06 Law of Agency (10) Chapter 10: Agency and Brokerage

From the Buyer's Vantage Point: Buyer's Agent v. Cooperating Broker

A buyer who enters into a real estate transaction today, without a buyer's agent, has no representation in that transaction. If a friendly cooperating broker (working as an agent for the listing broker and subagent for the seller) is the one showing the buyer the property and assisting the buyer in other related activities, the buyer still needs to understand that no one is looking out for the buyer's interests. Both the listing agent and the cooperating agent are working for the seller and with the buyer.

Cooperative Sales without Subagency

A cooperative sale without the presence of subagency is possible, thanks to the principle I shared with you earlier: Compensation ≠ loyalty, agency relationship, or fiduciary duty A principal can invite a cooperating broker to participate (and be compensated) in a cooperative sale without that broker acting as a subagent or creating vicarious liability for the principal. The cooperating broker would be operating, in this circumstance, as either a broker's agent or a buyer's agent.

Office Policy Manual: Mitigating Vicarious Liability

A great tool for mitigating the vicarious liability a broker faces is a comprehensive office policy manual. It is the broker's opportunity to put in writing an in-depth description of the scope of authority of the sponsored salespersons under the broker's supervision and control. It will serve to protect the brokerage, the broker, the sponsored salespersons, and even the broker's clients. Sponsored salespersons should be strongly encouraged to become familiar with their manual's contents and refer to it when they have questions if the broker is not available.

Landlord's Agent

A landlord's agent is similar to a seller's agent. The landlord's agent is a single agent who has agreed to represent the landlord's interests in a real estate transaction (to lease, not sell, a property). The landlord is the principal/client of the landlord's agent, and the landlord's agent owes all fiduciary duties to the landlord. The agency relationship between the landlord and the landlord's agent is documented in a listing agreement. The landlord's agent works for the landlord and with the tenant.

If You Only Knew - Part 2

A principal's vicarious liability exposure is limited in that the principal would only be responsible for the actions of the agent (broker) representing them if they knew of the misrepresentation or other misbehavior of the agent (broker).

Tenant's Agent

A tenant's agent is similar to a buyer's agent. The tenant's agent is a single agent who has agreed to represent the tenant's interests in a real estate transaction (to rent, not buy, a property). The tenant is the principal/client of the tenant's agent, and the tenant's agent owes all fiduciary duties to the tenant. The agency relationship between the tenant and the tenant's agent is documented in a tenant-broker agreement. The tenant's agent works for the tenant and with the landlord.

The Associate Broker

An associate broker is a licensed broker who chooses to work under the sponsorship of another broker (the designated broker for the brokerage). They might also choose to hold a separate broker's license, under which they are not affiliated or sponsored by any other broker. While operating as an associate broker, they assume the same role as agent to the employing broker and subagent to that broker's clients, just as someone licensed as a salesperson would do.* *Unless the associate broker choose to serve in the role of a brokerage office manager (which a salesperson cannot do).

Vicarious Liability (cont.)

An employing broker's vicarious liability exists even if the license holder assisting the employing broker is NOT sponsored by the broker but IS operating as a agent of the broker. That would be the case when utilizing brokers and salespersons from a cooperating brokerage. Confused? Me too! This example will help...

From the Broker's Vantage Point

And since anyone who has an agent, by definition, is a principal, it follows that a broker with agents operating on the broker's behalf is a principal of those agents. From the broker's vantage point: The broker is the principal/client's agent The client (buyer or seller) is the broker's principal The sponsored license holders and cooperating broker's are the agents of the employing broker The broker is the principal of the sponsored license holders and cooperating brokers

The Business of Brokerage

As a verb, the word "brokerage" has to do with the various efforts involved in bringing to completion real estate transactions involving buyers, sellers, tenants, and landlords. As a noun, the word "brokerage" refers to a for-profit business specifically formed for the purpose of completing these types of real estate transactions. With either use, the word "brokerage" has to do with business activity. And the law of agency is what governs that activity. A real estate brokerage might engage in the sale, purchase, lease, or management of property. The brokerage can take the form of a sole proprietorship, partnership, or corporation. But regardless of its form or how many owners it might have, there can be only one broker designated to assume legal liability for any activity flowing from that brokerage.

