting (proper handling of client funds) 6) Reasonable care (highest standard of competency and concern)

Most behaviors that fall under the umbrella of antitrust activity can be categorized as one of the following (4):

1) Price Fixing 2) Group Boycott 3) Market or Customer Allocation 4) Tie-in Agreements

Price fixing occurs when competitors agree to do any of the following (3)

1) Raise or fix prices for their goods or services 2) Set a minimum price they will not sell below 3) Reduce or eliminate discounts **The Sherman Antitrust Act prohibits agreements among competitors to fix prices or engage in other anticompetitive activity.

Working in real estate is a unique career for two reasons:

1) Real estate agents work with their competitors at other offices to share inventory and negotiate transactions to a closing. 2) Agents have fiduciary duties to their clients. Attorneys and medical doctors have a similar emphasis on fiduciary duties, but this commitment to always putting the client's interests first is rare in many other industries.

Examples of things that should be held in confidence even after the termination of agency:

1) Seller motivation for selling 2) Highest offer buyer is willing to make 3) Lowest offer seller would consider 4) Offer history on the property 5) Buyer or seller financial standing **Typically involves information about the client (buyer/seller) and not information about the property

There are three different types of agency relationships that define the scope of authority between parties:

1) Special Agency (broker-client) 2) General Agency (salesperson-broker) 3) Universal Agency (child-parent as executor of will)

In plain language, Safe Harbor/TEFRA outlines three "tests" used to determine if real estate agents are independent contractors:

1) The individual is licensed as a real estate agent. 2) The individual's income is sales- or outcome-based rather than hourly. 3) A written independent contractor agreement is in place between the agent and broker stating the agent will NOT be treated as an employee for tax reporting purposes.

Agency can be described in terms of 3 things:

1) The manner in which it is created (oral, written or action) 2) The degree of authority and liability it brings 3) The form that it takes

A finder's fee or referral fee is legal in New York so long as.. (2)

1) The referral fee is paid only to a broker licensed in New York OR a broker holding an equivalent license from another state (or country!) 2) The individual being referred has given informed consent

These factors (from the 20 factor list) go into the "behavioral control" bucket (4):

1) Type of instructions given 2) Degree of instruction 3) Evaluation systems 4) Training

Creation of agency requires two essential components:

1) consent (from both the agent and the principal) 2) control (agent has authority to act on behalf of the client)

The Tools of Express Agency and Express Authority

1) listing agreement 2) buyer-broker agreement **A third tool would be any verbal or written instructions

3 ways to terminate an agency relationship

1) renunciation 2) expiration 3) completion

Breach of Agreement: 3 Types

1) the client is uncooperative or fails to meet commitments 2) Abandonment: if the agent is not doing anything to accomplish the goals established through the creation of agency 3) Acts of commission or omission - constitute breach of duty

Customer vs. Client

A broker/salesperson/agent works FOR a client. A broker/salesperson/agent works WITH a customer.

Agency Relationship

A fiduciary relationship created wherein one party (the client) authorizes another party (the agent) to represent their best interests and that second party (the agent) accepts the responsibility given to them. -Agency relationships require the mutual consent of both parties (the principal and the agent) and can be entered into by written agreement (*preferred), oral commitment, or action. **Agency relationships are created on the BROKER LEVEL

Which of the following BEST describes what happens when Broker Bob signs a listing agreement with Seller Sally?

A fiduciary relationship is formed

Tradition for Commission

A negotiated commission rate paid upon the final purchase price of the property. And while a percentage rate range may be commonplace in a given region of the country (or state), an exact percentage rate is NOT set in stone but rather negotiated in writing between the broker and client. *Commission is earned when a "ready, willing, and able buyer is found" and a meeting of the minds between seller and buyer is established.

