Nature of Agency Relationships

Nature of Fiduciary Duties

A fiduciary is a person holding a position of trust and confidence by virtue of their representation of another (agent representing a principal). A fiduciary duty is. A duty imposed on a fiduciary by the common laws of agency. The common law imposes fiduciary duties on agents both during and after client representation. Unless the agent and the client agree otherwise in writing, the agent owes no further duties to a client after termination, expiration, or full performance of the brokerage relationship, except to: account for all moneys and property relating to the brokerage relationship; and to keep confidential all personal and financial information received from the client during the course of the brokerage relationship (or specific information that the client requested to be confidential), unless otherwise provided by law or the client consents in writing to disclosure.

Fiduciary

A position of trust and confidence, such as that between an agent and a principal. The common law imposes special fiduciary duties that the agent owes the client

Designated Agency

Agency relationship where a single broker represents both the buyer and the seller in the same real estate transaction. However, the broker appoints one salesperson to represent Client A and another salesperson to represent Client B. Each designated agent acts as a single agent of the assigned client, while both agents work for the same broker who is acting as a dual agents. In a This what, designated agency is closely associated with dual agency. Like dual agency, designated agency relationships must be properly disclosures to all parties under applicable state law.

Implied Agreement

Agency relationships may also be created by actions or statements of the parties that are short of an express agreement. If two peoples act as if an agency relationship exists, chances are that if called upon to make a decision,a court will rule than an agency relationship exists, even without a formal written agreement. Also known as ostensible agency, implied agencies may be unintended and may create conflicting duties (dual agency)

Implied Agreement: Estoppel

Agency relationships may also be established by estoppel. Judges apply estoppel on a case by case basis, which makes it difficult to predict. However, once applied, estoppel prevents one from asserting that there was no agency relationship. Estoppel often involve misleading conduct, or conduct that would otherwise reasonably lead a person to rely on a given set of assumptions (avoids unfairness when one party relies on the words or actions of another to his detriment) Ex: A does something (or says something) that leads B to believe that C is A's agent, working on A's behalf. If B relies on this information, then A creates an ostensible agency (one that appears to exist) and may become liable for the acts of his agent, C. That is, A may be estopped (prevented) from later trying to deny the agency relationship he created by virtue of his actions.

Ratification

Agency relationships may arise by ratification. To ratify means to approve, sanction, or validate. Through ratification, a principal may create an agency relationship where an agent performs for the principal without the principal's consent, but the principal subsequently approves or ratifies the agent's conduct. Ex: A broker performs a service for a buyer. It is an unauthorized service, but the buyer doe snot discourage the broker and later shows approval. This owner may owe the broker a commission, as a court could decide that an agency relationship was established by ratification

Single Agency

Agency representation where a. Broker represents only one party in a transaction- either the buyer or the seller, but not both. The party the agent represents is called the client and the other party to the transaction is called the customer.

General Agent

Agent authorized to perform any and all acts associated with a specific service (property manager). General agents have authority to legally obligate clients (may contract on client's behalf). Ex: a property manager authorized by an owner to manage a real estate project on a continuing basis is the general agent of the owner. As such, he is authorized to perform many different types of acts on behalf of the owner in order to carry out his management function. Likewise, a licensed salesperson is the general agent of his employing broker, which authorizes him to perform many different acts necessary to effectuate the sale of real estate.

Subagent

Agent of an agent who may perform for the client's benefit under primary agent's authority (requires client approval; salesperson is an example)

Disclosure of Representation: Designated Agency

Agent's state law disclosure and request for consent, where the agent (broker) proposes to represent both parties through different subagents (salespersons) in the same transaction

Disclosure of Representation: Dual Agency

Agent's state law disclosure request for consent, where the agent (broker) proposes to represent both parties in the same transaction

Disclosure of Representation: Disclosure of Agency

Agent's state law disclosure to customers regarding who the agent represents (often on mandatory forms)

