Unit 2 the law of agency

Fiduciary Responsibility

Care Confidentiality Loyalty Obedience Accounting Disclosure An agent's fiduciary relationship with the principal is a relationship of the highest form of trust and confidence. (Other types of fiduciaries include trustees, executors, guardians, managing agents, banks, and attorneys.) If the principal cannot count on the agent to act in the principal's best interest, the agency relationship is meaningless. Care Brokers must exercise reasonable care while transacting business entrusted to them by a principal. In the eyes of the law, the individual licensee is considered an expert. Therefore, real estate brokers are expected to have special skills and expertise in the real estate field. The definition of care includes a licensee's obligation to exercise diligence on behalf of the client. Brokers must be knowledgeable about real property laws, land-use issues, financing, transfer of title, and the like. Brokers should be skilled in the following areas: Valuing property (to determine a reasonable listing price and a reasonable purchase price) Clarifying the principal's needs Discovering pertinent facts about the neighborhood, the property, and the parties to the transaction and disclosing this information to the principal Filling in and explaining in simple terms the purpose and effect of the contract forms involved (the listing agreement or buyer agency agreement and the purchase contract), while never engaging in the practice of law (unauthorized practice of law can result in license revocation as well as other civil penalties) Recommending that the principal seek expert advisers (such as attorneys, accountants, or inspectors) when appropriate Making best efforts to sell or find the property Explaining different financing options available from local lenders Negotiating offers and counteroffers Meeting deadlines If a broker represents the seller, care and skill include helping the seller arrive at an appropriate and realistic listing price; discovering facts that affect the seller and disclosing them; properly presenting the contracts that the seller signs; making reasonable efforts to market the property, such as advertising and holding open houses; and helping the seller evaluate the terms and conditions of offers to purchase. For example, suppose a broker sells a home a few days after the listing agreement is signed. While the seller is initially pleased with the quick sale, she later realizes that the broker set the listing price too low. The seller also discovers that plans for a nearby shopping center were approved a few months ago. When the shopping center is completed in eight months, her property will be worth even more. The broker, who claimed to be an expert on her neighborhood, had no idea about the new shopping center. There were also several clauses in the sales contract that the seller didn't understand. When she asked the broker about them, he shrugged off her concern. Now she realizes that the clauses were important and were not to her advantage. If she had understood their effect, she would have consulted an attorney. The broker breached his duty to exercise reasonable care and skill when fulfilling the terms of the agency contract. He should have had a basic knowledge about property values, new developments in the neighborhood, and the importance of contract terms. And he certainly should have recommended that the seller consult an attorney before signing the contract or make the contract subject to the approval of her attorney. A broker who represents a buyer is expected to help that buyer locate suitable property; evaluate property values, the neighborhood, and property conditions; discover financing alternatives; and handle offers and counteroffers with the buyer's interest in mind. For example, the buyer's broker might discover that the seller is facing foreclosure if the property is not sold promptly but doesn't relay that information to the buyers. If the buyers had known, they might have bought the property for less than the amount they offered. The broker violated fiduciary duty to the buyer. The broker is liable to the principal for any loss resulting from the broker's negligence or carelessness. An agent may not disclose any confidential information learned from or about the principal. For example, if the agent is representing the seller, information about the principal's financial condition may not be disclosed to potential buyers, including the fact that the principal will accept a price lower than the listing price. The same rule applies to any confidential facts that might harm the principal's bargaining position, such as the fact that the seller must quickly move out of the area. Similarly, a buyer's broker would not reveal the buyer's readiness to pay more if necessary. Confidential information may never be revealed, even if it would mean a larger commission or a quicker closing date for the agent. Even after the agency relationship has terminated—for instance, after the sale has closed—confidential information should be kept confidential. A broker may not maintain confidentiality, however, if the information is something the broker is obligated to disclose because of the duty to deal honestly with a customer. For example, if the seller's broker knows about a hazardous condition on the property or that the roof leaks or the plumbing needs repairs, such information must be disclosed to the buyer. The agent should exercise extreme care to avoid violating the responsibility of confidentiality when communicating or dealing with other agents. For example, a common occurrence in the real estate industry is dealing with cooperating agents (particularly those not employed by the listing broker). Cooperating agents may ask whether the listing price is negotiable. Listing agents should never imply or reply that the price is negotiable because their principal would then likely never achieve an amount equal to or greater than the listed price. The listing agent would be guilty of violating the fiduciary responsibility of confidentiality. This would lead to disciplinary action against the licensee. Loyalty The duty of loyalty dictates that an agent must always place the principal's interests above those of all other persons, including the agent's own interests. The seller's agent, for example, must try to obtain the highest possible price, the buyer's agent to obtain the lowest. The agent must never take advantage of a chance to profit at the principal's expense. For example, an offer with a lower purchase price may be in the seller's best interest because of the financing terms, closing date, or other concessions. The agent must exert maximum effort to negotiate such an offer, even though it may mean a smaller commission. Even when agents find themselves working for no compensation, they must have the interests of their principals in mind before considering themselves. Obedience The fiduciary relationship obligates the broker to obey the legal and reasonable instructions of the principal. This duty of obedience is not absolute, however. The broker may not obey any instructions that are unlawful or unethical. For example, the broker may not follow instructions to make the property unavailable to members of a minority group or to conceal a defect in the property, such as a leaking roof. Brokers who know or have reason to suspect that a client will ask them to do something unlawful or unethical should either refuse to accept the listing or terminate an existing listing. Accounting Brokers must be able to report the status of all funds belonging to others that are entrusted to their possession. Real estate license laws require that brokers give duplicate originals of all documents to all parties affected by such documents and keep copies of them on file