Third Party (4 types)

ANY person involved in your real estate transaction who is not your client. Third parties include: 1) Any customer, plus all other real estate professionals in a transaction (such as inspectors, title officers, loan officers, etc.) 2) The buyer, title officer, inspector, loan officer, the insurance agent, and the appraiser 3) Customers, as well as other non-client individuals 4) Anyone with whom the license holder does NOT have an agency relationship

Agency by Estoppel

Agency that is imposed by law when it is determined that ostensible agency existed. -Agency by estoppel is typically created after the actions of the agent have already occurred. It is used to create legal accountability for the agent or the principal on whose behalf the agent acted. **So, agency by estoppel occurs in an environment of ostensible agency.

Accounting (Fiduciary Duty)

Agents must account for all funds entrusted to themselves. License holders may not use a client's funds for their personal funds, nor can they store them in the same account. Mixing a client's funds with an agent's personal funds is known as commingling and is illegal.

Group Boycott

An agreement among two or more competitors not to do business with another competitor for the purpose of inducing the other competitor to change its business practices or fail altogether. -One example of a group boycott in real estate would be an agreement among a group of full-service brokerage firms to not show the listings of a new discount brokerage. Consumers would be harmed by this practice - the selection of homes shown to them would be unnecessarily reduced and limited.

Undisclosed Dual Agent

An illegal agency relationship arising when a real estate broker represents two principals in a transaction without their informed consent. **If the agent is showing a property listed by their sponsoring brokerage and disclosure has not been made to the buyer that the agent is representing the seller

Fiduciary

An individual (i.e. the broker) upon whom is placed the highest levels of trust and confidence when acting on behalf of another. This is a level of trust reserved for clients (principals) of the agent, as opposed to customers. So serious are the obligations of fiduciaries that they are expected to put their client's interests ahead of anyone else's — including their own.

Client

An individual who has signed an agency agreement with a broker, authorizing that broker to represent them in a real estate transaction. *A client is the broker's principal - the client's best interests are represented by the agent!! You represent your client's interests. And you work for your client. -Client + Broker/Salesperson = Agency Agreement

Self-dealing

Any action taken by a fiduciary wherein their own best interests take priority over those of customers or clients; generally done without disclosing to others what the fiduciary's interests are in the transaction.

Disclosure (Fiduciary Duty)

As noted in the keywords screens, it is the act of revealing critical information regarding agency relationships or material facts (i.e. related to condition of the property). For example, sellers are required to fill out a written property disclosure to give to buyers. ***Another component of the duty of disclosure is the requirement that license holders present ALL offers to their clients, even if a buyer's offer appears to low or inadequate. It is the seller's decision to make. **APO (Always Present the Offer)

General Agency

BETWEEN BROKER AND SPONSORED SALESPERSON. -Principal: The broker is the principal of the agent. -Agent: The sponsored salesperson is the agent of the broker. *Role Explanation: The salesperson represents the broker in their relationships with clients. The salesperson helps the broker fulfill their fiduciary duties to their clients. In this way, the salesperson is a general agent of the broker. **Whereas special agency is limited, general agency: -Gives agents more power (general actions like representing sellers) AND -Holds the principal (broker) responsible for actions performed by their sponsored agents

Special Agency (Limited Agency)

BETWEEN REAL ESTATE BROKER AND CLIENT. -Brokers are authorized to act on behalf of their clients via listing agreements, buyer-broker agreements, etc. -Through those agreements, clients grant their agents (brokers) the ability to perform specific acts (i.e. listing their home on the MLS OR representing their interests as a buyer at an open house) -Most limited type of agency -Since special agency relationships are limited, special agents are unable to make decisions that would bind or obligate their principals. **Because special agency is created at the broker level, this means that not only does the broker owe the client (principal) fiduciary duties, but ALL of that broker's sponsored agents owe that client fiduciary duties as well.

Types of Agency: Exception for Property Management

Because property management is an ongoing duty with wide-ranging responsibility that a broker takes on for a principal (property owner client), it requires the parties to enter into a general agency agreement instead of the more limited special agency agreement that is typical of a broker-client relationship.

