Chapter 5: Unit 1 - Agency Law (Notes)

Principal's Duties

- Availability: In a special agency, the power and decision-making authority of the agent are limited. Therefore, the principal must be available for consultation, direction, and decision-making. Otherwise the agent cannot complete the job. - Information: The principal must provide the agent with a sufficient amount of information to complete the desired activity. This may include property data, financial data, and the client's timing requirements. - Compensation: an agreement includes a provision for compensating the agent and the agent performs in accordance with the agreement, the client is obligated to compensate the agent. As we will discuss later, however, the agency relationship does not necessarily include compensation

Client

A client is the principal.

Customer

A customer is the third party with whom the agent deals when working on behalf of the principal.

Implied Agency (Forms of Agency)

A written agreement is not necessary to create an agency relationship - the relationship can be implied. This relationship is formed when the actions of the parties indicate that they have mutually consented to an agency. In fact, the persons involved may not have consciously planned to form an agency relationship. However, their actions may unintentionally, inadvertently or accidentally form the relationship. (For example, Buyer Mary calls salesperson Jim to show her a home. She assumes then that he is her agent. In reality, Jim is the listing agent for the home he showed. An implied agency could be created if Jim does not correct Mary's assumption that he is now her agent. And in this example, an unintended dual agency relationship could be formed - causing conflict for all parties.

Accountability (Fiduciary Duties)

Accountability is an important duty owed to clients. An agent must be able to account for all monies, documents and other property he or she receives from the principal. Brokers must also give copies of documents to everyone who is affected by them and retain these documents for at least three years.

Fraud

Active Fraud Active fraud is an intentional misrepresentation of a material fact for the purpose of gaining an unfair or dishonest advantage over another person. This results in an injury to the person who is relying on the information (a buyer asks a question about termites and the seller produces a falsified termite report.) Passive Fraud Passive fraud is an intentional nondisclosure of a material fact. This can happen if a person intentionally fails to disclose a fact or actively attempts to hide the fact. (When the buyer asks the seller about termites, the seller says there are none or that he doesn't know for sure when in fact he does know they are present.)

Agency

Agency is the fiduciary relationship between the agent and the principal.

Duties to Customers

Agents do have certain obligations to customers, even though they do not represent them. In general, they owe a third party: - Honesty and fair dealing - Reasonable care and skill - Proper disclosure An agent has a duty to deal fairly and honestly with a customer. Thus, an agent may not deceive, defraud, or otherwise take advantage of a customer. Reasonable care and skill means that an agent will be held to the standards of knowledge, expertise, and ethics that are commonly maintained by other agents in the area. Proper disclosure primarily concerns disclosure of agency, property condition, and environmental hazards. Note: Regarding Megan's Law, many state courts have said that brokers are not obligated to search state records to determine where convicted sex offenders live. Brokers who represent buyers, however, are advised to let clients know that the sex offender registry is available online for public inspection. An agent who fails to live up to prevailing standards may be held liable for negligence, fraud, or violation of state real estate license laws and regulations. Agents should be particularly careful about misrepresenting and offering inappropriate expert advice when working with customers.

Fiduciary Duties

An agency relationship imposes fiduciary duties on both the client and the agent, but mostly in the agent. These duties are both moral and ethical, but also legal - they are the law of agency. The duties that the agent owes his or her principal are: Care Obedience Accountability Loyalty Disclosure or Notice These are often referred to by the acronym COALD or COALN.

Creating Agency

An agency relationship is created when a person (buyer or seller, landlord or tenant) delegates to another person, the agent, the right to act on his or her behalf in business transactions with third parties (customers). Several principles govern that relationship. - Both parties must consent to the relationship. - Both parties must agree to form the relationship. - The relationship is fiduciary meaning the agent owes certain duties to the principal as we have previously discussed. An agency relationship can be created by either an oral or a written agreement between the principal and the agent. It can also be implied from either words or actions. Although agency can be created orally, it would be in the best interests of all concerned to have the relationship clearly defined with a written agreement. Providing a service to a customer does not in itself create an agency relationship. Agency is created by mutual consent of the principal and the agent. Three types of agency relationships exist. - Express agency - Implied agency - Agency ratification and estoppel (Ostensible agency)

