Unit 7

implied agreement

Agency relationships also can be created by implied agreement when principal and agent, without formally agreeing to the agency, act as if one exists. An agent with such an understanding would be acting with implied authority. However, an implied contract will not be established simply on trade custom and practice. There must be sufficient evidence to show that the principal authorized the agent to perform acts under circumstances in which a reasonable principal would be expected to compensate the agent for the services. For example, the fact that a seller simply allows a broker to show the property is not sufficient to create an implied agency agreement. Implied agency agreements are illegal under North Carolina real estate license law, which requires all agency agreements be in writing.

responsibilities to third parties

Even though an agent's primary responsibility is to the principal, the agent also has duties to third parties often termed customers or prospects. The duties of an agent to a third party come from three sources: (1) North Carolina license law, (2) the North Carolina Unfair or Deceptive Trade Practices Act, and (3) common law of agency as interpreted by court opinions. These duties include being honest and fair, and complying with North Carolina Real Estate License Law and NCREC rules, including disclosure of material facts relating to a property or transaction about which the agent has knowledge or should reasonably have acquired knowledge (see Duties to Third Parties).

The purpose of the Working with Real Estate Agents disclosure is to create an agency relationship between brokers and consumers. True False

f

general agent

general agent One who is authorized to represent the principal in a broad range of matters related to a specific business or activity; a property manager might have this power.

Employers are liable for withholding payment of Social Security and income taxes for persons who are paid as Form W-2 employees. True False

t

In the past, putting a listing into a local multiple listing service (MLS) created a subagency relationship between cooperating brokers. True False

t

Oral buyer agency is a lawful alternative to use when a consumer is unwilling to commit to a written buyer agency agreement. True False

t

Properly licensed brokers can be paid as employees or as independent contracts. True False

t

The common law of agency refers to laws from judgments and decrees of courts as opposed to laws created by a legislature. True False

t

agency

the fiduciary relationship between the principal/client and the agent.

subagency and subagent

the fiduciary relationship between the subagent and the principal. Subagent—one who is employed by a person already acting as an agent (such as a provisional broker licensed under a broker-in-charge who is employed under the terms of a listing agreement). Simply stated, a subagent is an agent of an agent.

agent

the individual who is authorized and consents to represent the interests of another person. In the real estate industry, principals are hiring an entire company and all the company's affiliated brokers to represent them. Even though the firm is the agent, the broker-in-charge would be personally accountable for agency law compliance.

client and customer

the person who hires and delegates to the agent through a brokerage contract the responsibility of representing that person's best interests. In the real estate business, the principal/client can be the buyer, seller, landlord, or tenant. Customer—the third party for whom some level of service is provided by an agent of another party, but who is not represented by the agent.

Co-Brokered Transaction

A real estate transaction involving two or more brokerage firms, one firm representing the seller and the other representing the buyer. Unfortunately, confusion can quickly arise over whom the broker represents in these co-brokered transactions where two (or more) competing firms cooperated to bring about a sale. For example, ABC Realty would have the listing and represent the seller, but XYZ Realty would bring the purchaser to the transaction. With two different brokerage firms involved in a sale, consumers could easily assume that there was a clear division of responsibility. Consumers may think that the broker who had the property listed for sale represents the seller; the broker who found the buyer represents the buyer. However, this may not be the case. Up until the mid-1990s, it was commonplace in these shared transactions that both brokerage firms and their brokers or salespersons represented the seller as agents and owed all loyalty to the seller and owed no duties other than honesty and fairness to the buyer.

Undisclosed Dual Agency

A relationship in which the real estate agent is found to be the agent of both the buyer and seller in a transaction, but without the knowledge and informed consent of both parties. Undisclosed Dual Agency is illegal in all states.

agent for buyer must discolse

An agent for the buyer must disclose deficiencies of a property as well as factors that may adversely affect a property's value or desirability. The agent should disclose information that could affect the buyer's ability to negotiate the lowest purchase price, such as how long a property has been listed or why the seller is selling, if known by the agent.

self dealing

An agent must disclose to a client any personal or business relationship the agent may have with another party to the transaction, even if it is a former relationship to avoid claims of self-dealing. NCREC rules do not allow brokers to represent buyers when brokers are selling property in which they have an ownership interest. Likewise, brokers cannot represent sellers when the brokers are acting as buyers. These actions would create conflicts of interest.