Sellers and Buyers Agents

Agents owe fiduciary duties to buyer and seller clients

Customers and Clients

Agents owe most fiduciary duties to clients. Ther are some duties that an agent may owe to persons that they do not formally represent (customers), including: fair and honest treatment of buyers and sellers (not knowingly providing false information); disclosing material adverse facts regarding the physical condition of property that are actually known by the agent; ability to perform ministerial acts (unless prohibited by law or the brokerage relationship); representing multiple clients at different times; disclosure of brokerage relationship (as required by state law); and disclosing the intent to occupy (agent engaged by a buyer of residential property must disclose to a seller the buyer's intent to occupy the property as a principal residence)

Disclosure of Representation (General; Details Requirements in State Portion)

All states require that brokers and salespersons disclose who they represent to potential buyers and sellers. Making a proper and timely agency disclosure is an attempt to avoid misleading or confusing potential buyers and sellers. Proper and timely disclosure will also avoid creating an implied agency relationship, which would carry various duties and liabilities for the agent. States require various methods of disclosure and impose various substantive requirements for the disclosures. Generally, such disclosures must occur before the agent and the party have substantive discussions about the property or transaction, and before any confidential information is disclosed to the agent.

Sources of Agency Law

An agency relationship is either governed by the common law or by state laws which replace the common law. Always apply the common law, as explained in this section, when answering questions on the national portion of the exam.

Express Agreement

An agency relationship may be created by express agreement, which is clearly stated orally or in writing by the parties. Although listing agreements, which create an agency relationship by express agreement, may be oral, it is preferable to have a written listing signed by both parties. In a listing agreement, a broker (agent) and a client (seller) enter into an agency agreement for the purpose of selling real estate. While brokers may delegate agency authority to a salesperson, the underlying listing agreement is between the broker and the client- not the salesperson and the client. Brokerage relationships begin when a client engages an agent. However, compensation alone doe not create a brokerage relationship. Also, merely using common source information, such as a MLS, does not create a brokerage relationship. That is, an agent who represents a buyer can use an MLS to locate property without creating an agency relationship with a listing seller.

Common Source Information Company

Any person, firm, or corp that is a source, compiler, or supplier of information regarding real este for sale or lease and other data. Generally, common source information companies are known as multiple listing services (MLS), which are available to member firms on a fee or subscription bases.

Acts of the Parties

Because agency representation is a personal service, it may be terminated by either party at any time (courts will not enslave someone to perform). However, if the agency is terminated without agreement and before the stated expiration date, one party may be in breach of the agency relationship. The following acts of the parties can terminate an agency agreement, which may or may not create a claim for damages: mutual consent (no breach); completion of the objectives (no breach); renunciation (may result in breach); abandonment by the Agent (listing agent fails to make an attempt to sell- may result in a breach); or revocation by the client (may result in a breach)

Effect of Dual Agency on Duties: Nature of Agreement

Clients must consent to dual representation and acknowledge disclosure by their signatures. Proper consent usually includes various disclosures about the nature and risks of the dual agency relationship. Licensees may terminate an existing agency relationship (without liability) if the client refuses to consent to dual representation.

Effect of Dual Agency on Duties: Form of Disclosure

Disclosure must be written and may be made in a standard format described by VA law, or along with other disclosures as long as it is conspicuous (bold font, all caps, underlined, or in a box)

Effect of Dual Agency on Duties: Nature of Disclosure

Disclosure must indicate that the licensee cannot reveal any personal or financial information received from one party during the brokerage relationship to the other party (client need not request secrecy), and that the licensee cannot reveal any other information that a party requests to remain as confidential during the brokerage relationship to the other party (client must request secrecy). Most disclosures must be made before any confidential information is exchanged.

Effect of Dual Agency on Agent's Duties

Dual representation is permissible if properly disclosed, agreed to in writing, and allowed by the state.

Disclosure of Acting as Principal or other Conflict of Interest

Even if there is no advertisement, licensees who are interested parties to a real estate transaction must disclose the fact that they are licensed real estate professionals to the other party to the transaction. Virginia imposes this requirement to prevent licensees from taking unfair advantage of a less sophisticated buyer, seller, or lessor.