for three years. In addition, brokers must immediately deposit all funds entrusted to them in special accounts with titles that must include the words trust or escrow. It is illegal for brokers to commingle (mix) such monies with business operating funds or personal funds or to retain any interest such monies earn. This duty to account to the principal is also called accountability. Disclosure It is the broker's duty to pass on to the principal all facts or information the broker obtains that might affect the principal's decisions. The duty of disclosure is sometimes known as the duty of notice. It includes not only useful information the broker knows but also relevant information or material facts that the agent should have known. (A material fact is any fact that affects the value of the property and is important to a person making a decision.) Under the theory of law known as "presumption of knowledge," this applies to anything "the broker should have known." In the course of a transaction, principals must make critical decisions. Agents must supply their clients with all the material facts so that the principals may make informed choices. The broker must volunteer pertinent information, whether or not the client knows enough to ask for it. For example, a broker has presented an offer to her principal, the seller. The offer involves seller financing (the buyer will make a small down payment, and the seller will finance the difference between the down payment and the purchase price). The broker knows that the buyer has a history of defaulting on his obligations. Even though the seller does not ask the broker about the buyer's credit history, the broker must express a concern and perhaps recommend that the seller require the buyer to obtain a preapproved mortgage. In many cases, a broker may be held liable for damages for failure to disclose material facts. Some types of information considered imperative to disclose include the following: The relationship between an agent and other parties to the transaction. For instance, if the agent is representing the seller and the buyer is a relative of the agent, the agent must disclose that fact to the seller. Other relationships that must be disclosed include those with close friends and close business associates. Whether agents are acting for themselves (self-dealing). New York forbids brokers and salespersons to buy or sell property in which they have a personal interest without informing the seller or purchaser of that interest. It is prudent to make such a disclosure in writing as part of the purchase contract before it is signed. If a buyer's broker has a similar type of relationship with the property seller, that relationship must be fully disclosed to the buyer. The existence of other offers. All offers should be immediately submitted to the principal until the sale is closed. The seller's agent must remember that it is up to the principal to reject or accept an offer; it is not the agent's job to evaluate the offers and submit only the most favorable. Failing to submit all offers immediately is a violation of license law. This requirement applies even to properties that are in contract and waiting to close. The status or form of the earnest money deposit. The seller's agent always must inform the principal if the earnest money is in the form of a promissory note or a postdated check. If the broker fails to do so and the seller cannot collect on the note or check, the broker may be liable to the seller for the amount of the deposit. The buyer's financial condition. If the seller's broker knows of any negative information about the buyer, the broker must inform the seller at once. The buyer's broker, however, must keep the buyer's financial condition confidential, unless to do so would breach the agent's duty to treat the seller honestly. The value of the property. One reason that sellers use real estate brokers to market their properties and buyers use brokers to help them purchase properties is that brokers have expertise in the area of property values. Brokers must always give their true opinions of a property's value and should never inflate that value to obtain a listing or complete a sale. Brokers would be wise to disclose the sales prices of comparable properties, including those the brokers should know about if they had studied the marketplace. The buyer's broker should suggest the lowest price the buyer should pay based on comparable values and how long a property has been listed or why the seller is selling. Disclosure Any commission split. The listing broker should disclose to the seller any fee-sharing arrangement with a cooperating broker. This means that the listing broker must describe to the seller the general company policy regarding cooperating with subagents, cooperating agents, and buyer's agents. This usually occurs at the time the listing agreement is entered into. Contract provisions. Brokers must explain to their client the important provisions of any contract the client is going to sign. If the client requires anything more than a simple explanation, the broker must advise the client to seek competent legal advice. Property deficiencies. A broker representing a buyer must disclose the deficiencies of a property as well as contract or financing issues that are not to the buyer's benefit. Breach of Fiduciary Duties If agents breach their fiduciary duties, they may be subject to a variety of penalties. Some of these penalties can be imposed regardless of whether the agent's breach of duties caused the principal any actual harm. Penalties for breaching fiduciary duties may include the following: Loss of the commission Loss of the agent's license or other disciplinary action by the state Adverse judgment in a civil suit (defined as a lawsuit where violations of civil law have allegedly occurred) Rescission (voiding) of the transaction by court order Scope of Authority While agents must fulfill their fiduciary responsibilities, they must also act within the scope of their authority. Real estate agents, who are almost always special agents, have only the authority granted to them by their listing or buyer broker agreements. For example, the listing broker is authorized to find a ready, willing, and able buyer but generally has no authority to sign contracts for the seller, initial changes to an offer, receive the purchase price on behalf of the seller, or permit early occupancy. The authority granted to a listing broker should be stated expressly in the listing agreement. In a typical listing contract, the seller specifically authorizes the broker to place a sign on the property, advertise, show property, cooperate with other brokers, and accept earnest money deposits. Usually, the broker is not given the right to sign contracts, although in exceptional cases, the broker may be appointed as attorney-in-fact under a separately granted power of attorney. (One need not be an attorney to be appointed an attorney-in-fact.) A buyer's broker is generally given the authority to seek out appropriate property. The broker is not usually given the right to sign a purchase contract on behalf of the buyer. Other Parties in the Transaction Even though an agent's primary responsibility is to the principal, the agent also has obligations to third parties. The duties to the third party or customer include fair and honest dealing; disclosure of material facts that the licensee knows or should know that affect the desirability or value of the property (or the buyer's ability to complete the transaction) and that are not easily discoverable by the customer; and accounting for all monies belonging to others and trusted in the licensee's possession. Opinion versus fact Whatever the specific topic, brokers, salespeople, and other staff members must be careful about the statements