From the Buyer's Vantage Point

As an outgrowth of the confusion of the 1980s, buyers of real estate began seeking agency representation so that someone involved in the transaction would be looking out for their interests. Not surprisingly, the broker assuming this role became known as a buyer's agent.

The Broker

As mentioned earlier, every brokerage is required to designate a broker who will assume liability for all actions flowing from that brokerage. Oftentimes, this individual will have a full or partial ownership stake in the brokerage. The designated or employing broker sponsors a team of license holders — salespersons and/or associate brokers — to act as agents of the employing broker and subagents of the employing broker's clients. (The broker may also employ non-licensed assistants to carry out various office and administrative duties.)

Vicarious Liability of the Principal

Before we leave the subject altogether, I want you to be aware that even a principal can have their share of vicarious liability exposure. How so? Before I answer that, understand this: The broker representing the principal is an agent of the principal. Sponsored salespersons of the broker representing the principal are subagents of the principal. Cooperating brokers (and their sponsored salespersons) that serve as agents (by accepting a subagency offer) of the principal's broker are also subagents of the principal. Note: In New York, a cooperating broker can operate as a broker's agent and be an agent of the principal's broker but NOT a subagent of the principal. (More on this later.)

Best of Both Worlds

For many principals, a cooperative sale without the existence of subagency represents the best of both worlds: The principal has multiple brokers working towards their objective. The principal has limited their vicarious liability to that of the actions of their broker and their broker's sponsored salespersons.

From the Buyer's Vantage Point (cont.)

From the buyer's vantage point: The buyer broker is the buyer's agent The buyer is the buyer's agent's principal/client The buyer broker's sponsored license holders are agents of the buyer broker and subagents of the buyer The seller is the customer of the buyer broker and the buyer broker's agents

Subagency Recap

Here are some major points to remember about subagency: A subagent is an agent of an agent A subagent can be a sponsored salesperson of the broker representing the principal or an unaffiliated cooperating broker A buyer brought to a real estate transaction by a subagent of the seller has no one looking out for their interests A principal has vicarious liability for subagents — whether they are sponsored salespersons of the principal's agent or an unaffiliated cooperating broker The subagent owes all the same fiduciary duties to the principal that the broker representing that principal does The principal can reduce their vicarious liability in a cooperative sale by not allowing cooperating brokers to operate as subagents

Subagency: The Players

If you'll recall from a few screens back, a subagent is an agent of an agent. Therefore, subagency is a form of agency that arises when an agent enlists the use of other agents to accomplish the goal of the principal of the agent. Subagents in real estate can be: Sponsored salespersons of a broker who is serving as an agent to a principal Unaffiliated cooperating brokers (and their sponsored salespersons) who have accepted a subagency offer in a cooperative sale to assist a broker who is serving as an agent to a principal

Cooperative Sales in NYC

In New York City, there is no MLS in which a principal can state their preferences up front about how they wish to work with a cooperating broker. Because of this, the attorney general's office has stepped in with a ruling that serves to clarify relationships. Unless there is an agreement that specifically designates the cooperative broker as a subagent or broker's agent, the cooperative broker will be operating as a buyer's agent.

Buyer's Agent (cont.)

It is pretty easy to understand how a seller's agent gets compensated — from the proceeds of the sale of the seller's property — but it can be a little less clear how a buyer's agent gets paid. The buyer-broker agreement, like the listing agreement, will spell out how the agent is to be compensated. Usually, it will indicate that the buyer's agent will look first to the seller's offer, via the MLS, for compensation but will hold the buyer responsible for any shortfall should the seller either fail to pay or pay less than the full amount the buyer agreed the buyer's agent should be paid.

The Broker in the Role of Principal

It may seem funny, or perhaps confusing, to think so, but sometimes a broker takes on the role of principal. Remember our discussion of vicarious liability? Well, the reason the broker was vicariously liable was because the broker had agents carrying out that broker's wishes, directives, and intentions.