Traditional Common Law Agency Duties (OLD CAR): Loyalty

Fiduciary duty imposed on an agent during client representation. The duty of loyalty is the most fundamental duty owed by an agent to his client. The duty of loyalty requires that the agent promote the client's interest above all interest, including his own. The duty of loyalty is breached for example where a real estate agent profits to the disadvantage of the client.

Traditional Common Law Agency Duties (OLD CAR): Confidentiality

Fiduciary duty that prohibits an agent from disclosing information given to him by a client if such disclosure would be harmful to the client or the client's interest. Exceptions to the duty of confidentiality include the disclosure of material defects in property. The duty of confidentiality also prohibits agent from disclosing such things as: the client's financial status, whether the client is willing to pay or sell for more or less than the asking price, and whether the client has certain anxieties to buy or sell that may cause her to sell more or less quickly. For ex: real estate agents must not disclose the principal's lowest selling price. Duration of Duty: Information is guarded by the duty of confidentiality both during and after the agency concludes. However, the client may authorize disclosure. Source Information: Info is guarded by the duty of confidentiality regardless of its source. Conflicts with Customer Duties: Some state laws and the common law may trump the agent's duty of confidentiality to his or her client (disclosure of latent defects and material defects, for ex)

Traditional Common Law Agency Duties (OLD CAR): Accounting

Fiduciary duty that requires an agent (broker) to protect and account for all money and property held on behalf of the client. Commingling is the act of mixing or mingling entrusted client or customer funds with personal or business funds (deposit into same account), and conversion is the act of stealing (using, misappropriating) entrusted client or customer funds; both violate the duty of accounting. This includes any documents such as deeds, title policies, abstracts, or mortgages given to the agent by the client. Duration: The duty of accounting applies both during and after the agency concludes Escrow Accounts: Most states require real estate agents (brokers)- that hold money or documents on behalf of another until specified terms and conditions have been satisfied- place such items in an escrow account. Attorneys are often permitted to act as escrow agents, but his will vary by state. Generally, salespersons may not act as escrow agents, although they may accept money and documents for escrow on behalf of their employing broker (firm). Escrow accounts are regulated by state law and any agreement with/between the parties.

Traditional Common Law Agency Duties (OLD CAR): Reasonable Care and Due Diligence

Fiduciary duty that requires an agent to act as a competent professional and to make reasonable forts to keep the client informed Essentially, the agent must act with the same degree of competence that any reasonable agent would exercise under similar circumstances. This means that the agent diligently represents the client with all the customary tools and available information. However, while brokers and salespersons must be more knowledgeable than the average person, they are not required to have the knowledge of other professionals such as lawyers, engineers, or accountants. Agents should advise clients t seek the advice of such professionals whenever necessary in order to avoid a heightened standard of care or a violation of state law.

Traditional Common Law Agency Duties (OLD CAR): Disclosure

Fiduciary duty that requires an agent to disclose all material facts, rumors, and other information that might implicate the transaction to her client. The agent must only disclose material information that she knew or should have known. Material information includes: any offer, or the potential of any offer; any information suggesting that a buyer is willing to increase an offer; any arrangements concerning the sharing of compensation; financial conditions of the other party to the transaction; and sales of comparable properties

Traditional Common Law Agency Duties (OLD CAR): Obedience

Fiduciary duty that requires an agent to follow all lawful client instructions. An agent may propose alternative action, but the client must have final approval. However, an agent cannot carry out any illegal request; to do so would violate the duty of loyalty. Agents who cannot comply with lawful client instructions must withdraw from the agency relationship.

Dual Agency: Requires Written Consent

Generally, these disclosures must be written and signed by all parties in order to acknowledge receipt. Most disclosures must be made before any confidential information is exchanged.