Duties that survive termination (2)

Confidentiality and accounting

Confidentiality (Fiduciary Duty)

Connected quite closely to the concept of loyalty, in that private information given to the agent by the buyer-client will be kept secret (unless the client wants to have the information shared). -Confidentiality is a responsibility that lasts forever, not just for the length of the representation agreement. ***Additionally, an agent is not allowed to act on confidential information to obtain an unfair advantage over a principal. However, the listing agent could and should present the seller with a Comparative Market Analysis (CMA) so that the seller can make an informed decision about the range in which the home should be marketed.

In determining whether the worker is an employee or an independent contractor, what the most important factor to consider and the best general guidepost?

Control -If the worker has more control, then they're probably an independent contractor -If the paying entity has more control, then the worker is probably an employee.

Agency by Ratification

Created when an agent takes an unauthorized action on behalf of a principal, which is accepted after the fact by the principal. The principal accepting the action of the agent (such as a seller accepting an offer brought by an agent) establishes the agency relationship. **Agency by ratification can also affirm unauthorized actions by agents.

Express Agency

Created when the principal explicitly appoints the broker/agent to act on their behalf. *Can be oral or written

Universal Agency

Gives agents the power to act on behalf of the principal AND make decisions on behalf of the principal. -USUALLY granted to an agent via a power of attorney, which is a legal instrument used to confer the right of one individual to act on behalf of another. Armed with a power of attorney, the agent has the actual power to sign legal documents on behalf of the principal. **Broadest type of agency. -Ex. son acting on behalf of sick father; when a principal is abroad and gives their agent the general power of attorney in order to allow the agent to complete the sale of the property in question.

Breach of Agreement

If either party fails to uphold their obligations or duties as outlined in the contract, they are considered to have breached the agreement and are potentially liable for resulting damages. The agency is terminated.

Agency Coupled with an Interest

If the broker has a financial or security interest in the subject property at the center of the agency agreement, the principal or client does NOT hold the right to revocation of agency. This is because the broker's interest in the property is greater than that found in a typical transaction and, consequently, the broker would be injured by the revocation to a greater degree than they typically would in a purely agency role. ***Similarly, the death, incapacity, or bankruptcy of either party will not terminate an "agency coupled with interest" agreement.

Termination by Operation of Law

If there has been a change in law that affects the property involved in the agency agreement, that can be cause for termination of the relationship.

Why is an agency relationship fiduciary?

It is based on the principal's trust and confidence that the agent will act dutifully and responsibly as their representative. Also based on the law of agency that dictates the higher duties owed to the principal as opposed to the lesser duties owed to customers and third parties by the agent. **the client's interests come first — even over that of the agent.

Why is price fixing illegal?

It removes the freedom of rate negotiation for buyers and sellers. Commission rates are intended to always be negotiable between the client and the broker.

Agent (a.k.a the salesperson)

License holder who must be sponsored by a broker in order to engage in the business of real estate. The salesperson is an agent of the sponsoring broker and a subagent of that broker's principles/clients — many of which that salesperson may have brought to the broker. -The agent is authorized by the principal to act on their behalf. -In the context of real estate transactions, the agent is a licensed representative of the seller, buyer, landlord, or tenant. The agent facilitates the sale, purchase, exchange, or lease of real property for others.

Obedience (Fiduciary Duty)

License holders have the fiduciary duty to obey their clients, so that clients are the decision makers in a real estate transaction — not the agents. They can give guidance, but ultimately cannot make pricing decisions or buying/selling offers. **The duty of obedience does not apply, however, if the principal's instructions are illegal or unethical in any way. They should instead explain that they cannot carry out this request because it violates state and federal fair housing laws. If the owner still insists that they want to discriminate, then the sales person should walk away from that listing and find someone else to work with.

In comparison, agents owe their clients the full fiduciary duties of...

