Lesson 4: Real Estate Brokerage and Law of Agency/Ethics

Under Article 2, Standard of Practice (SOP) 2-1 states:

"REALTORS® shall only be obligated to discover and disclose adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. Article 2 does not impose upon the REALTORS® the obligation of expertise in other professional or technical disciplines."

Key element of Duty of Fidelity

Confidentiality

Ways to Terminate Agency Relationships (4)

1. Completion of performance 2. Expiration of the term agreed upon by the parties 3. Mutual agreement of the parties or bilateral termination 4. Termination of relationship by notice from either party to the other or unilateral termination The broker owes no further fiduciary duty to the client after the termination of the agency relationship, other than maintaining the client's confidential information as mentioned earlier. Just as an agent would likely want to formally create an agency relationship, they should also formally terminate it. Also, a simple thank you note at the conclusion of a successful transaction could serve as a notice of completion.

Defining and Communicating Agency Responsibilities - there are four basic steps that a broker must take to achieve this and deliver on their responsibilities to the consumer, what are they?

1. Decide - The broker must decide who is going to be offered services as a customer or a client and in what situations. This must take the form of an office policy and be clearly communicated to the agents employed by the broker. It is also important to remember that the consumers have the right to consent or not consent to these offers of services. 2. Disclose - The offering of these services must be clearly disclosed and the agent must clearly define the differences in how services are going to be delivered to a customer or a client. This disclosure must be done in a timely and meaningful manner, which is usually at the initial meeting between the consumer and the agent. 3. Document - The disclosure must be properly documented to ensure clear communication and the accompanying evidence. This is achieved by using the INFORMATION ABOUT BROKERAGE SERVICES form at the inception of any relationship with a prospect. 4. Do - A broker needs to be sure that the actions of agents reflect and are consistent with the services offered to the consumer whether they are as a customer or a client. Clear communication is the most effective way to ensure this.

The Principal's Duties to the Agent (4)

1. Duty to compensate the agent 2. Duty to provide information 3. Duty of indemnification 4. Duty of availability

Agency Types (4)

1. Seller's Agent 2. Buyer's Agent 3. Limited Representation/Dual Agency 4. Sub-agent

Agency representation guidelines have evolved as a result of a convergence of the following: (6)

1. Texas Constitution 2. State Statutes: The most prominent statute is found in the Texas Real Estate Licensing Act where agents may be subject to disciplinary action if they acted for more than one party in a transaction without the knowledge and consent of both parties. 3. Texas Real Estate Commission (TREC) 4. Common law: Formed or influenced by opinions of the courts as opposed to statutes. 5. Code of Ethics of the National Association of REALTORS® (NAR): Article 1 of the REALTOR® Code of Ethics identifies and defines the agent's fiduciary duties to the client and also provides for the requirement for the agent to obtain informed consent when acting as an agent for both the buyer and the seller in the same transaction in states where dual agency is legal. 6. Industry-wide practice: The standards of care can be modified by what measures brokers decide to implement within their own companies' practices. A broker should take the time to adopt, define and deliver an agency representation office policy that should be in writing. This policy needs to be clearly communicated to the sub-agents employed by the broker and the sub-agents have a responsibility to be aware of this policy. Furthermore, all agents in the company have a responsibility to disclose this policy to any prospects they interact with in assisting the prospect in making a decision on who they want representing them in a transaction. Brokers are also charged with the responsibility to adopt office policies in certain situations where there may be potential conflicts of interest or misunderstandings. Examples of this may occur when agents employed by the broker may represent different buyers who may have competing and conflicting interests in the same properties. Another example is when an agent employed by the broker is buying one of the broker's listings or is selling their property through the company.

Defining and Communicating Agency Responsibilities - The disclosures, advice, and counsel offered to the client will depend on the following:

1. The facts of each transaction 2. The knowledge and experience of the client 3. The questions asked by the client 4. The requests and requirements of the client 5. The nature of each property 6. The terms of the sale In essence, if there is an ambiguity in a contract drafted by a real estate licensee, it is the licensee's duty to clarify the ambiguity

Another way to remember fiduciary duties: OLD CAR

Obedience (Legal) Loyalty (100%) Disclosure (Full) Confidentiality (Forever) Accounting (Forever) Reasonable Care

TRELA (Texas Real Estate License Act) Sec. 1101.560 discusses...

ASSOCIATED LICENSE HOLDER ACTING AS INTERMEDIARY (a) A broker who complies with the written consent requirements of Section 1101.559 may appoint: (1) a license holder associated with the broker to communicate with and carry out instructions of one party to a real estate transaction; and (2) another license holder associated with the broker to communicate with and carry out instructions of any other party to the transaction. (b) A license holder may be appointed under this section only if: (1) the written consent of the parties under Section 1101.559 authorizes the broker to make the appointment; and (2) the broker provides written notice of the appointment to all parties involved in the real estate transaction. (c) A license holder appointed under this section may provide opinions and advice during negotiations to the party to whom the license holder is appointed.