breach of duty

Any agent who breaches an agent's duties to either the principal or a third party must bear the consequences of that breach. These consequences may include any (or all) of the following: Disciplinary action by NCREC—any violation of a duty owed to the principal or third parties is grounds for disciplinary action by NCREC. If the Commission finds that the agent did in fact violate the license law, that agent's license may be revoked or suspended. A civil action in court brought by the injured party—if the breach of duty harms either the principal or a third party, the agent may be sued and found liable for the damages caused by the breach. Note that if the agent's improper behavior is deemed to be within the scope of the agent's duties, the agent's principal also may be held liable for the damages caused by the agent. The principal can in turn sue the agent for reimbursement for those damages. Criminal prosecution brought by the district attorney—a violation of a provision of the real estate license law is also a misdemeanor (see G.S. 93A-8). If the agent's breach of duty also is a criminal act, such as fraud or embezzlement, the district attorney may bring a criminal action against the agent.

OLD CAR

As mentioned earlier, an agency relationship is a fiduciary relationship, one of trust and confidence between the broker and the principal. In a fiduciary relationship, the broker, by law, owes the principal specific duties—the duties of obedience, loyalty, disclosure of information, confidentiality, accounting, and reasonable skill, care, and diligence, easily remembered by the acronym OLD CAR (see Agent's Responsibilities to Principal). Note that such duties are not simply moral or ethical obligations; they are the law of agency. These duties are owed to a principal whether the principal likes the agent or the agent likes the principal.

brokerage

Brokerage is the business of bringing buyers and sellers together in the marketplace. Buyers and sellers in many fields of business employ the services of brokers to facilitate complex business transactions. In the real estate business in North Carolina, a broker is defined as a person who is licensed to list, lease, buy, exchange, auction, negotiate, or sell interest in real property for others and to charge a fee for services. The provisional broker works under direct supervision of the broker-in-charge (see G.S. 93A-1, G.S. 93A-2).

common law agency relationships can be created in the following ways

Common-law agency relationships can be created in the following ways: With a written listing contract where a seller employs an agent to produce a buyer for the property; the seller is the principal; the firm/broker is the seller's agent With a buyer agency contract where a prospective buyer hires a firm/broker to locate properties for the buyer with buyer representation; the buyer is the principal; the firm/broker is the buyer's agent With a dual-agency contract where the agent legally represents both parties; both seller and buyer are principals, firm/broker is agent to both, but written informed consent from both parties is required With a property management contract where the owner of rental properties engages the services of an agent to rent and manage the property; the owner is the principal, and the firm/broker is the property manager/agent With an in-house brokerage employment contract where a broker signs an employment agreement with a firm/broker that defines the legal and agency relationship between them; the firm/broker is the principal and the broker is the agent With a tenant representation agreement where a tenant employs an agent find properties for the tenant; the tenant is the principal, and the firm/broker is the tenant's agent By the conduct of the parties (implied agency)

termination of agency

Completion or fulfillment of the purpose for which the agency was created Expiration of the terms of the agency Mutual agreement to terminate the agency Breach by one of the parties, such as abandonment by the agent or revocation by the principal (The breaching party might be liable for damages.) By operation of law, as in a bankruptcy of the principal (because title to the property would be transferred to a court-appointed receiver) Destruction or condemnation of the property Death or incapacity of either party (Notice of death is not necessary. Note that if a property is listed with a brokerage firm, the firm must dissolve to "die." If the individual listing agent dies, the listing would not be terminated because the listing belongs to the brokerage firm rather than to the deceased listing agent.)

designated dual agency

Designated dual agency is used when one broker or firm who represents both parties in a transaction believes that the challenges of the clients' best interests are too difficult. The broker and/or the BIC may wish to appoint one or more brokers of a firm to exclusively represent the seller as an agent and appointing another broker of the same firm to exclusively represent the buyer as an agent. The firm continues to act as a dual agent; the individually designated brokers do not.

agent for seller needs to disclose

Examples of facts an agent for the seller has a duty to disclose to the seller include all offers (See NCREC Rule A.0106); the identity of the prospective purchasers, including the agent's relationship, if any, to them (such as a relative of the broker being a participating purchaser); the ability of the purchaser to complete the sale or offer a higher price; any relationship the broker has with the buyer (such as an agreement for the broker to manage the buyer's property after it is purchased); and the buyer's intention to resell the property for a profit.

single agency

In single agency, the agent represents only one party in any single transaction. The real estate agent must provide either fiduciary or statutory duties exclusively to one principal within the transaction (who may be either the buyer or the seller or the landlord or the tenant). The customer is the party not represented by the agent