OLD CAR!! 1) Obedience 2) Loyalty 3) Disclosure 4) Confidentiality 5) Accounting 6) Reasonable Care

Blockbusting

Occurs when a real estate agent canvasses a geographical area and incites panic by suggesting that people of certain races, colors, religions, or other protected classes will be moving into the neighborhood, causing the area to deteriorate and prices to destabilize.

Finder's Fee (Referral Fee)

Paid by one broker to another for pointing a client to their brokerage. This will generally happen only if the broker making the referral is unable or unwilling to represent the individual being referred. **Note: This is NOT a commission based on the sale of a property.

Agency

Refers to agency relationships where agents advocate on behalf of their principals. In the practice of real estate brokerage, real estate brokers act as agents and represent the best interests of their clients.* *Remember, your client = your principal.

Antitrust

Refers to laws aimed against these trusts. The trusts in this sense refer to monopolies.

Implied Authority

Refers to legitimate actions an agent takes in order to complete duties that the principal has already expressly authorized. Implied authority rarely creates the level of concern that implied agency can.

Behavioral Control

Refers to whether there is a right to direct or control how a worker does their work. -When a business has the right (even if they don't utilize that right) to direct and control a worker, the worker is an employee.

Reasonable Care (Fiduciary Duty)

Take care of the client the way you would want to be taken care of yourself! **When hired, you are held to a high standard of care that requires knowledge concerning real estate. You must use reasonable care when you are filling out paperwork, writing an offer, inputting information into MLS, preparing graphics, taking pictures, mailing flyers, staging properties, completing a listing, writing agreements, showing properties, and knowing what to say and when to keep quiet.

Loyalty (Fiduciary Duty)

The agent has a duty of loyalty to their principal. The agent's job is to represent their principal's best interests, not the agent's best interests.

Commission Split

The compensation payment from the broker to the sponsored salesperson — the details of which the salesperson should have already negotiated with the broker when the salesperson first signed their employment agreement with the brokerage.

When is commission guaranteed?

Until an agency relationship is formed, the agent is not guaranteed to earn the customer's commission in a sale. An agency relationship assures there is some form of commitment between the agent and the client. Turn your customers into clients with a WRITTEN agency agreement! (easily guarantees commission)

Gratuitous Agency

When an agent agrees to work for no compensation. Although no payment changes hands, the agent is still held to all duties of an agency relationship. -If the advice the agent gave turned out to be bad advice (and the party suffers a loss because they relied on that advice) the court may find that, in giving the advice, agency was created and the agent (and their broker) are negligent and liable. **Because of this liability, it is important for license holders to ALWAYS get permission from their broker to practice gratuitous agency.

Fiduciary Relationship

When clients ask an agent to represent their interests, they are asking to form a fiduciary relationship. The fiduciary (agent) is similar to a trustee and responsible for looking out for the interests of their clients. -For example, this means that agents should NOT disclose to potential buyers that their seller would accept less than the listing price. **Recap: An agency relationship establishes a fiduciary relationship.

Principal

an individual who has authorized an agent to represent their interests as a client. **The scope of authority given to an agent by the principal can vary from one situation to another.

Renunciation

When the agent decides to leave an agency relationship -An agent will usually give written notice of the renunciation, and the agent could be liable for damages if renouncing a contract with a specific termination date. (If the agency agreement is open-ended, a broker can usually renounce the agreement without liability.) **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.

Revocation

When the client (the principal) fires their agent — usually by way of written notice of the 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 contained a specific termination date, the client may be found in breach of contract. If the agency agreement was open-ended, the client simply has to reimburse the broker for any expenses incurred on behalf of the client.

Agreement Expiration

When the parties don't agree to renew the agreement after the termination/expiration date specified

Commission Split when cooperating broker is involved..

When there is a cooperating broker involved, the total commission earned on the sale of a property gets split between the two brokers BEFORE they can each turn around and split their portion with their respective salespersons (if involved) in the transaction.