TRELA (Texas Real Estate License Act) Sec. 1101.561 discusses...

DUTIES OF INTERMEDIARY PREVAIL (a) The duties of a license holder acting as an intermediary under this subchapter supersede (replace) the duties of a license holder established under any other law, including common law. (b) A broker must agree to act as an intermediary under this subchapter if the broker agrees to represent in a transaction: (1) a buyer or tenant; and (2) a seller or landlord.

Confidentiality

the agent's obligation to keep careful watch over the information he or she receives from a client and to ensure that private information is not shared without the client's consent. an agent cannot act on confidential information to obtain an unfair advantage over a principal. An agent could not, for example, inform a prospective buyer that the agent owned property that was similar to the principal Texas law also prohibits an agent from buying or selling any piece of property in which he or she has a personal interest unless first disclosing this information and confirming the consent of the principal to follow through with the real estate transaction

The Third Party

the final variable to consider when an agency relationship is formed. The individual with whom the agent and principal enter into real estate negotiations. also sometimes referred to as the customer. may be a prospective seller, buyer, landlord, or tenant - anyone who expresses real interest in completing a contract toward the sale, purchase, or rental of real property and is both ready and able to do so. The third party is the person the agent is not representing.

Imputed Knowledge

This is the concept where knowledge possessed by one agent in a company is assumed to be the same knowledge possessed by all other agents in the company and the client. The prevailing sentiment on this legal issue is that in large companies it is unrealistic and even preposterous to assume all agents possess all of the knowledge about a client and/or property represented by the broker.

Designated Licensee Representation

This is where individual licensees in the same firm can individually represent buyers and sellers in the same transaction. In some states this is an alternative to dual or limited representation that has been codified. In Texas, this practice occurs when the parties to a transaction do not wish to consent to dual agency. The broker then has the option of becoming an "Intermediary" and appointing a licensee to represent the seller only and another licensee to represent the buyer only.

LimitedRepresentative/DualAgency

This party acts as a broker for both the buyer and seller through one or more salespeople within the same firm. In other words, two salespeople working for the same firm would represent both the buyer and the seller in the transaction as would one individual agent orchestrating the transaction between the buyer and the seller. This is because that under the common law of agency there is one agent per employing broker and any agent employed by that broker must represent whoever the broker represents.

The agent owes the principal the following five duties:

1. Duty of fidelity 2. Duty of care 3. Duty of obedience 4. Duty of accounting 5. Duty to disclose facts

Fiduciary

A real estate broker or salesperson, while acting as an agent for another

Ways to Create Agency Relationships (2)

Express Agency Implied Agency

gratuitous agency

agency relationship where the principal has no duty to compensate the agent

An agency relationship is created when

when an individual authorizes another party to represent him or her and act in his or her best interest

In TRELA Sec. 1101.558 (d), If the broker ACTS AS AN INTERMEDIARY

A broker may act as an intermediary between the parties if the broker complies with The Texas Real Estate License Act. The broker must obtain the written consent of each party to the transaction to act as an intermediary. The written consent must state who will pay the broker and, in conspicuous bold or underlined print, set forth the broker's obligations as an intermediary. The broker is required to treat each party honestly and fairly and to comply with The Texas Real Estate License Act. A broker who acts as an intermediary in a transaction: (1) shall treat all parties honestly; (2) may not disclose that the owner will accept a price less than the asking price unless authorized in writing to do so by the owner; (3) may not disclose that the buyer will pay a price greater than the price submitted in a written offer unless authorized in writing to do so by the buyer; and (4) may not disclose any confidential information or any information that a party specifically instructs the broker in writing not to disclose unless authorized in writing to disclose the information or required to do so by The Texas Real Estate License Act or a court order or if the information materially relates to the condition of the property. With the parties' consent, a broker acting as an intermediary between the parties may appoint a person who is licensed under The Texas Real Estate License Act and associated with the broker to communicate with and carry out instructions of one party and another person who is licensed under that Act and associated with the broker to communicate with and carry out instructions of the other party. "If you choose to have a broker represent you, you should enter into a written agreement with the broker that clearly establishes the broker's obligations and your obligations. The agreement should state how and by whom the broker will be paid. You have the right to choose the type of representation, if any, you wish to receive. Your payment of a fee to a broker does not necessarily establish that the broker represents you. If you have any questions regarding the duties and responsibilities of the broker, you should resolve those questions before proceeding."