MLS

In the 1960s, however, the ways buyers and sellers were brought together in a transaction began to change. Brokers started to share information about properties they had listed, which resulted in two brokers/firms cooperating with one another to sell a property. Brokers formalized this exchange of information by participating in multiple-listing services (MLSs). By increasing exposure to potential buyers, the MLS expedited sales and became a widely used industry service.

dual agency

Many real estate transactions are co-brokered, that is, they involve two or more competing brokerage firms that cooperate by bringing the buyer and seller together. In the majority of co-brokered transactions, the firm with the listing represents the seller and the firm with the buyer represents the buyer's interests. Firms do reap financial rewards when the transaction is an in-house sale; that is the listing agent and the selling agent are within the same firm. Thus the firm keeps the entire commission and does not have to split it with outside brokerages. Large firms with many listings are likely to produce buyers through their marketing efforts and may keep control of the transaction rather than involving other firms. While an in-house sale does not have to involve dual agency (buyers could be unrepresented in such transactions), it is likely that it will be a dual agency situation. In a dual agency situation, the broker/firm represents both the buyer and the seller in the same transaction. Dual agency requires that the agent be equally loyal to two separate principals at the same time. The challenge is to fulfill the fiduciary obligations to each principal without compromising fiduciary obligations to the other.

Negligent Misrepresentation

Negligent misrepresentation takes place when brokers unintentionally misinform a buyer, seller, tenant, or landlord concerning a material fact because they do not have actual knowledge of the fact, because they have incorrect information, or because of a mistake by the agent. If the broker should reasonably have known the truth of the matter that was misrepresented, then the broker may be guilty of negligent misrepresentation even though the broker was acting in good faith. The fact that the broker was ignorant about the issue is no excuse. If a buyer relies on the agent's statement, the agent is liable for any damages that may result. If a buyer's agent relies on incorrect information provided by a listing (seller's) agent through the MLS property data, even with disclaimers, the buyer's agent may be held liable if the agent should reasonably have known the information was incorrect. EXAMPLE A listing agent relies on a recent appraiser's report that a house has 2,500 square feet of heated living floor space and enters that information into the MLS property data. However, the house actually has 2,000 square feet. Although the Residential Square Footage Guidelines written by the NCREC allows a broker to "reasonably rely" on a recent report from a qualified appraiser, a prudent and knowledgeable broker in this case should have recognized a 500-square-foot error (i.e., 25% error). If the agent unreasonably relied on the appraiser's report and informed a buyer the house has 2,500 square feet, she has made a negligent misrepresentation. A buyer's agent also should recommend that a buyer measure a property if square footage is important to the buyer. An agent tells a buyer/client that the home being shown has Levelor blinds throughout, without actually checking the brand name. The blinds are actually cheap, imported imitations of Levelor blinds.

negligent omission

Negligent omission takes place when brokers do not have actual knowledge of a material fact but should reasonably have known of such fact. If they fail to disclose this fact to a buyer, seller, tenant, or landlord, they may be guilty of negligent omission, even though they acted in good faith in the transaction. Agents have an obligation to discover and disclose material facts about the property that any prudent agent would reasonably have discovered during the transaction. A listing agent would be held more accountable than would a buyer's agent in discovery and disclosure of defects in the property because of the listing agent's direct fiduciary relationship with the seller and the fact that the listing agent inspected the property and should be more familiar with the property than the selling agent. EXAMPLE A broker has listed a property in a neighborhood where a vacant lot is being considered by the city for installation of a garbage recycling system. The plan has been well publicized in the news media, which also has given much publicity to the fact that the neighbors have filed legal action against the city. The agent does not reveal this information to a buyer and when questioned, states that he was not aware of these plans. Frequently, the buyer or the buyer's mortgage lender will request inspections or tests to determine the presence or level of environmental risks. If environmental risk questions arise in a transaction, brokers should recommend that their client/customer obtain advice from state and local authorities responsible for environmental regulation or other appropriate experts, whenever toxic waste dumping, contaminated soil or water, nearby chemical or nuclear facilities, or health hazards such as radon, asbestos, and lead paint may be present.

examples of material facts

Per the North Carolina Real Estate Manual, the NCREC has historically interpreted material facts to be disclosed to any party under the Real Estate License Law to include at least facts about the property itself (i.e., significant physical characteristics such as unpermitted space, a structural defect, or defective mechanical systems); facts relating directly to the property (usually factors outside the property that may directly affect value, use, or desirability of the property, such as a pending zoning change or planned highway construction in the immediate vicinity); facts relating directly to the ability of the agent's principal to complete the transaction (such as a pending foreclosure sale or buyer's inability to qualify for financing); and facts known to be of specific importance to a party (most likely to be items of special interest to a purchaser's intended use of the property, such as zoning allowing home businesses or covenants allowing multiple pets).