If You Only Knew

It should be noted here that Article 12-A Real Property Law §442-c limits a broker's vicarious liability for the actions of a license holder "unless it shall appear that the broker had actual knowledge" of those actions deemed a violation of the law. That should help lessen (at least a bit) the broker's anxiety of vicarious liability for agents — sponsored or otherwise.

Landlord's Agents & Tenant's Agents

Just a reminder here that, by default, when I mention landlord's agents or tenant's agents, I am referring to single agents that have chosen to represent one side or the other in a real estate lease agreement transaction. If the agent chooses to represent both sides in a lease agreement, they would operate as a dual agent and be subject to all the rules, restrictions, and obligations of a dual agent who was representing both sides of a real estate sales transaction.

Vicarious Liability Example

Leanna is a broker and owner of Newbie Realty. Her client (principal) is Audrey, a homeowner looking to sell her condo in Manhattan for big bucks because of its glorious view of majestic Hoboken, New Jersey, situated just across the Hudson River. Sarah, a cooperating broker from Cusco Realty, is operating as Leanna's agent to help accomplish the mission of finding a buyer for Audrey. In this instance, by allowing cooperating broker Sarah to operate as her agent in bringing about the objectives of Audrey (the principal), broker Leanna has opened herself up to vicarious liability for the actions of someone she, Leanna, does NOT employ. Why? Because, while Leanna does not employ Sarah, she did authorize Sarah to act in Leanna's name on behalf of Audrey.

Can't Buy My Love (or Loyalty)

Listing agreements and buyer-broker agreements should spell out who gets paid and how. Oftentimes, that even includes the payment of a cooperating broker — regardless of whether or not they are representing the best interests of the principal doing the compensating. It's important for license holders and clients alike to understand that compensation ≠ loyalty, agency relationship, or fiduciary duty.

From the Seller's Vantage Point

Okay. Let's look at a real estate transaction from the perspective of the seller. From the seller's vantage point: The listing broker is the agent of the principal/seller The seller is the principal/client of the listing broker The listing broker's sponsored license holders are agents of the listing broker and subagents of the principal/seller The buyer is the customer of the listing broker and that broker's agents

The Cooperating Broker

Revisiting the key term definition I gave you at the beginning of this chapter, a cooperating broker is a broker not affiliated with the brokerage representing a principal in a real estate transaction but who brings the other party to the transaction. A cooperating broker can an operate as: A subagent A broker's agent A buyer's broker In the real world, you're more likely to be interacting with the sponsored salespersons of the cooperating broker than the cooperating broker themselves, but the interaction remains the same since those salespersons would be acting in the name of the cooperating broker and any client or customer they might bring to the transaction.

The Agent

The agent, a.k.a. the salesperson, is a license holder who must be sponsored by a broker in order to engage in the business of real estate. The salesperson is an agent of the sponsoring broker and a subagent of that broker's principles/clients — many of which that salesperson may have brought to the broker. The agent can only act under the authority and supervision of the broker and will NOT be listed as a party to any agency agreement that a client signs. Listing agreements and buyer-broker agreements will be contracts between the client and the broker; not the sponsored salesperson — even if the salesperson does all the "heavy lifting" in the transaction. Additionally, the sponsored salesperson should receive compensation ONLY through their sponsoring broker.

Vicarious Liability of the Principal (cont.)

The bottom line is this: anyone who operates as an agent or subagent of the principal and, in that role, carries out the wishes and directives of the principal, creates an environment of vicarious liability for the principal. In other words, when the principal can direct the agent's or subagent's actions, the principal assumes liability for those actions.

Broker's Agent

The broker's agent is a special classification, recognized by the New York Department of State, which allows an unaffiliated cooperating broker to assist another broker in accomplishing the goals of that broker's principal (buyer or seller) without entering into a subagent role. Even in the absence of subagency, the broker's agent still owes fiduciary duties to the principal of the other broker while operating as an unaffiliated agent of the other broker. three important things to remember about broker's agents are: The principal of the listing broker must consent to this arrangement before it can be offered in the MLS listing. Since the broker's agent is NOT a subagent of the principal, the principal has no vicarious liability for the actions of the broker's agent. Since the broker's agent is NOT a subagent of the principal, the principal cannot direct the activities of the broker's agent.