Agent

A real estate licensee that is acting in agency relationship on behalf of a client. This is usually evidenced in the form of an employment agreement such as a listing agreement. any individual acting as a representative for another individual in dealings with a third party. The agent is authorized by the person he or she represents to act on that person's behalf. In the context of real estate transactions, the agent is a licensed representative of the seller, buyer, landlord, or tenant and facilitates the sale, purchase, exchange or lease of real property for others. In the real estate industry, salespeople are often generically referred to as agents (as in the phrase "real estate agent") and indeed often act as agents for their clients. We should remember, though, that there is a distinction between this generic term and the legal concept of agency: only certain individuals may legally act as agents in a real estate transaction. Brokers are the only Texas real estate professionals who can officially enter into an agency relationship with a buyer or seller. Any salesperson involved in a transaction then represents the broker - the salesperson cannot act as an agent. This is explained further in later lessons.

Agency

A relationship in which one person, the agent, is authorized to represent the interests of another, the client, in business dealings with third parties. the fiduciary relationship between one individual (the principal) and another (the agent). In this relationship, the agent acts on behalf of the principal to negotiate with a third individual (the third party), subject to the principal's control and consent. This relationship is fiduciary because it is based on the principal's trust and confidence that the agent will act dutifully and responsibly as his or her representative. A fiduciary relationship is based on the law of agency that dictates the duties owed to the principal and third party by the agent. Agency relationships are considered to be fiduciary relationships, which means that the principal entrusts certain powers or authority to the agent with the understanding that the agent will act competently on the principal's behalf. Because of the trust and confidence placed in the agent in a fiduciary relationship, the law has established that an agent has certain obligations to the principal, called "fiduciary duties." In addition, the principal has duties to the agent that are, in effect, obligations to behave in a way that makes it easier for the agent to provide competent service.

Termination of relationship by notice from either party to the other or unilateral termination

An agency relationship can be terminated unilaterally by either the client or the broker. However, this termination would not affect the contractual rights set forth in any employment agreement. For example, if a seller decides to list with a broker while his or her property is still listed exclusively with a different broker, he or she can terminate the listing with the original listing broker but would likely owe commissions to both brokers if there is a resultant sale with the new broker. The laws and REALTOR® Code of Ethics do require that this be disclosed to the sellers by the new broker. The prevailing sentiment is that any termination should be done mutually and done so in writing.

REALTORS® Code of Ethics provisions on representation

Article 1: states that the REALTOR® shall promote and protect the interests of their client. Under common law this would also mean that the REALTOR® has the obligation to do this even above his or her own interests in the transaction. SOP 1-9 states that the REALTOR® is obligated to preserve confidential information provided in the course of any agency relationship, even after the agency relationship terminates without the consent of the client. The agent's vow of confidentiality under his or her fiduciary duty continues forever. Article 16 states that an agent cannot engage in any practice or take any action inconsistent with exclusive representation or exclusive brokerage relationship agreements that other REALTORS® have with their clients. In other words, once the client reaches an exclusive agreement with a broker to buy or sell a property, competition ceases and cooperation begins. It is important that a REATLOR® not interfere with an exclusive relationship or agreement. Most importantly a REALTOR® is prohibited from soliciting prospects who are subject to current exclusive listings or exclusive buyer/tenant relationships or agreements. SOP 16-6 states that if an agent is contacted by the client of another REALTOR® and the client initiates the discussion, the agent may discuss the terms upon which the agent may enter into an exclusive relationship that takes effect when the current exclusive relationship expires. SOP's 16-7 and 16-8 state that the fact that a prospect retained a REALTOR® as an exclusive representative or exclusive broker in one or more past transactions does not preclude other REALTORS® from seeking such prospect's future business, or from entering into a similar agreement after the expiration of the prior agreement. SOP 16-9 states that the REALTOR® needs to make reasonable efforts to determine if the prospect is subject to a current, valid exclusive agreement to provide the same type of real estate service before entering into a representation agreement with the prospect. For example, if the REALTOR® is looking to list a property exclusively, he or she should determine is the property is subject to any other listing before taking the exclusive listing. Texas Principles of Real Estate I Page 36 of 102 SOP 16-13 states that all dealings with a client who is subject to an exclusive agreement shall be carried on with the client's representative or broker, except with the consent of the client's representative or broker or except where such dealings are initiated by the client. This standard of practice also provides that before providing substantive services such as writing an offer or preparing a competitive market analysis (CMA), a REALTOR® should ask the prospects whether they are subject to any exclusive representation agreement. A REALTOR® is prohibited from knowingly providing substantive services concerning a prospective transaction to prospects who are parties to exclusive representation agreements, except with the consent of the prospects' exclusive representatives or at the direction of the prospects.

Duty of Fidelity

Chapter 531 (Rule 531.1, "Fidelity") of TREC obligation to be true to others by keeping our promises to them Promises: (1) that the primary duty of the real estate agent is to represent the interests of the agent's client, and the agent's position, in this respect, should be clear to all parties concerned in a real estate transaction; that, however, the agent, in performing duties to the client, shall treat other parties to a transaction fairly; (2) that the real estate agent be faithful and observant to trust placed in the agent, and be scrupulous and meticulous in performing the agent's functions; (3) that the real estate agent place no personal interest above that of the agent's client. Key element: confidentiality

Duty of Care

Chapter 531 (Rule 531.2, "Integrity") of TREC A real estate broker or salesperson has a special obligation to exercise integrity in the discharge of the licensee's responsibilities, including employment of prudence and caution so as to avoid misrepresentation, in any wise, by acts of commission or omission. licensee must conduct real estate transactions with care and diligence, ensuring that he or she represents the principal to the best of his or her abilities while acting in the principal's best interests. With this understanding in place, the agent can be held professionally liable for any loss the principal suffers as a result of the agent's negligence. Agents must protect their clients from foreseeable harm.

