Unit 3

Buyer as principal

- A buyer who contracts with a broker to locate property and represent the buyer's interests in a transaction is the principal—the broker's client. -The broker, as agent, is strictly accountable to the buyer. -A buyer agency relationship is established in the same way as any other agency relationship: by contract or agreement. -The buyer's agent may receive a flat fee, a share of the commission, or both, depending on the terms of the agency agreement. -When acting as a buyer's agent, licensing law specifically states that the licensee must make a continuous and good-faith effort to find a property for the buyer until the buyer is subject to an existing agreement of sale. -The law also states that the buyer's agent must disclose to the listing broker any engagement to represent the buyer. -In the absence of a listing broker, this disclosure must be made to the seller.

Creation and Termination of Agency (cont.)

-Agency Relationships (cont.) -Implied agency -An agency may also be created by implied agreement. This occurs when the actions of the parties indicate that they have mutually consented to an agency. -A licensee acts on behalf of another party as that party's agent. Even though the licensee may not have consciously planned to create an agency relationship; nonetheless, the parties can create one unintentionally, inadvertently, or accidentally by their actions. -Example -Prospective buyers enter a real estate office asking to see a property listed with another brokerage. A real estate salesperson immediately calls the sellers' agent to make an appointment to show the property. -Without having the customers sign a written agency agreement, the salesperson drives them to the house. -Through the actions of the salesperson, the customers think they are being represented. -Even though licensees may be required to disclose their agency status, consumers often find it difficult to understand the complexities of the law of agency. -Buyers can easily assume that when they contact a real estate salesperson in order to be shown a property, the real estate salesperson becomes their agent, even though, under a listing contract, the real estate salesperson may legally represent the seller. -An implied agency with the buyer can result if the words and conduct of the salesperson do not dispel this assumption. -Otherwise, one agency relationship is created in conflict with another. -Note that some state laws prohibit the creation of agency by implied actions or conduct. -An agency coupled with an interest is a relationship in which the agent is given an interest in the subject of the agency, such as the property being sold. -An agency coupled with an interest cannot be revoked by the principal or be terminated upon the principal's death. -For example, a broker might agree to supply the financing for a condominium development in exchange for the exclusive right to sell the completed units. -Because this is an agency coupled with an interest, the developer would not be able to revoke (end) the listing agreement after the broker provided the financing.

Agency

-Agency is the relationship between a real estate licensee (agent) and the parties represented by the agent in a real estate transaction. -In addition to the parties' assumptions and expectations, the licensee is subject to a wide range of legal and ethical requirements designed to protect the seller, the buyer, and the transaction itself. -Agency is governed by common law (the rules of a society established by tradition and court decisions) and statutory law (the laws, rules, and regulations enacted by legislatures and other governing bodies). -States have reconsidered the principal-agent relationship, and today, licensees may determine whether they will represent the seller, the buyer, or both (if that is permitted by state law) in a transaction. -The underlying assumptions that govern the agency relationship remain intact. -The principal-agent relationship evolved from the master-servant relationship under English common law. -In that relationship, the servant owed absolute loyalty to the master. -The loyalty replaced the servant's personal interests as well as any loyalty the servant might owe to others. -In today's agency relationship, the agent owes the principal similar loyalty and other defined duties.

Fiduciary, Care

-Agents must exercise a reasonable degree of care while transacting business entrusted to them by the principal. -Principals expect the agent's skill and expertise in real estate matters to be superior to that of the average person. -The most fundamental way in which the agent exercises care is to use that skill and knowledge on the principal's behalf. -The agent should know all facts pertinent to the principal's affairs, such as the physical characteristics of the property being transferred and the type of financing being used. -If the agent represents the seller, care and skill include helping the seller arrive at an appropriate and realistic listing price, discovering and disclosing facts that affect the seller, and properly presenting the contracts that the seller signs. -It also means 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. -An agent who represents the buyer is expected to help the buyer locate suitable property and evaluate property values, neighborhood and property conditions, financing alternatives, and offers and counteroffers, all with the buyer's interest in mind. -An agent who fails to make a reasonable effort to properly represent the interests of the principal could be found negligent in court. -The agent is liable to the principal for any loss resulting from negligence or carelessness. In Practice -Because real estate licensees have, under the law, enormous exposure to liability, some licensees purchase what is known as errors and omissions (E&O) insurance. -Similar to malpractice insurance in the medical and legal fields, E&O policies cover liability for errors and negligence in the listing and selling activities of a real estate licensee. -Individual salespersons might also be insured. -Licensing laws in several states now require E&O insurance for brokers and, in some cases, for individual salespersons as well. -However, no insurance policy will protect a licensee from a lawsuit or prosecution arising from criminal acts. -Insurance companies normally exclude coverage for violation of civil rights and antitrust laws as well.