Buyer's Agent

The buyer's agent is a single agent who has agreed to represent the buyer's interests in a real estate transaction. The buyer's agent is a relatively recent phenomenon... an outgrowth of the efforts to clarify the agency representation issues that came to a head in the early 1980s, as well as provide the buyer with representation in a real estate transaction. The agency relationship between the buyer and the buyer's agent is documented in a buyer-broker agreement. The buyer's agent works for the buyer and with the seller.

From the Seller's Vantage Point (cont.)

The cooperating broker is either: The agent of the listing broker and subagent of the principal/seller The agent of the listing broker but NOT subagent of the principal/seller (operating as a broker's agent) The agent of the buyer Note: If the cooperating broker is operating as the agent of the listing broker and subagent of the principal/seller, the cooperating agent is working for the seller and with the buyer.

Vicarious Liability

The employing broker, by necessity, will likely authorize a number of sponsored license holders (salespersons, associate brokers, and cooperating brokers) to act as agents for the employing broker in the activities and roles of the brokerage — many of which happen concurrently. In the process of authorizing these license holders, brokers knowingly open themselves up to what is referred to as "vicarious liability," the common law concept which states that a person is liable for the actions of those acting with authority on that individual's behalf.

Seller's Agent

The seller's agent is a single agent who has agreed to represent the seller's interests in a real estate transaction. The seller is the principal/client of the seller's agent, and the agent owes all fiduciary duties to the seller. The agency relationship between the seller and the seller's agent is documented in a listing agreement. The seller's agent works for the seller and with the buyer.

Single Agent

The single agent represents only one party to the transaction... buyer or seller... landlord or tenant. Good ol' Single Agent, faithful to the very end. The single agent represents the traditional approach to real estate transactions and provides the "singular" benefit of clarity of agency relationship. (See what I did there?) In other words, the single agent works for the client and with the customer. The agency relationship is documented with either a listing agreement or a buyer-broker agreement, depending on which side the single agent represents.

Subagent

The subagent is an agent of an agent. Here's how you arrive at that simple but potentially confusing statement: A broker representing a principal is the agent of the principal A sponsored salesperson is an agent of the broker who is serving as the agent of the principal A sponsored salesperson is an agent of the agent of the principal A sponsored salesperson is a subagent of the principal A cooperating broker can be a subagent, too, if they accept an offer of subagency from an unaffiliated broker (who is operating as the agent for a principal). Here's how that looks: A broker representing a principal is the agent of the principal A cooperating broker is the agent of the broker who is serving as the agent of the principal A cooperating broker is an agent of the agent of the principal A cooperating broker is a subagent of the principal

Subagent: The Same Fiduciary Duties

The subagent owes all the same fiduciary duties to the principal that the broker representing that principal does. The subagent works for the principal and with the customer. This holds true whether the principal is the seller or buyer (landlord or tenant).

Subagency in Cooperative Sales

There is not a lot of controversy or complication to the type of subagency that simply involves the actions of sponsored salespersons of the broker who is serving as an agent to a principal. When subagency involves subagents not affiliated with the principal's broker, however, things get a little more complex. For that reason, it is critical that proper disclosure of agency relationships and informed consent is secured before proceeding. A cooperative sale can involve a cooperating broker with or without the use of subagency. The principal has ultimate control over that decision. When a seller agrees to list their property through a broker, they can stipulate which types of cooperative brokers — subagents, buyer's brokers, or buyer's agents — they are willing to work with. This is usually communicated through an MLS listing. When a cooperating broker responds to such a listing, they should immediately disclose the role they will play: subagent, broker's agent, or buyer's agent. (This also holds true for areas, like New York City, where no MLS exists.)

Compensation: Paid by Multiple Parties

There may even be occasions when a broker is eligible to receive compensation from both the buyer and seller. While that sounds like heaven, just know that a license holder needs to tread carefully in these situations to stay on the right side of licensing law. In order to legally receive compensation from both parties in a real estate transaction, a license holder must: Fully disclose to all parties to the transaction that compensation from both sides will take place Receive informed consent (in writing) from both parties to this arrangement of joint compensation

A Unilateral Offer of Subagency

There was a time when most listing agreements contained a provision known as a "unilateral offer of subagency" in which all cooperating brokers had no choice but to operate as subagents of the seller. (Again, back to the 1980s). Now, it's a choice — and not necessarily a common one at that. If you're curious why the popularity of subagency has faded somewhat, just head on over to the next screen...