Principal

Client The agent derives his or her power and authority from another individual - the transfer of this authority is what allows him or her to take on the role of agent. The principal is the individual who authorizes another person to act on his or her behalf. This person may also be referred to as the client. In real estate, the principal engages the professional advice and other services of his or her agent to aid in the sale, purchase, exchange or lease of real property. The principal may be a seller, a prospective buyer, an owner wanting to lease his or her property to another person, or an individual seeking property to rent.

Fiduciary Duties

Common law also provides that the licensee owes the following fiduciary duties to his or her client in addition to the ministerial duties identified previously: 1. Confidentiality: Agents must keep confidential whatever the client confides in them unless the item is a material fact. 2. Accounting: The agent has a duty to be able to account for all monies and other property contributed by the client and how it is allocated in the transaction. 3. Reasonable care and diligence: As with the ministerial duty of reasonable skill and care, the agent does owe a duty to provide at least the standard of care to the client but also has a greater obligation to make sure that the client has the opportunity to perform the "due diligence" necessary to make a completely informed decision that would favor their interests in the transaction. 4. Loyalty (Undivided): An agent has a duty to protect and promote his or her client's interests in the transaction even above the agent's own interests. 5. Obedience: An agent must obey all lawful instructions of the client and to not exceed the authority given them by the client. 6. Accountability: An agent's representations to a client, whether they are written or verbal, can be relied upon by the client. This was upheld in a case in Arizona called Darner Motor Co. v. Universal Underwriters where Darner Motor Company had the right to rely on the verbal representations of the Universal insurance agent. 7. Disclosure (Full): An agent has the duty to fully disclose to clients anything that could benefit the client's negotiating position with the other party in the transaction or pertinent to the property or transaction. TRELA also requires that a licensee disclose anything that could materially or adversely affects the consideration to be paid by any party in the transaction to any party in the transaction in writing before completion of the transaction. Some items identified under this section include: 1. Material defects 2. Liens and/or encumbrances 3. Possible inability of seller or lessor to complete the transaction 4. Possible inability of buyer or lessee to complete the transaction TRELA also provides that a licensee shall: 1. perform all acts required by the holding of a license. 2. not delay performance, either intentionally or through neglect. 3. shall not accept compensation from or represent more than one party to a transaction without the prior written consent of all parties. 4. the services that a salesperson or broker provides to a client or third party shall conform to the standards of practice and competence recognized in the professional community for the specific real estate discipline in which the salesperson or broker engages. 5. A salesperson or broker shall not undertake to provide professional services concerning a type or property or service that is outside the salesperson's or broker's field of competence without engaging the assistance of a person who is competent to provide those services, unless the salesperson's or broker's lack of expertise is first disclosed to the client in writing and the client subsequently employs the salesperson or broker. 6. a salesperson or broker shall exercise reasonable care in ensuring that the salesperson or broker obtains information material to a client's interests and relevant to the contemplated transaction and accurately communicates the information to the client. 7. A salesperson or broker is not required to have expertise in subject areas other than those required to obtain the salesperson's or broker's license. For example, if the seller states that the roof is in excellent condition and only an inspector would have the expertise to determine otherwise, the broker should have no liability for merely passing along the seller's representation. 8. A salesperson or broker shall take reasonable steps to assist a client in confirming the accuracy of information relevant to the transaction. For example, if the seller states that the roof is new and in excellent condition, but the agent has reason to believe that the roof is old and in a state of disrepair, evidenced by broken shingles and obvious water leaks, the agent should point out these circumstances to the buyer/client and recommend that the buyer obtain a professional roof inspection. 9. A related policy states that a licensee is a real estate professional with a fiduciary duty to his or her client and to act in the client's best interests even above his or her own interests. 10. Reasonable care or competence may include recommending that a client seek professional or technical advice when the matter is beyond the expertise of the agent. For example, in the previous scenario, if the client is concerned about the roof's condition, the agent should advise the client to have the roof inspected by a roofing expert. 11. Licensees are expected to take reasonable steps to assist their clients in confirming or verifying information under circumstances in which a reasonably prudent real estate professional has reason to question the accuracy of the information being provided in a transaction, or where the client has questioned the accuracy of the information. These considerations are intended to provide a reasonable standard for licensees to follow in complying with their duties and obligations under the statute or rule. These are also consistent with the obligations imposed by the National Association of REALTORS® Code of Ethics in Article 2 which states: "REALTORS® shall avoid exaggeration, misrepresentation or concealment of material facts relating to the property or the transaction. REALTORS® shall not, however, be obligated to discover latent defects in the property, to advise on matters outside of the scope of their real estate license, or to disclose facts which are confidential under the scope of agency or non-agency relationships as defined by state law."