Disclosure Scenario

-Alanda, a licensee, is selling a single family home for Lester. -There is a city bus stop in front of the home, and Alanda advertises the fact that public transportation is easily accessible. -Jenna, a woman with mobility impairment, views the property and submits an offer on her own. -Lester accepts the offer. -During the attorney's review portion of the contract, Alanda learns that the bus stop will be moved six blocks away. -She brings this to the attention of Lester, who instructs her not to disclose this information to Jenna. -Alanda, however, does disclose the information to Jenna, and Jenna cancels the contract before the end of the attorney's review. -Lester is angry and sues Alanda for breach of fiduciary duty. -Based on this scenario, answer the following questions: Q: Has Alanda violated her fiduciary duty of obedience to Lester? Why or why not? No, because The agent is obligated to discover facts that a reasonable person would feel are important in choosing a course of action, regardless of whether they are favorable or unfavorable to the principal's position. If there is an issue regarding disclosure of Material Facts, which is it? Q: Has Alanda violated her fiduciary duty of obedience to Lester? Why or why not? No, because the agent may not obey instructions that are unlawful or unethical. If there is an issue regarding disclosure of material facts, which is it? IS a defect that threatens the well being of the habitant.

Types of Agency Relationships

-An agent's empowerment to represent the principal depends solely on the authorization to do so. 1.) A universal agent. is a person empowered to do anything the principal could do personally. -The universal agent's authority to act on behalf of the principal is virtually unlimited. -A real estate licensee typically does not have this scope of authority in a real estate transaction. 2.) A general agent (One who is authorized by a principal to represent the principal in a range of matters.) may represent the principal in a broad range of matters related to a particular business or activity. -The general agent may, for example, bind the principal to any contract within the scope of the agent's authority. -A property manager is typically a general agent for the owner. -Most real estate salespersons are general agents of their broker. 3.) A special agent, (One who is authorized by a principal to perform a specified single act on behalf of a principal.) or limited agent, is authorized to represent the principal in one specific act or business transaction only. -A real estate broker is usually a special agent. If hired by a seller, the broker is limited to finding a ready, willing, and able buyer for the property. -A special agent for a buyer would have the limited responsibility of finding a property that fits the buyer's criteria. -As a special agent, the real estate broker may not bind the principal to any contract. Example: -You are very busy with an important project, so you give your colleague $5 and ask him to buy your lunch. Your colleague is your general agent—you have limited your colleague's scope of activity to a particular business (buying your lunch) and established the amount that may be spent (up to $5). -Still, your colleague has broad discretion in selecting what you will eat and where to buy it. However, if you had told your colleague, "Please buy me a chef's salad at the corner café," you would have further limited his authority to a very specific task. -Your colleague, therefore, would have been your special agent. -In Pennsylvania The Pennsylvania Real Estate Licensing and Registration Act (RELRA) permits a broker to act as the agent of a buyer (or tenant); the agent of a seller (or landlord); a dual agent for the seller/landlord and buyer/tenant in the same transaction; or a transaction licensee, a nonagent who provides only customer-level service for either or both the buyer/tenant and seller/landlord in the transaction. -While the RELRA permits the broker to engage in any of these relationships, the law does not require a broker to offer all of them. -Regardless of which services the broker's firm offers, the licensees are required to disclose all the relationships permitted by state law so that consumers are aware of their options. -This disclosure is provided in the Consumer Notice that is discussed later in this unit. While licensees have fiduciary responsibilities to their clients, they have certain obligations to all consumers of their services.