Duties to Customers

Many courts recognize that agents owe limited fiduciary duties to customers, including: fair and honest treatment of buyers and sellers (not knowingly providing false information); disclosing material adverse facts regarding the physical condition of property which are actually known by the agent; ability to perform ministerial acts (unless prohibited by law or the brokerage relationship); representing multiple clients at different times; disclose brokerage relationship (as required by state law); and disclosing the intent to occupy (agent engaged by a buyer of residential property must disclose to a seller the buyer's intent to occupy the property as a principal residence). For ex, agents must not knowingly provide false info to a customer or must not fail to disclose all material adverse facts (including latent defects). Also, many state laws require agents to identify their clients to prospective buyers and to disclose any personal or professional interest in the transaction.

Disclosure of Representation: Material Facts

Most state license laws require brokers and other agents to disclose material facts that they know or should know to clients and customers. This obligation may be in addition to, or in lieu of, any state mandated Property Disclosure Forms. Failing to disclose material facts could be a violation of a state's license law or an instance of common law fraud.

Principal

One who has conferred authority on an agent to act on his behalf (may include authority to execute legal decisions)

Universal Agent

One who is authorized to perform a variety of acts necessary to effectuate a variety of transaction on behalf of another. Universal agency is a much broader grant of authority than either the special (authorized to complete a specific act) or general agent (authorized to complete any and all acts necessary for a specific transaction). An unlimited power of attorney is an example of universal agency. Courts do not view universal agency favorable due to the broad scope of power vested in the agent. Universal agents have authority to legally obligate clients.

Agent

One with authority to act on behalf of, and to obligate, another

Parties to an Agency Relationship

Parties to an agency relationship include the principal and the agent. A principal, also known as a client, is a person that hires an agent to a ct on his behalf in a legal transaction. An agent is a person that agrees to represent a. Client in a legal transaction. Generally, the parties in an agency relationship that was created to purchase or sell property are the client and the real estate broker (NOT the salesperson and client). A real estate salesperson working under he listing or buying broker may serve a a sub-agent of his or her broker. The broker is engaged on behalf of the client to procure a seller, buyer, option, tenant, or landlord that is ready, able, and willing to sell, buy, option, exchange, or rent real estate. Agency relationships can involve more than one client and more than one agent.

Special Agent

Person authorized to perform a particular act or transaction pursuant to an agency agreement. In most brokerage transactions, the broker acts as a special agent. Special agency limits the broker to certain activities specified in the listing agreement. Special agents cannot legally obligate clients (cannot accept an offer on the client's behalf) Ex: if the seller is the client, the broker can offer the property for sale, but cannot actually sell it. A special agent has authority to carry out one specific act only.

Independent Contractor

Person hired to perform a specific task, who uses independent discretion and judgment to select a method of completion. An independent contractor is not an agent, and is therefore not subject to the default fiduciary duties. Some states permit real estate brokers to represent clients as independent contractors (sometimes referred to as transaction brokerage). In such states, there must be a written contract with their client stating that the broker is acting as an independent contractor and not as an agent. The broker and her associated agents will only have the obligations agreed to by the parties in the contract- Agency Law will not otherwise apply. This type of limited representation usually allows a licensee to facilitate the transaction by assisting the buyer, the seller, or both in a real estate transaction. However, since the broker does not represent the client in a fiduciary capacity, the parties to the real estate transaction are giving up their rights to the undivided loyalty of the licensee.

Customer

Person who is not in a brokerage relationship with respect to a particular broker, but for whom a real estate agent may perform ministerial acts in a real estate transaction. Ex: buyer where the agent represents the seller

Client

Person, also known as a principal, who has an agency relationship with an agent. A buyer may be the client of a buyer's agent, a seller may be the client of a seller's agent, and a property owner may be the client of a property manager

Dual Agency: Implied Dual Agency

Problems arise when, through careless words or actions, a broker unintentionally creates an implied dual agency without the proper disclosures. In fact, if a broker acts as a dual agent, but fails to formally disclosure that is a dual agent to all parties, he risks losing his commission, his license, and/or jeopardizing the transaction (under state law)

Ministerial Acts

Routine acts that do not involve discretion or the exercise of significant independent judgment. Many state real estate license laws permit real estate agent to perform ministerial acts for non-clients in real estate transactions without creating an agency relationship.