Consequences

An agent can be liable for violating a duty to a client or customer. Since clients and customers rely on the expertise and actions of agents performing within the scope of their authority, regulatory agencies and courts aggressively enforce agency laws, standards, and regulations. - Violation of a duty owed to a client or customer could result in: - Rescission of the listing agreement (causing a loss of a potential commission) - Forfeiture of any compensation that may have already been earned - Disciplinary action by the state license law authorities, including license suspension or revocation - Suit for damages in court

Puffing

An agent can offer an opinion as long as he or she does so with no intention to be deceptive. The agent should clearly identify to the client what is fact and what is just an opinion. Exaggerated or superlative comments about a property's benefits are called puffing. For example, the statement "This home has the most efficient floor plan of any of the homes in this neighborhood" is puffing. The test for whether a statement is puffing or misrepresentation is based on whether a reasonable person would have relied on the statement to make a purchasing decision. (The statement "This apartment has a fantastic view," is an example of puffing because this is an opinion the buyer could assess for himself or herself. On the other hand, the statement "This apartment has a view of the lake," when in fact it faces the street, would be considered a misrepresentation.)

Client or Customer?

An agent is a person who is empowered by contract to represent the interests of a client, also known as the principal. The principal could be a seller, a buyer, a landlord, or a tenant. The agent represents the principal in dealings with third parties, who are known as customers. (Mary Jones asks Broker Jim to help her find her first home. Broker Jim takes Mary to see a home listed by Broker Sara. In this scenario, Broker Jim is Mary's agent, Mary is Broker Jim's client or principal, and the seller of the home listed by Broker Sara is the customer. Broker Jim has a fiduciary relationship with Mary, but not with Broker Sara's seller. Because of this relationship, Broker Jim owes a set of duties to Mary that he does not owe to the seller.)

Scope of Authority

An agent is authorized to perform only those activities that the principal permits. As we mentioned earlier, real estate agents are usually special or limited agents. Their scope of authority does not usually extend beyond the terms that are outlined in the listing agreement. A broker is authorized by the client to find a ready, willing and able buyer, but this authorization usually does not include authority to perform such actions as: Signing contracts for the seller Initialing changes to an offer Permitting early occupancy The authority granted to the broker is outlined in the listing agreement, which typically authorizes the broker to perform these actions: - Place a sign on the property - Advertise the property - Show the property - Cooperate with other brokers - Use MLS - Accept earnest money deposits Brokers are also often given authority to perform some tasks that are not explicitly spelled out in the agreement, but which are customary in order to accomplish the goal of the agreement - namely to find a buyer for the property. (Using a salesperson to hold an open house)

Disclosure (Fiduciary Duties)

An agent is bound to inform the client of all facts that might affect the client's interests in the transaction. This includes both the facts that the agent knows and those that the agent should have known. An agent is responsible for discovering anything that might be deemed important to his client in making an informed decision, whether or not they are favorable to the client's position. An agent could be held liable for damages if he or she failed to disclose such information. (a crack in a basement wall that the agent failed to notice. If the basement wall ultimately springs a leak, the agent could be held liable for failing to disclose a material fact if the court believes that the typical agent would have noticed the crack.) An agent for a seller has a duty to disclose such things as: - Purchase offers - Who the prospective purchasers are and if the agent has a relationship with them in any way - Ability of the purchaser to complete the transaction - Ability of the purchaser to offer a higher price - Purchaser's intention to resell the property for a profit An agent for the buyer has a duty to disclose such things as: - Deficiencies in the property - Any contract provision of financing terms that doesn't suit the buyer's interests - How long the property has been listed - Why the seller is selling There is no obligation to obtain or disclose information related to a customer's race, creed, color, religion, sex or national origin: anti-discrimination laws hold such information to be immaterial to the transaction. Some states have enacted laws requiring a seller to make a written disclosure about property condition to a prospective buyer. This seller disclosure may or may not relieve the agent of some liabilities for disclosure.

Agent

An agent is the person who is authorized to represent and act on the behalf of another person.