prohibited conduct

North Carolina real estate license law specifically prohibits the following types of acts in the broker's relationship with any party to the transaction [G.S. 93A-6(a)(1)]: Willful misrepresentation: intentionally misinforming any party involved in a transaction about a material fact Negligent misrepresentation: unintentionally misinforming any party involved in a transaction about a material fact Willful omission: intentionally failing to disclose a material fact to any party involved in a transaction Negligent omission: unintentionally failing to disclose a material fact to any party involved in a transaction

deceptive trade parties act

North Carolina's G.S. 75-1.1, Unfair or Deceptive Trade Practices Act, also applies to real estate agents. Agents who engage in the prohibited acts described above may find themselves liable for treble (triple) damages and attorneys' fees under certain circumstances.

special agent

One who is authorized by a principal to perform a single act or transaction. A real estate broker is usually a special agent of the seller authorized to find a ready, willing, and able buyer for a particular property, or a special agent of the buyer to find a specific type of property to purchase. Special agent has limited authority and cannot bind his principal

stigmatized properties

Over the years, brokers have encountered what are called stigmatized properties, those properties branded by society as undesirable because of events that occurred there. Some properties are typically marked by a criminal event: a homicide, suicide, or other violence; illegal drug or gang-related activity; or other events that render the property socially unmarketable in the community's view. Another psychologically impacted property would be a purported haunted house, which is not a material fact.

written office policy

The North Carolina Real Estate Commission (NCREC) strongly encourages the broker-in-charge (BIC) of a real estate firm to have a written office policy as to the type(s) of agency the firm will practice. The firm is technically the agent in a transaction. The company policy should cover whether the firm will practice seller single agency only, buyer single agency only, or dual and designated agency. Whichever form of representation the firm adopts, the written policy should clearly state how that type of agency representation will be exercised. The written policy also should explain how the firm will enter into cooperative relationships among other firms, how it will arrange commission splits, and how it will implement disclosure requirements.

Common law of agency

The basic framework of law that governs the legal responsibilities of the broker to the people the broker represents.

commingling

The broker must be able to account for all funds received from, or on behalf of, the principal. It is illegal for the broker to commingle such monies with personal funds. Commingling is a term used to describe when trust funds and the firm/broker's personal/business funds are placed in the same account. All states have laws that require accounting for trust funds and the maintenance of transaction files and records. North Carolina real estate license laws require that brokers give accurate copies of all documents to all parties affected by them and keep copies of such documents on file for three years (see Rule A.0108). In addition, the license laws generally require that the broker deposit immediately all trust funds entrusted to the broker in a trust account (see Rule A.0116).

tort

The principal also may be held liable and accountable for the agent's misconduct, referred to as a tort, which is a wrongful act by an agent while representing the principal and acting within the scope of the employment agreement that created the agency.

express agreement

Under general agency law principles, an agency relationship can be created by either an oral or a written agency agreement between the principal and the agent. It also can be implied from conduct. To ensure that all parties have a clear understanding of the agency relationship, it is in everyone's best interest to create an agency relationship through an expression of agreement rather than through implication. Principal and agent should have an express agreement (written or oral), such as those reviewed in Unit 8. An agent with such an agreement would be acting with express authority.

material facts

Under the laws of most states, the broker must disclose material facts about the condition of the property even if the seller chooses not to disclose such facts and even if the seller instructs the broker not to disclose such facts. Some states, however, permit a seller disclaimer—essentially a statement that the property is sold "as is physical condition" with no promises regarding its quality or condition. Note, however, that even with this disclaimer, most sellers are still required to disclose known problems with the property if they affect the health and well-being of the occupants. It is important to remember that anything a real estate agent learns about a client must remain confidential. In most states, confidentiality terminates upon completion, expiration, or termination of the agency relationship.

buyer agency

When a buyer contracts with a firm/broker to locate property and represent the buyer's interests in the transaction, the buyer is the principal—the broker's client. The broker as agent is strictly accountable to the buyer. The seller is the third party or customer. In the past, it was simple: brokers always represented sellers, and buyers were expected to look out for themselves. With the widespread use of MLSs and subagency, a buyer often had the mistaken impression that the subagent was the buyer's agent; although the reality was that both agent and subagent exclusively represented the seller's interest. Today, however, many residential brokers recognize the opportunities afforded by buyer representation. Some brokers have become specialists in the field of buyer brokerage, representing buyers exclusively

ratification

When someone claims to be an agent but there is no express agreement, the principal can establish an agency relationship by ratification (apparent authority)—in other words, by performing any act that accepts (ratifies) the conduct of the agent as that of an agent.