they make to third parties. They must be sure that the customer understands whether the statement is an opinion or a fact. Statements of opinion are only permissible as long as they are offered as opinions and without any intention to deceive. When rendering an opinion, the agent should ensure that the customer does not solely rely on this opinion in the purchase of the property. For instance, a broker is showing a house to buyers and says, "This house has the best view in the neighborhood." This statement is obviously a statement of opinion, and because the buyers can look out the window and judge the view for themselves, the statement is not intended to deceive. Statements that exaggerate a property's benefits are called puffing. If the broker in the previous example said, "This house has the best view in the whole county—no, the whole state!" her statement would be considered puffing. It is an obvious exaggeration. Puffing is considered a sales tactic and is legal. However, real estate agents must be careful to make sure that their puffing is not accepted by buyers as fact. For instance, telling a prospective buyer that a home "will appreciate at least 50 percent in the next five years" may be an exaggeration, but it is also a misleading statement that a buyer might easily accept as a fact. Licensees must be sure that none of their statements can be interpreted as fraudulent. Fraud is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person. Misrepresentations One of the most common complaints against real estate agents is that of misrepresentation. Misrepresentations violate the broker's obligation of honest dealing. Most complaints come from buyers. To successfully sue a real estate agent for misrepresentation, the plaintiff (the one bringing the suit) must be able to prove that the broker made a misstatement (oral or written) to the buyer or failed to disclose a material fact to the buyer that should have been disclosed; the broker either knew or should have known that the statement was not accurate or that the information should have been disclosed; the buyer reasonably relied on such statement; and the buyer was damaged as a result of that reliance. Misrepresentation can be an affirmative (intentional) statement, such as "A new roof was put on this house three years ago," when the broker knows that the roof is 12 years old. It can also be a failure to disclose a latent defect (discussed previously). For instance, if the broker knows the basement regularly floods but does not disclose that fact to the buyer, the broker is guilty of misrepresentation. The misstatement does not have to be intentional to be misrepresentation. Real estate agents can be liable for misrepresentation if they knew or should have known a statement was false. Brokers around the country have been held liable for misrepresentations in the following types of cases: Termite infestation. The broker, acting for the seller, plastered over termite damage. Free of liens and encumbrances. The broker mistakenly told the buyer that the seller owned the property free and clear of all encumbrances. Filled land. The broker made an unauthorized statement to the buyer that the property was not a "filled lot." (The house later sank when the fill settled.) Easements. When a buyer asked a broker about easements on a property, the broker said not to worry. Three months later, the city used the easement to lay water pipes. Zoning. The broker misrepresented the property's zoning a contract to purchase real estate is obtained as a result of misstatements made by a broker or salesperson, the contract may be disaffirmed or renounced by the purchaser. In such a case, the broker will lose a commission. If either party suffers loss because of misrepresentations, the broker can be held liable for damages. For the buyer's broker, a hidden defect requiring disclosure to the seller would be the buyer's financial inability or unwillingness to complete the purchase. Take, for example, a buyer who filed for bankruptcy two years ago. The buyer, through a broker, intends to submit an offer to purchase that would be contingent on the buyer obtaining financing. Because a buyer's broker who knows of a bankruptcy is required to disclose that fact to the seller, the buyer's broker would not be guilty, in this case, of violating the fiduciary responsibility of confidentiality. Bankruptcy would generally affect any buyer's ability to obtain future financing, so it becomes a material fact concerning the buyer's ability to perform and conclude a transaction, and as such it requires disclosure. In the reverse, if no financing contingency was required for the sale to take place, no disclosure would be required on the part of the buyer or the buyer's broker. Environmental concerns Disclosure of environmental health hazards, which can render properties unsalable, also may be required. Frequently, the buyer or the buyer's mortgage lender will request inspections or tests to determine the presence or level of risk. Licensees are urged to obtain advice from state and local authorities responsible for environmental regulation whenever toxic-waste dumping, contaminated soil or water, nearby chemical or nuclear facilities, or health hazards such as radon, mold, asbestos, or lead paint may be present. Latent defects Brokers and salespersons should be aware that some courts have ruled that a seller is responsible for revealing to a buyer any material (important) latent defects relating to the property. A latent (or hidden) defect is one that is not discoverable by ordinary, reasonable inspection; that is, it is simply not visible to the human eye without further inspection. Regardless of whether the agent represents the buyer or the seller, the broker likewise is responsible for disclosing known hidden defects to the buyer. Buyers have been able either to rescind the sales contract or to receive damages when latent defects are not revealed. Examples of such hidden defects include a leaking underground oil storage tank, a buried drain tile that causes water to accumulate, and a driveway built partly on adjoining property. According to the Department of State, Division of Licensing Services, it is not the broker's duty to verify all of the seller's representations, unless the broker uses such representations in marketing the property. However, if the broker knows or has reason to know that the seller has indeed made a misrepresentation or failed to disclose material facts, the broker is required to make a full disclosure. Remember the following: A broker acts as an agent. An agent is one who transacts on behalf of others; therefore, it is safe to deduce that an agent is a direct extension of the principal and, as such, may be held equally responsible for lack of making property condition or other material disclosures that would affect the price of the property. New York State requires sellers to furnish prospective buyers with a 48-item Property Condition Disclosure Statement, which is discussed in Unit 3. Stigmatized properties In a New York Supreme Court Appellate Division case, Stambovsky v. Ackley (the haunted house case), a seller was held responsible for failing to disclose that a house was haunted. The court did rule that the broker was not at fault. To clear up the problem of stigmatized properties, a 1995 amendment to the New York State Real Property Law (Section 443-a) provides that an owner, occupant, or agent need not disclose the fact that the property is or is suspected to be the site of a homicide, suicide, other death, or any other felony. In addition, the fact that the property was ever owned or occupied by someone who had or was suspected to have the HIV infection or AIDS or any disease highly unlikely to be transmitted through occupancy of a dwelling also need not be disclosed.