Brokerage

Bringing buyers and sellers together to assist them in the negotiations for the sale of a property. Brokerage firms can be owned by one licensed broker or can be owned by a partnership or corporation that has more than one licensed person. Most times, brokerage firms employ other licensees. Sellers enter into listing agreements with the brokerage firm; therefore the brokerage firm owns the listing agreements. When a client enters into a listing agreement with a brokerage firm, the broker is the agent of the client. The licensees that are affiliated with the brokerage firm are the agents of the broker and the subagents of the broker's clients. a broker is vicariously liable for a salesperson's wrongful actions only if "the broker had actual knowledge of such violation or retains the benefits, profits or proceeds of a transaction wrongfully negotiated by his salesperson or employee after notice of the salesperson's or employee's misconduct."

Fiduciary

Fiduciary is the relationship of trust or confidence between the agent and the principal.

Misrepresentation

Intentional Misrepresentation An agent may intentionally defraud a buyer by misrepresenting or concealing facts. While it is acceptable to promote the features of a property to a buyer or the virtues of a buyer to a seller, it is a fine line that divides promotion from misrepresentation. Silent misrepresentation, which is intentionally failing to reveal a material fact, is just as fraudulent as a false statement. Negligent Misrepresentation Negligent misrepresentation is usually the result of an agent giving information carelessly or failing to verify a fact before passing it to the buyer. An agent does not have to intentionally misrepresent a fact. The agent would be liable if he or she knows or should have known that the fact he or she is sharing is false. (agent Sam's buyer Paul has told Sam that he wants a home with a relatively new heating system. Sam shows Paul a home he likes and then tells Paul that the heating system is new (when in fact it's 20 years old). Paul buys the home and three months later the heating system fails. Agent Sam is liable because he either knew or should have known the age of the heating system.)

Obedience (Fiduciary Duties)

Obedience requires that the agent act in good faith and obey the principal's directions as outlined in the contract, as long as they are legal. (an agent may follow the principal's instructions stating that the home may not be shown on Sundays. However, an agent may not follow any directives that violate Fair Housing laws or that instruct the agent to conceal a defect in the property) If a directive is illegal and the agent cannot get the client to remove it from the contract, the agent should withdraw from the relationship.

Legal Implications - Notice

On the other hand, actual notice means that not only is the information available, but someone has been given the information and actually knows it. If the prospective buyer (or his or her agent) has searched the public record and inspected the property, that buyer has actual notice, also called direct knowledge. A third type of legal notice is known as imputed notice. This means that what an agent knows is binding on the principal because of the agency relationship they have entered into. (if the buyer's agent receives notice that the seller has accepted the buyer's offer, the buyer could not then withdraw the offer, even though the buyer does not yet have actual notice of the contract acceptance.)

Care (Fiduciary Duties)

Since the principal hires an agent because of his or her expertise in the field, the principal expects the agent to use that expertise on the principal's behalf. If the agent represents the seller, exercising care and skill includes: - Helping the seller set a realistic asking price - Discovering and disclosing facts that affect the seller - Presenting contracts properly - Marketing the property effectively - Helping the seller evaluate purchase offers If the agent represents the buyer, exercising care and skill includes: - Helping the buyer locate appropriate housing - Evaluating property values and property conditions - Determining financing alternatives - Presenting offers and counteroffers with the buyer's interests in mind If an agent fails to exert reasonable efforts to represent his client's interest, the agent could be found guilty of negligence in court. An agent is liable to the principal for any loss that results from carelessness or negligence.

Legal Implications of Agency

State licensing laws impose statutory requirements on licensees acting as agents, which obligate them to perform in ways that protect their client's interests in real estate transactions. Entering into an agency agreement is a legal action, which could make an agent legally liable if he or she violates the duties owed to the client. An agent has a responsibility to inform the client of any facts or information that could affect the client's position in a transaction