Disclosure of Acting as Principal or other Conflict of Interest types

Same Transaction: A licensee is an interested party that must make disclosure when the licensee is a party to a real estate transaction Attempting to Acquire Property: A licensee is an interested party that must make disclosure when the licensee is acquiring or attempting to acquire property by lease or purchase Assisting Family: A licensee is an interested party that must make disclosure when the licensee is assisting any family member to purchase or lease property Business Interest: A licensee is an interested party that must make disclosure when the licensee's firm or business is attempting to purchase or lease property. The disclosure must be made in the applicable contract (sales contract, lease agreement, etc.) However, like advertising, this disclosure need not be made if the licensee is selling his property through another agent or broker.

Dual Agency

Situation where the same agent (broker or firm) represents multiple parties (buyer and seller) with competing interest in the same transaction. Most of the states that permit dual agency require an agent to obtain proper client consent before entering into the relationship. Proper consent usually includes various disclosures about the nature and risks of the dual agency relationship. Dual agents owe agency duties to both parties. However, it is difficult to carry out these duties because the buyer and seller have opposing interests and are in competition with one another. Escrow agents are examples of dual agents, a they hold money for the benefit of multiple parties.

State Laws

Some state laws have replaced common law fiduciary duties with duties created by state legislation (laws), which are often similar to the common law. In such states, the applicable law (not the common law) controls

Nature of Sub-Agency

The agent of an agent. Agents (brokers) may appoint sub agents (salespersons) where the client expressly authorizes or the law otherwise permits. The subagent may then perform tasks for the primary agent's clients. A subagent, lawfully appointed by a listing broker, must represent eh client (seller) in the same manner as the primary agent (in the real estate context, the listing broker). Because an agency relationship exists between the broker (agent) and the seller (client), both parties have duties to one another.

Terminating Agency Relationships: Operation of Law

The following situations can terminate an agency by operation of law: mental incompetence of either party (no breach); death of either party (no breach; however, the death of the salesperson will not terminate the agency agreement because it is with her broker); destruction or disposition of the subject of employment (no breach); bankruptcy of either party (may result in a breach); or expiration of time (no breach)

Agency

The legal relationship between two or more persons where Person 1 (principal) provides Person 2 (agent) with the authority to act on Person 1's behalf in a manner that promotes Person 1's best interests. The legal relationship between a client and an agent usually arises by an express agreement., wherein the client confers authority upon the agent to act for him or her in dealing with third parties in exchange for a fee. Either the Common law or state law (where the common law is supplemented or replaced) establishes the rights, responsibilities, and duties between a principal and an agent.

Nature of Agency Relationship

The legal relationship between two or more persons, where Person 1 (the principal) provides Person 2 (the agent) with the authority to act on Person 1's behalf and in a manner that promotes Person 1's best interests (known as fiduciary duties). The relationship between a client and an agent usually arises by an express agreeement, wherein the client conferes authority upon the agent to act for him or her in dealing with third parties in exchange for a fee.

Fiduciary Duties Following Agency Representation

Unless the agent and the client otherwise agree in writing, the agent owes no further duties to a client after termination, expiration, or full performance of the brokerage relationship, except to: account for all moneys and property relating to the brokerage relationship; and keep confidential all personal and financial information received from the client during the course of the brokerage relationship (and any specific information the client requested to be confidential) unless otherwise provided by law or the client consents in writing to disclosure.

Power of Attorney

Written document in which one person appoints another to be their attorney-in-fact, authorizing the attorney-in-fact to act on their behalf. The death of either party automatically revokes the power of attorney because it is a personal authorization. Thus, when an attorney-in-fact is conveying property on behalf of a grantor, proof is usually required that the grantor is alive at the time of the signing.