What is an agent?

Real estate brokers and salespersons are commonly referred to as agents. Legally, however, the term refers to strictly defined legal relationships. In the case of real estate, it is a relationship between licensees and buyers, sellers, landlords, or tenants. In the law of agency (the body of law that governs these relationships), the following terms have specific definitions: Agent—an individual who is employed or authorized (and consents) to transact business on behalf of another, usually for a fee. In the real estate business, the broker firm acts as the agent of the seller, buyer, landlord, or tenant. Principal—the individual who hires and delegates to the agent the responsibility of representing the principal's interests. Agency—the fiduciary relationship that is created between the principal and the agent. Fiduciary—term describing the role that the agent takes on when the agency relationship is created, a relationship based on the highest form of trust and confidence. The agent is empowered (within the limitations of the agency appointment) to transact business on behalf of the principal. Client—a term that may be used to describe the principal. Customer—the third party with whom the agent deals on behalf of the agent's principal. The customer is owed "fair and honest dealing" by an agent transacting business on behalf of a principal, but the relationship between the agent and the customer is not a fiduciary one. There is a distinction between the duties owed by the agent to a client and the treatment owed to a customer. The principal, or client, is the one to whom the agent gives advice and counsel, and whose interest must be put above the interests of all other parties to a transaction, including the interests of the agent. The agent is entrusted with certain confidential information and has fiduciary responsibilities (discussed in greater detail later) to the principal. In contrast, the customer is entitled only to factual information and honest dealings as a consumer but does not receive advice and counsel or confidential information about the principal. The agent works for the principal and with the customer. Types of Agents Through the creation of the agency relationship, the scope of authority granted an agent will determine which of the three types of agent categories that relationship falls under. The three categories of agent relationships may be classified as follows: Universal agent General agent Special agent universal agent has the authority to represent the principal in all matters concerning all transactions that can be delegated. Universal agents can enter into any contract on behalf of the principal. However, under the New York State General Obligations law, the aforementioned may not occur without a prior written notarized power of attorney. They can act for the principal in the broadest scope and range of areas. This type of agency cannot happen without this written document known as a power of attorney. A guardian or an individual who looks after a mentally incompetent party is an example of a universal agent. That appointed party (appointed by the courts via a written decree that replaces the written power of attorney) tends to all the needs and cares of the noncompetent party. A general agent is empowered to represent the principal in all matters concerning one transaction. The general agent is granted authority to only transact a specific range of matters. As in the case of a universal agent, the general agent may bind the principal to any contract within the scope of the agent's authority. This type of authority also can be created by a power of attorney. A property manager is usually an example of a general agent, performing various duties on behalf of the property owner/principal. These duties consist of rent collection, bill paying, accounting/bookkeeping functions, and maintenance of the property. As you can see, the property manager acts on numerous levels for the principal. However, unlike with the universal agent who bears the broadest scope of authority to transact on all matters concerning all transactions, the scope of authority granted to a general agent is limited to that assignment only. Types of Agents A special agent is authorized to represent the principal in one specific transaction or business activity under detailed instructions. Under this agent category, the scope of authority granted the agent by the principal is extremely limited. For example, think of a principal and a real estate broker entering into a listing agreement (an employment agreement that engages a licensee). The role established for a real estate broker through the listing agreement is usually that of a special agent. If hired by a seller, the broker's duty is limited only to finding a ready, willing, and able buyer for the property. If hired by the buyer, the broker's duty is limited to finding a suitable property for the buyer. As a special agent, the broker is not authorized to bind the principal to any contract. An agency coupled with an interest is a relationship in which the agent has some interest in the property being sold. Such an agency cannot be revoked by the principal, nor can it be terminated on the principal's death. For example, a broker might supply the financing for a condominium development, provided the developer agrees to give the broker the exclusive right to sell the completed condo units. Because this agent has a special interest in the transaction, the developer may not revoke the listing agreement after the broker provides the financing.