Compensation

The compensation or commission the broker will receive is usually spelled out in one of the following: Listing agreement Buyer's agency agreement Management agreement This commission can be computed in any of these ways. - Percentage of the transaction amount - Flat fee - Fee for service - Hourly rate A broker will earn compensation when that broker has actually completed the work he or she was hired to perform. Commission is usually paid after the transaction has been consummated. However, the commission is earned when the following activities have occurred. - The broker has produced a ready, willing and able buyer. - The buyer has signed an offer to purchase. - The seller has accepted the offer. - Both buyer and seller have received signed copies of the agreement. When a seller hires a broker, that broker produces a ready, willing and able buyer and the seller accepts an offer from that buyer, the seller has now become responsible for paying compensation to that broker. However, if for some reason the transaction does not complete, the seller may still be responsible for paying a commission to the broker. This can happen if the seller: - Changes his or her mind and refuses to sell - Has a spouse who won't sign the deed - Has a title with uncorrected defects - Commits fraud with regard to the transaction - Cannot deliver possession - Insists on terms that were not in the listing agreement - Mutually agrees with the buyer to cancel the sale What this means is that the broker is still entitled to receive the commission if the transaction does not complete due to the seller's default. In the same vein, if a buyer hires a broker to find a property and agrees to pay a commission to the broker, the broker will be entitled to receive that commission if he or she performs according to the terms of the contract, even if the buyer - Decides against making the purchase - Makes a direct purchase of a "for sale by owner" property - Chooses to purchase a property through another broker

Loyalty (Fiduciary Duties)

The duty of loyalty requires the agent to place the client's interests above those of all others, including his or her own. An agent must negotiate agreements without considering the amount of compensation he or she will receive. In addition, a licensee is required to disclose any personal interest he or she has in a property. Confidentiality If the agent represents the seller, he or she may not disclose without the seller's express permission such things as: - Client's willingness to accept an offer lower than asking price - Client's anxiousness to sell However, the agent must disclose material facts about the property. If the agent represents the buyer, he or she may not disclose without the buyer's express permission such things as: - Client's willingness to pay more than asking price - Client's need or desire to move quickly Note: The duty of confidentiality extends beyond the termination of the relationship. No personal information gained during the term of the agreement can ever be disclosed to another party. Confidential information must always remain confidential. An agent must exercise care in fulfilling this duty. If confidentiality conflicts with the agent's legal requirements to disclose material facts, the agent must inform the client of this obligation and make the required disclosures. If the agent and the client cannot resolve the conflict, the agent must withdraw from the relationship.

Constructive Notice

The legal presumption that information is available and can be obtained through due diligence (care and activity). This is also referred to as legal notice. A deed that is properly recorded in the public record serves as constructive notice to the world of a person's rights or interests. Taking physical possession of a property is also an example of giving constructive notice. (Because the information is readily available, a prospective buyer could investigate if the deed for the property he or she is attempting to purchase was properly recorded.)

Principal

The principal is the person who hires the agent and delegates to the agent the responsibility of representing the principal's interests.

Agency Ratification and Estoppel (Forms of Agency)

This agency relationship arises by the actions of the parties involved, rather than by a written agreement. (Charles is the owner of a vacant property he is selling himself. He knows that broker Hal is showing the property to prospective buyers without the authority to do so. If Charles doesn't stop Hal from doing the showings, the law considers that the prospective buyers have the right to believe that Hal is Charles' agent.)

Express Agency (Forms of Agency)

This most common way of creating an agency relationship is a written agreement in which the parties involved formally express the intention to form an agency relationship and they outline the terms and conditions of that agreement. A listing agreement is the common form of express written agency agreement between a seller and a broker, authorizing the broker to find a ready, willing and able buyer for the property. A buyer's agency agreement is the common form of express written agency agreement between a buyer and a broker, authorizing the broker to find a suitable property to purchase or rent.

Type of Agency

Universal Agent In a universal agency relationship, the principal empowers the agent to perform any and all actions that may be legally delegated to an agency representative. The instrument of authorization is the power of attorney. General Agent In a general agency, the principal delegates to the agent ongoing tasks and duties within a particular business or enterprise. Such delegation may include the authority to enter into contracts. Special Agent A special agency agreement, the principal delegates authority to conduct a specific activity, after which the agency relationship terminates. In most cases, the special agent may not bind the principal to a contract. In most instances, real estate brokerage is based on a special agency. The principal hires a licensed broker to procure a ready, willing, and able buyer or seller. When the objective is achieved, the relationship terminates, although certain fiduciary duties survive the relationship. An agency coupled with an interest is an agency relationship in which the agent has an interest in the property that is being sold. This type of agency cannot be revoked by the principal, nor is it terminated if the principal dies (a broker agrees to finance a condominium development if the developer agrees to give the broker the exclusive right to sell the finished condo units. Since the broker has a special interest in the transactions, the developer would not be able to revoke the listing agreement after the broker has provided the financing.)