Willfull Misrepresentation

Willful misrepresentation takes place when brokers who have actual knowledge of a material fact deliberately misinform a buyer, seller, tenant, or landlord concerning such fact. Willful misrepresentation also takes place when a broker who does not have actual knowledge of a matter material to the transaction intentionally provides information concerning such matter to a buyer, seller, tenant, or landlord without regard for the truthfulness of the information. (See the examples that follow.) This is an act that is intentional on the part of the broker. A broker could also be involved in indirect misrepresentation, which occurs when an agent misrepresents a material fact to a subagent who in turn passes it on to a third party. If a material fact is misrepresented, courts could provide relief to the injured party in the form of damages or rescission of the contract. A broker guilty of misrepresentation could also face disciplinary action by the NCREC. EXAMPLE A broker tells a buyer the cost of utilities is very reasonable without verification from the owner. If the costs are very high, the broker could be guilty of willful misrepresentation. A broker tells a buyer the foundation of a house is sound and has been properly built, when the broker knows the foundation is substandard and improperly constructed. A builder explains to an agent that the poor exterior wall insulation resulted from the developer's overall goal of containing cost. When this agent's buyer/client asks about the insulation, the agent replies that the builder was highly reputable and he was certain the insulation met the necessary standards. A buyer signs a buyer agency agreement with an agent. The buyer wants to purchase property with low taxes. The agent informs the buyer that a particular property has annual taxes of $600 when in fact the agent knows the new assessed value will increase taxes to $1,200.

willful omission

Willful omission takes place when brokers have actual knowledge of a material fact and a duty to disclose such fact to a buyer, seller, tenant, or landlord, but deliberately fail to disclose such fact. EXAMPLE A broker knows that a highway relocation is pending that would adversely affect value and use of a property a buyer wants to purchase but does not reveal this to the buyer. A broker lists a property in midwinter knowing that the air-conditioning system does not operate properly but does not reveal that fact to a prospective buyer.

fiduciary

a relationship in which the agent is placed in the position of trust and confidence to the principal.

caveat emptor

let the buyer beware In many states, lawmakers have departed from the common-law doctrine of caveat emptor—let the buyer beware—toward greater consumer protection. Buyers seek not only accurate, factual information but also advice, particularly as real estate transactions have become much more complex. Buyers view the real estate broker as the expert on whom they can rely to guide them. Today, most buyers seek and obtain representation. Though North Carolina is still considered to be a caveat emptor state, while buyers should "beware," buyers can trust real estate professionals—even those who represent buyers—to be honest and fair in their dealings.

Subagency

outside brokers and agents who help listing agent; listing broker's own agents A subagency is created when one broker/firm, usually the seller's agent, appoints other brokers/firms (with the authority of the seller) to assist in performing client-based functions on the principal's behalf. These cooperating brokers/firms have the same fiduciary obligations to the seller-principal as the listing broker, assisting in producing a ready, willing, and able buyer for the property. The listing broker and the seller now become potentially liable for the conduct of all of the cooperating brokers/firms and their affiliated brokers. Vicarious liability is a legal concept that might allow a consumer to successfully sue the seller and/or the listing firm for illegal or inept actions performed by the subagent firm and/or its brokers (see Subagency). It is also important to note that when a real estate broker/firm becomes an agent under an agency agreement with a principal, all individual real estate brokers affiliated with the broker/firm automatically become subagents of the principal, unless there is a specific agreement to the contrary.

principals fiduciary responsibilities to the agent

the principal also has the following responsibilities to the agent: To act in good faith (to cooperate with the agent and refrain from hindering the agent's efforts)—for example, if the seller-client refuses to let the agent show the property, this is a breach of good faith. To pay the agent the agreed-on compensation when the agent finds a ready, willing, and able buyer—once the agent brings the seller a buyer who is ready, willing, and able to purchase the property on the seller's terms, the agent has earned a commission, whether or not the seller decides to sell the home. Similarly, the principal/client is a buyer, the buyer is obligated to make sure that his or her agent is compensated for the agent's efforts to find the appropriate property.

facilitator/ transaction broker

the real estate licensee who assists buyers and sellers in reaching an agreement in a real estate transaction without representing interests of either party. The licensee treats both parties equally as customers. This nonagency relationship is not allowed in North Carolina.

universal agent

universal agent Person empowered to do anything the principal could do personally; unlimited authority; unusual in real estate.