Antitrust laws

The real estate industry is subject to federal and state antitrust laws. Antitrust can be defined as any business activity that would otherwise result in a monopoly and/or a restraint of trade, and that would be deemed a harmful act or that would act as an impedance against free enterprise and competition. Four distinct acts violate antitrust laws: Price-fixing Group boycotts Market-allocation agreements Tie-in arrangements We will examine each of the four violations shortly, but first let's look at the history of these laws. History of Antitrust Laws In 1890, the Sherman Act was enacted into law. Previous to the enactment of the law, a variety of business monopolies began to develop. This required government to react to this dilemma. In 1914, the Federal Trade Commission (FTC) was created by Congress with powers that included overseeing business practices, the ability to declare that certain trade practices were deemed unfair, and enforcing compliance with the Sherman and Clayton Acts. Similarly, in 1914, the Clayton Act was created. Its purpose was to supplement the Sherman Act (which lacked the teeth for enforcement); the act itself covered the same general purpose of the Sherman Act. The Sherman and Clayton acts prohibit the four activities detailed in the following paragraphs. Price-Fixing Illegal price-fixing occurs when competing brokers get together to set commission rates, rather than letting competition in the open market establish those rates. This is deemed by the federal authorities to be a conspiracy to price fix. A conspiracy is defined as two or more persons or parties acting in a manner that would otherwise negatively impact the ability of others to compete within a marketplace. Each real estate company, of course, is free to set its own fee schedule and to negotiate various rates with individual buyers or sellers if it wishes. The violations occur when competing firms agree to act together, in what the U.S. Justice Department calls restraint of trade. It's not that simple, though. Real estate companies—and agents—have been prosecuted under the Sherman Antitrust Act for what appeared to be innocent discussions with agents from other firms. A licensee should walk away immediately, even from what might seem like the most trivial conversation about rates with someone from another brokerage. (The only exception might be a conversation about a particular property the two firms have cooperated in selling.) For example, broker Max and broker Ian are owners of two competing real estate firms. As friendly competitors, they meet for dinner. Ian asks Max, "What are you guys getting these days for commission rates on sale transactions?" The resulting conversation would be considered conspiracy to price fix. Group Boycott In the past, discussions about the negative qualities of a third company have been interpreted as a group boycott—a conspiracy to boycott that firm and drive it out of business. Licensees must learn which topics must be avoided when engaging in conversation with agents from other companies. For example, broker Mark and broker Eileen are owners of two competing real estate firms. They are also friendly competitors. One night over a casual dinner, Mark brings to Eileen's attention that ABC Realty, a real estate brokerage firm, has just come to town. Mark suggests to Eileen, "Let's not do business with ABC Realty. Maybe they'll just go away." This would be considered a conspiracy to group boycott. Market Allocation Market allocation might occur when competing firms agree to split up an area and refrain from doing business in one another's territories. For example, as in the group boycott example above, broker Maggie and broker Isabel, owners of two friendly competing real estate firms, are meeting for coffee. Isabel suggests to Maggie, "You have always done business primarily on the east side of town, while I have always done business on the west side of town. Why don't we draw an imaginary line down the center of town, and I won't do business in your area if you don't do business in my area." This would be a market-allocation agreement Tie-in Arrangement A tie-in arrangement normally occurs when a selling party conditions the sale of an item. The condition might require the buyer (as a prerequisite to the purchase of that item) to purchase another unrelated item or the seller will refuse the sale of the original item to the buyer. For example, a buyer approaches a seller to purchase the seller's property. As a condition of sale, the seller requires the buyer to obtain title insurance only from the seller's title company or mortgage company or the seller will not sell the property to the buyer. That would be considered a tie-in arrangement. Tie-in Arrangement Penalties for violating antitrust laws Penalties for violating antitrust laws exist for individuals and business entities. Violation of the Sherman and Clayton acts for individuals bears one or both of the following penalties: Fines of up to $1 million Felony prison sentencing of up to 10 years The Department of Justice may impose other fines, and the FTC, which has no penal sanctions, has powers of enforcement as they relate to the Sherman and Clayton acts. Violation of the Sherman and Clayton acts for business entities bears one or both of the following penalties: Fines of up to $100 million Other fines imposed by the Department of Justice It should be noted that the great disparity in fines between business entities and individuals is meant to compensate for the fact that a business entity cannot serve a prison sentence; therefore, heavy fines are assessed to deter a repeat offense.