Dual Agent

When I mentioned earlier in this chapter that compensation can come from multiple parties, I explained that it often happens in an environment of dual agency. In an in-house transaction (meaning within one brokerage), one agent can represent both parties (seller AND buyer or tenant AND landlord); hence the opportunity for joint compensation. When this occurs, the agent is operating as a dual agent. The agency agreement includes informed consent (sometimes obtained in advance) from both parties.

What's a Typical Transaction?

When I speak of a typical real estate transaction, I'm talking about a seller (or landlord) who is looking for a buyer (or a renter) of a property that is to be sold (or leased). And in that typical transaction there are four primary players: The seller (or landlord) The buyer (or renter) A license holder representing each party; two total Note: Real estate sales commonly involve a different license holder representing each of the two parties to the transaction. That's not necessarily the case in a lease agreement transaction.

Compensation: Paid by the Buyer

When a buyer enters into a buyer-broker agreement with a broker, they negotiate how the buyer broker will be compensated. Often there is language stating that the buyer broker's compensation will come from the commission split offered by the seller (as outlined in the MLS). But there is usually language in the agreement that ensures compensation for the buyer broker in the event compensation is not derived from the seller.

Compensation: Paid by the Seller

When a listing broker takes on a seller client as their principal, they negotiate how compensation is earned, what form it will take, and who will be eligible for compensation — including cooperating brokers operating either as the principal's subagent, a broker's agent, or a buyer's agent. Understandably, the amounts or percentages a seller agrees to pay a cooperative broker could vary, based on which of those three roles the cooperating broker plays.

Dual Agent: Doubly Difficult

While there are certainly some advantages to operating as a dual agent (e.g., no splitting of commissions), it can also be extra challenging. After all, we know that an agent owes fiduciary duties to their clients, right? Well, if a dual agent has two clients whose best interests are at odds with each other, how can the dual agent possibly fulfill their fiduciary duties to both?

Dual Agency: Dual Compensation

While we'll talk more about Dual Agency in the next level of this course, it's worth noting that dual agency is an environment in which a broker represents both sides of a transaction and can get paid by both parties to the transaction. There are many, many caveats to dual agency, however, because of the difficulty (impossibility?) of a broker to provide undivided loyalty to both parties - not to mention the heightened need to provide disclosure and obtain informed consent of both parties before proceeding.

Subagency: Vicarious Liability Avoidance

You'll recall from our earlier conversation about vicarious liability that anyone who operates as an agent or subagent of the principal creates an environment of vicarious liability for the principal. Well, many principals are not comfortable with the idea of that — that they might be held responsible for the actions of someone beyond the broker with whom they entered an agreement. Those concerns can be addressed by limiting the way in which a cooperating broker can participate in the transaction, and communicating those restrictions in the MLS listing (assuming the principal we're talking about is the seller). An important thing to remember is that an invitation to participate (and be compensated) in a cooperative sale can be made without the use of subagency — if the cooperating broker will assume the role of broker's agent or buyer's agent.

cooperating broker

a broker not affiliated with the brokerage representing a principal in a real estate transaction but who brings the other party (buyer or seller, as customer or client) to the transaction; can operate as a buyer's broker, subagent, or broker's agent

buyer's agent

a broker representing a buyer in a real estate transaction

landlord's agent

a broker representing a landlord in a real estate transaction

seller's agent

a broker who has entered an agency relationship with a seller, usually via a listing agreement; owes all fiduciary duties to the seller client

broker's agent

a cooperating agent from a brokerage firm not affiliated with the listing or buyer broker but who is assisting that broker by finding a buyer or a property for that broker's client; has fiduciary obligations to the client but does not operate as a subagent of the client

subagent

any license holder who is given authority by the principal's broker to assist in accomplishing the objectives of the principal; may or may not be affiliated with the principal's broker

vicarious liability

the responsibility assigned to one individual for the actions of another; may be established by mandate of law or agreement of the parties