Mutual agreement of the parties or bilateral termination

If the agent and the client elect to mutually terminate their agreement, this would also serve to terminate such a relationship. This would require the mutual consent of both parties (broker and client) and should be done in writing in the form of a "mutual cancellation."

Expiration of the term agreed upon by the parties

If the time period established in the representation agreement expires, whether or not the contemplated act has been consummated, this also would terminate the relationship. However, it would be important to understand that while the relationship has itself expired, there are residual obligations that will succeed the relationship's termination. The agent would still owe confidentiality to the client even after the agreement expires. For example, if an agent has a listing that expires, the agent would still be bound to keep any information confided in them by the client, that is not a material fact in any further contemplated transaction, confidential. This obligation is eternal in its duration.

Imputed Notice

In similar fashion to imputed knowledge, imputed notice provides that once a client's agent has been notified of any action, it is assumed that the client has also been notified. For example, if an agent who represents a buyer is informed by the listing agent of the seller's acceptance of an offer, it is assumed that the buyers have also been notified. If the agent should delay notifying the buyer client of this acceptance and the buyer has decided to withdraw the offer after the acceptance has been communicated to their agent, they will still be bound to the agreement. They were obligated once their agent was notified.

Texas Disclosure Guidelines

Licensees have the general duty to disclose agency relationships to all parties involved in a transaction. There are actually two requirements to disclosing agency: 1. Tell everyone (agents, customers and prospects) whom you represent at first contact, if you are representing anyone. This disclosure is required at open houses. This disclosure can be oral or in writing. 2. Give the written statement (IABS) at the first substantive discussion about a specific property. Once substantive dialogue occurs between an agent and a potential client or a third party, the agent must give the person a written statement that outlines Texas agency law. Sec. 1101.558(a) of the Texas License Law defines substantive dialogue as follows: A meeting or written communication that involves a substantive discussion relating to specific real property. Substantive dialogue does not include: 1. meetings that occur at open houses. 2. meetings or communications that occur after the parties have signed a contract to sell, buy or lease the property that is the subject of the meeting or communication. So, once an agent has engaged in this kind of discussion with a client or potential client - outside the context of an open house and before the signing of a final contract - that agent is obligated to provide that person with a statement clarifying Texas agency law. There are situations in which the agent need not supply the client with this statement. According to Sec. 1101.558(c) of the Texas License Law, the agent does not need to provide a written agency disclosure statement if: • The proposed transaction is for a residential lease for not more than one year and a sale is not being considered; or • The license holder meets with a party who is represented by another license holder. We provide here a sample statement of agency disclosure created by the Texas Real Estate Commission (TREC). TREC does not require that licensees print and use this specific form; however, any alternative form must use the same wording; the wording is required by TRELA; the only alterations the licensee may make to this language are the substitution of the term "buyer" for "tenant" and "seller" for "landlord," as appropriate. This statement must be printed in no smaller than 10-point type; though not legally obligatory, a font larger than 10-point will make the statement easier for people to read. The client, potential client or third party must sign or initial this document to show that he or she has read and understands it; signing the statement does not in any way bind the party to the agent.

Becoming a Broker

Once brokers have obtained their active licenses, they can begin their brokerage business working with and representing clients. The broker must comply with the proper handling of the license in accordance with TRELA and comply with the laws of agency (client relationships). As a broker in the real estate brokerage business, the broker may establish the association with or sponsor other license holders to perform the practices of real estate under his or her license. Remember, in order for a salesperson license holder to legally practice he or she must be associated or sponsored by a broker. It is that broker who is ultimately responsible for salespersons' actions and the true representative of the client when hired for the purposes of conducting real estate business. Brokers in Texas are highly regulated by TRELA. They must provide their associated agents with a policy manual, ascertain the agents are well trained and keep their licenses current, and keep them informed of any changes in the License Act or the Rules of the Commission. If an agent violates the License Act, it is quite likely the broker may be found guilty by TREC of not supervising sales agent properly. As a broker operates a real estate brokerage, he or she may be hired by buyers, sellers, landlords, and tenants to represent them in the sale, purchase, or lease of real property. Since a broker can represent any or all of the parties to a real estate transaction, it is extremely important that compliance with the law of agency and proper disclosure of client representation is adhered to. It should be clear to all parties whom the agent is representing. When a broker represents both sides (buyer and seller or landlord and tenant) of a real estate transaction, he or she is acting as an intermediary. There are limitations to providing advice and opinions in some intermediary representation relationships as well as disclosure and written consent requirements. A license holder is required to treat all parties fairly and honestly, regardless of representation.