Creation of agency

relationship can be created by either an oral or a written agency agreement between the principal and the agent. It can also be implied from words or conduct. Of course, to ensure that all parties have a clear understanding of the agency relationship, it is in everyone's best interest to create an agency relationship with a written agreement. Following are the two ways or methods by which agency relationships can be created: Express agency Implied agency Express Agency The most common way of creating an agency relationship is through an express agreement, an agreement that is expressed in words, either spoken or written. A written agreement that creates an express agency relationship between a seller and a real estate broker is called a listing agreement. Think of the listing agreement as you would an "employment contract." A listing agreement employs and authorizes the broker to find a buyer or a tenant for the owner's property. An agency relationship also can be created between a buyer or a tenant. This is achieved by the use of a document called a buyer broker agreement, an agreement to procure, or a buyer agency agreement. This buyer agency agreement describes the activities and responsibilities the principal expects from the broker in finding the appropriate property for purchase or lease. Implied Agency An agency also could be created with an implied agreement. This occurs when both the principal and the agent act as if an agency exists, even though they have not expressly entered into an agreement. Providing services that are accepted by the principal can create an implied agency relationship. For instance, brokers advise a seller on a fair listing price, give helpful hints on how the seller can make the house more marketable, show the property to several buyers, and continually refer to themselves as the seller's agent. The seller sets the listing price according to the broker's advice, makes the recommended repairs to the house, and agrees to numerous showings. In this case, there may be an implied agency relationship. The dangers of this type of relationship arise when a seller's agent offers advice to the buyer/customer. The seller's agent may unknowingly be creating what is called an illegal undisclosed dual agency. This subject will be covered in greater detail later within this unit. Note that it is not always the seller's agent who creates the impression of an agency relationship. At times, the buyer customer may treat the seller's agent in a manner that gives the impression that an agency relationship has been created. In this event, the seller agent should immediately correct the buyer customer's impression. This will avoid the risk of creating an undisclosed dual agency. When someone claims to be an agent but there is no agreement, the principal may establish an agency by one of two implied agency subcategories: ratification and estoppel (defined as when a party is prevented by the party's own acts from taking a different position because it would cause detriment to another party). Ratification can be defined as an after-the-fact or retroactive acceptance of the relationship or previous agreement that may not have existed before. Ratification occurs when one party continues to accept what was bargained for after the parties realize that a mistake or misrepresentation occurred. For example, B is purchasing furniture from A, who has made representations as to the condition of the furniture. B pays for and takes control of the furniture but feels that the condition was not as represented. Instead of returning immediately to A and demanding return of his money, B uses the furniture. Therefore, B has ratified the agreement. Estoppel can be defined as accepting the benefits of the previously unauthorized act. This occurs when an individual does not stop another from performing services on her behalf even though the agents had no prior authority. Implied Agency As you can see, ratification and estoppel can create ostensible relationships, which are generally found to be false and misleading. The reason for this is simply that there has been no clarity or disclosure as to the relationship of the parties. A licensee must always make relationships clear to all parties in a transaction (Section 175.7). Failure to disclose one's relationship at first substantive contact will subject the licensee to disciplinary action by the DOS. First substantive contact can be defined as follows: The point at which a licensee exchanges or expresses information regarding a property to an interested party (other than information provided in advertising) The point at which an interested party begins to discuss or detail personal financial or other information concerning the party's interest or ability to conclude a transaction At the time these events occur, the licensee must disclose to a buyer, seller, landlord, or tenant (as the case may be) the nature of the licensee's relationship within the transaction. The legal requirement for written agency disclosure (discussed in Unit 3) reduces the chances for misunderstanding in a residential transaction. A residential transaction can be defined as any transaction involving the sale or rental of a building that contains four or fewer units intended for dwelling purposes. (Any transaction involving the sale or rental of a building that contains greater than four units would be considered a commercial transaction.) Although the written agency disclosure forms for cooperative and condominium units in buildings that contain greater than four units are now required under state law, licensees are still obligated to make known their relationship to the parties within a transaction (Section 175.7). However, members of the general public tend not to understand the complexities of the law of agency. Buyers easily can assume that when they contact a broker to show them property, the broker becomes "their agent." Under the law, it is a person's actions, not just words, that control the creation of an agency relationship. Compensation It is commonly assumed that a licensee is the agent of the one who pays the compensation. However, this is not true. The source of compensation does not determine agency; the agent does not necessarily represent the person who pays the commission. Creation of the agency relationship by the respective parties (as detailed previously) becomes the sole determining factor as to employment and necessary duties therewith. In fact, agency can exist even if no fee is involved (a gratuitous agency). Buyers, sellers, and brokers can make any agreement they choose about compensating the broker, regardless of which one is the agent's principal. For example, the seller could agree to pay a commission to a broker who is the buyer's agent. Written agency agreements should always state how the agent is to be compensated. The agent is reminded that Section 175.7 also covers compensation. Under Section 175.7, an agent may never receive compensation from more than one party to that transaction without the full knowledge and written consent of all interested parties to the transaction.