Buyer-broker agreement

Written agency between a broker and a buyer, also known as a buyer representation agreement, in which a buyer authorizes the broker (and sponsored salesperson) to assist the buyer in the procurement of a real property. -This agreement will contain information regarding the start and termination dates of the representation, the duties of each party, and expectations for compensation. -This is when a buyer becomes a client-principal. *Not provided by New York DOP Licensing Services, most obtain from state or local REALTORS (NAR) association or create with lawyer

Listing Agreement

Written agency between a broker and a seller will usually take the form of a listing agreement, in which a principal authorizes the broker (and sponsored salesperson) to assist the principal in the sale of a real property. -This agreement will contain information regarding the start and expiration dates of the representation, the duties of each party, and expectations for compensation. *Not provided by New York DOP Licensing Services, most obtain from state or local REALTORS (NAR) association or create with lawyer

Tie-In Agreement

a conditional agreement that stipulates that a product or service desired by a party will be offered only on the condition that the party also agree to the purchase of a second product or service. *Antitrust violation

Violation of the Sherman Act is...

a felony punishable by up to 10 years imprisonment and a $1 million fine for individuals and a fine of up to $100 million for corporations. *In addition to receiving a criminal sentence, a corporation or individual convicted of a Sherman Act violation may be ordered to make restitution to the victims for all overcharges. Victims of price fixing conspiracies, for example, may also seek civil recovery of up to three times the amount of damages suffered.

Sherman Antitrust Act

a landmark law that was passed in 1890 that prohibits the formation of trusts, or monopolies, in the marketplace. It governs business by regulating anti-competitive conduct to promote fair competition on behalf of American consumers.

Customer

a person with whom no agency relationship exists and to whom no fiduciary duties are owed. The customer is usually on the other side of the transaction and represented by another license holder, but not always.

Safe Harbor/TEFRA

a place of refuge for those industries Congress felt were victims of an overly aggressive IRS practice of attempting to reclassify independent contractors as employees. *Section 530 of the Revenue Act of 1978

Ostensible Agency

a principal allows a license holder to act in a way that causes a third party to believe the license holder is that principal's agent.

Collusion

a secret agreement or cooperation for an illegal or deceitful purpose.

When is agency by estoppel typically created?

after the actions of the agent have already occured

A broker who enters into a Listing Agreement with a seller is considered a:

fiduciary

3 types of misrepresentation

innocent, negligent, fraudulent

Net Listing

one in which the seller pre-determines a specific amount that they will accept on the sale of their property. Anything that comes in over and above that amount is considered earned compensation by the broker. **ILLEGAL in New York because they offer ample incentive for fraud or bad faith on the part of license holders who might be tempted to take advantage of sellers who don't realize the true market value of their property.

Market or Customer Allocation

the assignment of markets or customers between brokerages. -That scenario is illegal under the Sherman Antitrust Act. -The brokers might be playing nicely, but that doesn't really work out for consumers. Buyers and sellers won't be able to be serviced by the brokerage of their choice.

Steering

the deliberate avoidance of showing a protected person a non-integrated area. **Steering happens when an agent guides a potential buyer to or away from a particular area based on one or more of the protected groups.

Puffing

the making of exaggerated claims (technically opinions) in order to achieve a sale or some other objective. -It is not considered outright misrepresentation, unless fraudulent - though not illegal, it is unethical!!

Redlining

the practice of denying services to residents of certain areas based on the racial or ethnic composition of those areas. **Redlining is most commonly committed by lenders or insurance companies. If a lender or homeowners' insurance provider refuses to offer their products (or offers less attractive terms & conditions in an area due to its makeup), that's redlining.

The most desirable way to terminate an agency relationship is...

through the fulfillment of its purposes — such as the home getting sold or bought.

Implied Agency

when a party assumes consent to the relationship based solely upon inferences formed by the actions, conduct, and words of either or both parties. It is a form of accidental agency that probably means a license holder dropped the ball in their communications with a customer

Mutual Agreement (Mutual rescission)

when both parties make this decision, mutually agreeing to end the agency relationship. -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.