TRELA (Texas Real Estate License Act) Sec. 1101.558 discusses...

REPRESENTATION DISCLOSURE (a) substantive dialogue: a meeting or written communication that involves a substantive discussion relating to specific real property. The term does not include: (1) a meeting that occurs at a property that is held open for any prospective buyer or tenant; or (2) a meeting or written communication that occurs after the parties to a real estate transaction have signed a contract to sell, buy, or lease the real property concerned. (b) A license holder who represents a party in a proposed real estate transaction shall disclose, orally or in writing, that representation at the time of the license holder's first contact with: (1) another party to the transaction; or (2) another license holder who represents another party to the transaction. (c) A license holder shall provide to a party to a real estate transaction at the time of the first substantive dialogue with the party the written statement prescribed by Subsection (d) unless: (1) the proposed transaction is for a residential lease for not more than one year and a sale is not being considered; or (2) the license holder meets with a party who is represented by another license holder. (d) The written statement required by Subsection (c) must be printed in a format that uses at least 10-point type and read as follows: "Before working with a real estate broker, you should know that the duties of a broker depend on whom the broker represents. If you are a prospective seller or landlord (owner) or a prospective buyer or tenant (buyer), you should know that the broker who lists the property for sale or lease is the owner's agent. A broker who acts as a subagent represents the owner in cooperation with the listing broker. A broker who acts as a buyer's agent represents the buyer. A broker may act as an intermediary between the parties if the parties consent in writing. A broker can assist you in locating a property, preparing a contract or lease, or obtaining financing without representing you. A broker is obligated by law to treat you honestly. (e) The license holder may substitute "buyer" for "tenant" and "seller" for "landlord" as appropriate in the written statement prescribed by Subsection (d).

Duty to Disclose Material Facts

The agent must inform the third party of any material facts that he or she knows about the property. A material fact in a real estate transaction is any fact that is significant or essential to the transaction - that is, any piece of information that could reasonably be expected to influence a prudent individual's decisions regarding the transaction. This duty requires the agent to disclose latent, or hidden, defects in the property that may not be identified in an ordinary inspection, but which could alter the customer's decision regarding the property. EXAMPLE: If the seller is aware that the fence surrounding his listed property extends beyond the designated property boundaries and that this may lead to problems with the owners of the adjoining property, then he needs to inform potential buyers of this fact as it would probably be difficult for a buyer to discover alone. The agent must disclose this information to the prospective buyer; otherwise, the agent is intentionally concealing important information that could very likely impact the third party's decision. Texas Real Estate License Law identifies particular pieces of information that are not properly considered material facts. Under this law, a licensee is not required to inquire about, disclose or release information relating to whether: - a previous or current occupant of real property had, may have had, has or may have AIDS, an HIV-related illness, or an HIV infection as defined by the Centers for Disease Control and Prevention of the United States Public Health Service; - or a death occurred on a property by natural causes, suicide, or accident unrelated to the condition of the property. (Sec. 1101.556)

The Agency Relationship

The agent works for the principal and works with, but not for, the third party The third party negotiates with the principal through the agent. In these negotiations, the agent is obligated to represent the principal's interests; it is not the agent's task to look out for or act on behalf of the third party. The third party should have an agent of his or her own, whose job it is to act in the third party's best interest. For example, a seller's primary interest might be to get the full purchase price for his or her property. A broker representing that seller should attempt to get all prospective buyers to agree to the full price, without concern for what price is best or most reasonable for those prospective buyers. The seller's agent thus cannot do things such as helping a prospective buyer to find a way to pay less than the price the seller wants. In doing so, the agent would not be acting in his or her client's interests. Of course, an agent cannot completely disregard all of the third party's concerns. He or she has certain ethical and legal obligations to the third party, such as the obligation not to misrepresent a property. Third parties are entitled to fairness, honesty and full disclosure of material facts about the property.

In TRELA Sec. 1101.558 (d), If the broker represents the BUYER

The broker becomes the buyer's agent by entering into an agreement to represent the buyer, usually through a written buyer representation agreement. A buyer's agent can assist the owner but does not represent the owner and must place the interests of the buyer first. The owner should not tell a buyer's agent anything the owner would not want the buyer to know because a buyer's agent must disclose to the buyer any material information known to the agent.

In TRELA Sec. 1101.558 (d), If the broker represents the OWNER

The broker becomes the owner's agent by entering into an agreement with the owner, usually through a written listing agreement, or by agreeing to act as a subagent by accepting an offer of sub-agency from the listing broker. A subagent may work in a different real estate office. A listing broker or subagent can assist the buyer but does not represent the buyer and must place the interests of the owner first. The buyer should not tell the owner's agent anything the buyer would not want the owner to know because an owner's agent must disclose to the owner any material information known to the agent.

Customer/Third Party

The consumer or agent who receives information, services, or benefits but has no agency relationship with the licensee or licensee's firm.