Learning objectives

After completing this unit, you will be able to understand permitted agency relationships prescribed by law, describe the ways in which an agency relationship may be created while distinguishing between the duties owed to a client and/or a customer, and explain permitted agency relationships that may exist in a transaction involving a seller; compare and contrast the duties of each of the three types of agent, understand the duties of a fiduciary agent while knowing how these fiduciary responsibilities impact the real estate professional and the public, and discuss the ways in which an agency relationship may be terminated, as well as identify which fiduciary duties remain after the transaction has been completed; and differentiate between the duties an agent owes to the principal and the duties owed to the third party or customer, and discuss how the broker's compensation is negotiated and who may compensate the broker, and summarize the four distinct acts that violate antitrust laws.

Agency and brokerage

Basic Agency Relationships Self-dealing Problems can also occur when a broker lists property, then decides to buy it and collect the agreed-on commission. This is called self-dealing. At that point, those brokers represent themselves but continue to act as the sellers' agents as well. Agents in this position are advised to give up the listing, collect no commission, and just represent themselves as buyers. Self-dealing also occurs when licensees employed by a broker attempt to acquire or dispose of real property for their own account. Most employment contracts between licensees and their employing brokers prohibit any self-dealing unless it is accomplished in the name of the brokerage with whom the licensee is registered. For example, a salesperson wishes to place this advertisement in the classified section of the newspaper: "House for sale by owner. Contact Ian at 555-5555." Although license law does not prohibit licensees from selling their own property, it does establish procedures for how this should be done. As it stands, the ad the salesperson wants to place is considered a blind ad, which is not permitted. A blind ad is defined as any ad that does not identify the advertiser as a licensee. (See Unit 1.) A situation like this one falls under the restrictions of the self-dealing section of an employment contract, and the responsibility falls to broker-employers to exert their authority over the activities of salespersons or associate brokers in suc

Termination of agency

Because the agency relationship involves so many responsibilities, it is important to know how agencies are created and how they are terminated. An agency relationship may be terminated at any time (except when coupled with an interest) for any of the following reasons: Death or incompetence of either party (Although death will terminate an agency, it does not necessarily terminate a contract of sale or listing agreement that was entered into during life by the deceased party.) Destruction or condemnation of the property Expiration of the terms of the agency Mutual agreement to terminate the agency Renunciation by the agent or revocation by the principal (In New York, the principal acting in good faith always has the power to cancel a listing at any time. The principal may, however, be required to reimburse the broker for expenses if the principal cancels before the agency's expiration. Damages could be awarded to the agent if the principal acted in bad faith.) Bankruptcy of either party Completion or fulfillment of the purpose for which the agency was created The question of when an agency relationship ends can be important. For example, suppose agent John listed and sold Margaret's property. Three weeks after closing, Margaret shows up at one of John's open houses. Is Margaret still John's client? Probably not, but John must clarify this with Margaret. Because it is often difficult to treat a former client as a customer, some firms will obtain a written dual agency consent agreement from both parties or enter into a buyer agency relationship with the former client. The broker may not disclose to a new client any information obtained in confidence from a former client during the agency relationship. Even though the agency relationship may have terminated, the duty of confidentiality has not.

Antitrust

Each brokerage is free to set its own fee schedules and to negotiate different charges with individual clients. Any agreement between two different firms to set standard rates, however, is a serious violation of antitrust laws. Additionally, any agreement between two or more companies to boycott some other company is a violation. The subject of boycotting has taken on greater importance recently with the emergence of discount brokerages. Discount brokerage firms offer "unbundled" services in return for low fees. In some cases, the only service offered may be entering the client's property into the local multiple listing service (MLS). Real estate licensees must refrain from any discussion of fees except when two firms are cooperating on the sale of a multiple-listed property. Merely remaining in the room while prohibited discussions are going on has been considered evidence of guilt in the past. Antitrust violations can have drastic consequences.