Client

The consumer who has an agency relationship with the licensee and/or the licensee's firm.

Ministerial Duties

The duties of the Division of Real Estate that involve recordkeeping. They include: 1. Honesty 2. Disclosure of material facts: Anything deemed material in Texas is addressed by TRELA. 3. Accounting: In the ministerial context, this means making sure that all parties have legible and signed copies of all transactions documents prior to the closing of the transaction. 4. Reasonable skill and care: An agent has a duty to provide the reasonable standard of care of the real estate industry to all parties in the transaction. 5. Fairness: The NAR purged the word "fairness" from the REALTOR® Code of Ethics back in 1993 with the prevailing sentiment that the term was ambiguous

Duty to Compensate the Agent

The principal has a duty to compensate the agent for his or her expertise, as laid out in the terms of the contract. The principal must pay the agreed-upon commission to the agent when the agent completes his or her specified duties, unless all parties agree to another arrangement. In the real estate industry, any party may pay the agent's commission or fees, as long as full disclosure is made to all parties - that is, it is not the case that the principal is the only party permitted to pay the agent. If there is no other arrangement, compensation is the principal's duty. This point will be discussed in detail later in the lesson. An agent can agree to work for no compensation, and in these cases, the principal has no duty to compensate the agent. This kind of agency agreement creates a relationship called gratuitous agency. Even though no payment changes hands, the agent must still honor all of the duties of an agency relationship and the principal must honor his or her duties as well.

Duty to Provide Information

The principal has a duty to provide accurate responses to the agent's requests for information; he or she must ensure that the agent and third party can rely upon his or her precision and truthfulness. The agent is usually not held responsible for any false statements made by the principal unless the agent had reason to suspect that the statements were false.

Duty of Availability

The principal must make an effort to be available for all activities related to the real estate transaction, assuming requests for his or her presence are reasonable and made in timely fashion. This includes being available to show or view a property, and being available to consider offers and notices within a realistic amount of time, and in a reasonable place and manner.

Buyer's Agent

This agent acts as a broker for the buyer only. This is most often true even if this agent is compensated by the seller or seller's broker. This agent does not act as an agent for the seller and owes a fiduciary duty to the buyer in addition to ministerial duties.

Seller's Agent

This agent acts as broker for the seller only and normally under a listing agreement. A listing agreement is an employment agreement and any agreement identified as a "listing" is considered as such. The agent would therefore have a fiduciary duty to the seller in addition to ministerial duties, which are owed to all parties by the agent.

Sub-agent

This is an agent of a person who is already acting as an agent for a principal. In essence, this is "an agent of an agent." They are empowered and authorized to act on behalf of an agent. The broker is normally the agent who provides this authorization. The individual licensees are sub-agents of the broker; therefore they are sub-agents of all of the clients of the firm. ——————————— Cooperating brokers used to be sub-agents of the seller. From 1913 until 1993 the National Association of REALTORS® (NAR) mandated that all brokers (both listing and selling) represent the seller as a client and work with the buyer as a customer. This was achieved by requiring that any multiple listing service (MLS) working in conjunction with any REALTOR® association mandate that any listing broker was to make an automatic unilateral offering of sub-agency to any cooperating (selling) broker in transactions. Since this offering was automatic, the only way that a sub-agency would have not been created would be when the selling broker would have rejected this offer from the listing broker. Since the selling broker was being compensated through the listing broker, this almost never happened. For many years the prevailing sentiment was that this created a very unnatural relationship between the selling broker and the seller as many selling brokers acted as if they represented the buyer when their obligation was to advocate for the seller. It also created a situation where the seller and listing broker had vicarious liability for the actions of the selling broker whether they knew about them or not. This was because the listing broker employed the selling broker through this unilateral offering. Many felt this created a very precarious situation for the listing brokers and sellers. This system was finally challenged successfully by some local associations in California in the 1980's and the NAR changed its position on this issue in 1993. This is when the NAR allowed listing brokers to compensate and cooperate with selling brokers who were agents for the buyers and made the offering of sub-agency optional. Very few, if any, listing brokers offer sub- agency today and instead cooperate with and compensate buyer's agents. Sub-agency still exists today in practice but only within the firm where the broker for that firm employs the sub-agents under the common law of agency.

Express Agency

This is created by mutual agreement between the client and the agent. It can be either created by written or oral agreement but is most often more advantageous if it is done in writing. In most cases agency is created with sellers by agents with a listing agreement. With buyers, it is most often created orally although many agents do use buyer/broker employment agreements.

Completion of performance

When the contemplated act is completed whether it is to sell a property for a seller or assist a buyer in the purchase of a property, this would constitute the completion of the act. The completion would occur when the contemplated transaction closes.

Broker A was advertising his brokerage services in the newspaper while his license was inactive and being renewed. Broker A has held his license for five years. Is Broker A violating any TREC rules by continuing to advertise his brokerage services during the inactive period?

YES. According to Section 1101.351 (b) of the Real Estate License Act, no individual may sell, lease, advertise, or exchange real estate services without an active license. If the licensee is a salesperson, then he or she may only sell, lease, advertise, or exchange real estate while acting under his or her sponsoring broker. If that sponsoring broker's license status is "inactive," then all agents must stop providing real estate services until the broker renews his license.

Implied Agency

an agency that occurs when a principal and an agent do not expressly create an agency, but it is inferred from the conduct of the parties Implied agency may be created by actions and or words and is often accidental or unintentional. Like any agency relationship, it does require the consent of the client. However, this consent can happen by any number of ways that often are not obvious. An agent's actions that may lead a consumer to believe that the agent is acting in the client's best interests may be approved by the consumer simply by the consumer not objecting to the agent's representations to them. Agents should take special care to not act beyond their intentions at the initial interaction with the prospect. Formalities aren't required to create agency relationships. In creating an agency relationship, written agreements, employment agreements or compensation are not necessary elements. Although these are common ingredients in an agency representation or employment agreement, they are not essential for the establishment of the relationship. Either knowing or being related to a party to a transaction does not necessarily, in itself, create an agency relationship. A close relation or even a friend can be integral to creating the relationship but, again, are not essential. The receipt of confidential information from a party also, on its own, does not establish such a relationship. Each of these would depend on the context in which these events or situations would occur. It is important to remember that once created, whether express or implied, the agency relationship will impose on the broker fiduciary duties to the client.

Prospect

consumer who is not subject to a representation relationship with the licensee or licensee's firm.

Duty to Disclose Facts

central to an agent's role in a fiduciary relationship. Just as it is an agent's duty to keep a principal's personal information confidential, an agent must also disclose any information about the property or customer that may affect a principal's decisions regarding the outcome of the real estate transaction. The agent's duty of disclosure differs slightly depending upon whether the agent is acting on behalf of the buyer or on behalf of the seller. Providing proper factual disclosure is one of the most important tasks of the real estate licensee. Because of its ambiguous nature, disclosure often involves conflicting opinions. One individual may consider a particular fact to be nonessential information concerning a property, while another person may believe that fact to be extremely important. For this reason, the Texas legislature periodically revisits disclosure issues, striving to clarify agency obligations

Common law

law formed or influenced by opinions of the courts as opposed to statutes It is also important to note once again, that under the common law of agency, there is one (1) agent per employing broker

hold harmless clause

releasing the agent from all damages except those resulting from the agent's own negligence or fraud

Duty of Accounting

requires agent to account to the principal for all money and property of the principal that comes into the agent's possession If an agent holds any funds for the principal or the third party, then the status of these funds must be available to those parties at all times. The details of any financial transactions should be accurately recorded; proof of any deposits or exchanges of funds should be issued to the parties involved. In Texas, most licensees prefer to have an independent entity, usually the title company, hold such funds in an escrow account. If a licensee elects to hold this money in trust for others, then he or she must set up a separate account for this purpose. Texas License Law forbids commingling (i.e., mixing) these funds with other funds in the licensee's personal or business accounts. Furthermore, Texas License Law requires these funds to be deposited into the escrow or separate account within a reasonable time. Agents (and any salespeople acting on their behalf) cannot wait any longer than the close of the second business day after the signing of a contract to make these deposits. The money will then be held in the escrow or separate account until closing, at which time the agent must release the funds to the appropriate party. In the event that the transaction does not close, the money can only be released with the written consent of all parties involved.

Duty of Obedience

requires employee to follow the reasonable orders and rules of the employer; requires agent to carefully obey the instructions of the principal A fiduciary relationship requires that the agent act in good faith at all times, making a conscious effort to obey the principal's instructions as set forth in the contract. This duty does not apply, however, if the principal's instructions are illegal or unethical in any way. For example, if an owner tells his or her broker that he or she will only sell the property to a third party of a particular race, the agent has no duty to obey this instruction. He or she should instead explain that he or she cannot carry out this request because it violates fair housing law. This example is not a matter of deciding whether breaking the law is in the client's interest. It is not the agent's task to determine a client's interests for the client; that is a decision that the principal must make on his or her own. An agent might provide information that aids a client in choosing his or her goals, or an agent might try to persuade a principal that a certain course of action is an unwise choice. It is never up to the broker to determine - independently - what a client's interests actually are. If an agent makes this kind of determination and acts on it without consulting the client, that agent runs the risk of acting against what the client believes to be in his or her best interest.

Duty of Indemnification

requires principle to compensate the agent for losses that occur on behalf of the agency In addition to providing compensation, the principal has a responsibility to reimburse the agent for any financial losses incurred while carrying out the real estate transaction (beyond the cost of promotional efforts, which are the agent's responsibility). This is considered a "hold harmless" clause, releasing the agent from all damages except those resulting from the agent's own negligence or fraud.