The brokers compensation

The broker's compensation is specified in the listing agreement, management agreement, or other contract with the principal and is subject to negotiation between the parties. Compensation is usually computed as a percentage of the total amount of money involved, but it could be a flat fee or any other consideration. Compensation usually is considered to be earned when the broker has accomplished the work for which the broker was hired after a seller accepts an offer from a ready, willing, and able buyer. A ready, willing, and able buyer is one who is prepared to buy on the seller's terms, is financially capable, and is ready to take positive steps to complete the transaction. Many listing agreements contain a preclusive agreement (an "as, if, and when" clause) providing that the broker will not collect the commission unless and until the sale has actually closed. Brokers, however, are usually entitled to a commission if the transaction is not completed for any of the following reasons: The owners change their mind and refuse to sell (with no preclusive agreement as previously mentioned) when a licensee presents a full-price offer with no contingencies. The owners commit fraud with respect to the transaction. The owners are unable to deliver possession within a reasonable time. The owners insist on terms not in the listing (for example, the right to restrict the use of the property). The owners and the buyers agree to cancel the transaction. In other words, a broker generally is due a commission if a sale is not consummated because of the seller's default. In rare situations, the commission may still be due even when it is the buyer who defaults. Generally, three events entitle brokers to compensation under the law: They must be the holder of a valid license at all times during the transaction and collection. They were either employed under a listing or other employment agreement or were authorized to perform the services in question. They were the procuring cause. Note: In every transaction, items 2 and 3 above go hand in hand. In other words, the one who is either authorized or employed always ends up being the procuring cause. Brokers are entitled to a fee if they are the procuring cause of sale; produce a ready, willing, and able buyer; or bring about a meeting of the minds. If several brokers disagree as to which one brought about a sale, the one with the best claim to be the procuring cause is that broker who brought the parties into agreement, as evidenced by the sales contract. A meeting of the minds is said to have taken place when the parties are in agreement on price, down payment, financing method, and other essential terms. New York's Real Property Law makes it illegal for a broker to share a commission with unlicensed people. This regulation forbids any form of gift or compensation, such as giving a television to a friend for providing a valuable lead or paying finder's fees and portions of the commission. Compensation by both parties is permissible if there is full knowledge and written consent of both parties. Salesperson's Compensation A salesperson's compensation is set by agreement between the broker and the salesperson. A broker may pay a salary to a salesperson or, more commonly, a share of the commissions from transactions originated by a salesperson (the commission "split"). The salesperson may never accept compensation directly from any buyer or seller, and may not accept compensation from any broker (see paragraph directly below), except the one broker with whom he or she is associated (Article 175.B). A salesperson may, however, accept compensation from a former broker for fees earned while associated with that broker.

Summary

The law of agency covers the legal relationship between real estate brokers and salespersons and the sellers, buyers, landlords, and tenants who hire them to assist in real estate transactions. The person who hires an agent is known as the principal, or client. The relationship between them is known as a fiduciary one, a relationship of trust and confidence. Third parties with whom the agent deals are simply customers. The client is owed specific fiduciary duties. The customer is owed only honest dealing. A universal agent may represent the client in all matters. A general agent such as a property manager is entrusted with a specific range of matters. Most real estate brokers act as special agents and are authorized to represent the client in one specific matter. An agency can be created by an express agreement, oral or written, or by the action of the parties. An agent does not necessarily represent the party that pays the compensation. Dual agency, in which the broker represents both parties, is a difficult situation, but legally possible if both parties give written consent to the situation. The agent's fiduciary duties to the principal include reasonable care, confidentiality (except when it would mean dishonesty to the customer), loyalty, and obedience to lawful instructions, accounting, and disclosure. Agents need not disclose the existence of "stigmas" on the property, but like the seller, they are responsible for disclosing latent, or hidden, defects. The broker's compensation may be in the form of a percentage of the sales price, a fixed fee, or an hourly wage. By law, it is considered earned when the broker presents a ready, willing, and able buyer. However, the broker and principal/client can always modify this and determine that the brokerage commission shall not be deemed earned until further action, for example, a contract signing or closing has occurred. An agency can be terminated by the death, bankruptcy, or incompetence of either party; destruction of property; expiration of the term of the agency agreement; renunciation by the agent or revocation by the principal; or completion of the purpose for which the agency was created. The duty of confidentiality, however, lasts after the agency has ended. However, when a listing agreement is executed, the relationship between broker and buyer or seller is contractual and the language of the contract controls. For example, if a seller signs an exclusive right-to-sell agreement and the seller dies during the term, the listing agreement does not terminate. Antitrust laws prohibit competing brokers from discussing or publishing commission rates charged to clients. Brokers also must refrain from negative discussions about other brokers to avoid the appearance of a group boycott. In conclusion, it is important that all representation agreements and agency disclosures be in writing.