Confidentiality

-Confidentiality is a key element of fiduciary duties. -An agent may not disclose the principal's financial condition. -If the principal is the seller, the agent may not reveal such things as willingness to accept less than the listing price or urgency to sell, unless the principal has authorized the disclosure. -If the principal is the buyer, the agent may not disclose that the buyer is willing to pay a higher price, is under a tight moving schedule, or other facts that might affect the principal's bargaining position. -Confidentiality can change when the business relationship changes, such as when a seller's agent becomes a disclosed dual agent, because the broker is now also representing the buyer. -Under the laws of most states, the agent must disclose material facts about the condition of the property itself. -Some states, however, permit a seller disclaimer—essentially a statement that the property is sold as is, with no promises regarding its quality. -Note, however, that even with this disclaimer, sellers are still required to disclose known problems with the property if they affect the health and well-being of the occupants. -It is important to remember that anything a real estate agent learns about a client must remain confidential forever; it extends beyond the expiration of that relationship.

Single Agency (cont.) Seller as principal

-If a seller enters a listing agreement with a broker to market the seller's real estate, the broker becomes a seller's agent; the seller is the principal, the broker's client. -The broker is obligated to deal fairly with all parties in the transaction and within the licensing law. -The broker is strictly accountable to the principal. -The listing contract usually authorizes the broker to use licensees employed by the broker, as well as the services of other cooperating brokers in marketing the seller's real estate. -The relationship of a salesperson or an associate broker to an employing broker is also an agency. -These licensees are thus agents of the broker and owe the same fiduciary duties as the broker to the principal, who in this case is the seller.

Dual Agency (cont.)

-In Pennsylvania Disclosed dual agency Licensees may act for more than one party in a transaction only with the knowledge and written consent of all parties being represented. -Although the possibility of conflict of interest still exists, disclosure is intended to minimize the risk for the broker. -The disclosure alerts the principals that they might have to assume greater responsibility for protecting their interests than they would if they had independent representation. -Because the duties of disclosure and confidentiality are limited by mutual agreement, they must be carefully explained to the parties in order to establish informed consent. Example -A real estate broker is the agent for the owner of a large mansion. -A prospective buyer comes into the broker's office and asks her to represent him in a search for a modest home. -After several weeks of activity, including two offers unsuccessfully negotiated by the broker, the prospective buyer spots the For Sale sign in front of the mansion. -He tells the broker that he wants to make an offer and asks for the broker's advice on a likely price range. -The broker is now in the difficult position of being a dual agent. -She represents the seller, who naturally is interested in receiving the highest possible price, and the buyer, who is interested in making a successful low offer.

Dual Agency

-In dual agency, the agent represents two principals in the same transaction. -Dual agency requires equal loyalty to two different principals at the same time. -Because agency originates with the broker, dual agency arises when the broker is the agent of the buyer and the seller. -The salespersons, as agents of the broker, have fiduciary or statutory responsibilities to the same principals as well. -The challenge is to fulfill the fiduciary or statutory obligations to one principal without compromising the interests of the other, especially when the parties' interests may be not only separate but also opposite. -While practical methods of ensuring fairness and equal representation may exist, it should be noted that a dual agent can never fully represent either party's interests (see Dual Agency). -Because of the risks inherent in dual agency—ranging from conflicts of interest to outright abuse of trust—the practice is illegal in some states. - In those states where dual agency is permitted, all parties must consent to the arrangement, preferably in writing. Buyer -> agent <- Seller.

Single Agency

-In single agency, the agent represents only one party in any single transaction. -The agent must provide fiduciary or statutory duties exclusively to one principal within the transaction (who may be either the buyer or the seller or the landlord or the tenant). -The customer is the party not represented by the agent (see Single Agency). -While a single agency broker may represent both sellers and buyers, that broker cannot represent both the buyer and the seller in the same transaction and remain a single agent. -This avoids conflicts and results in client-based service and loyalty to only one principal. On the other hand, it traditionally rules out the sale of in-house listings to prospective buyers. Single Agency: Client -> Agent -> Customer

Agency Concepts cont.

-Legally, the term agency refers to a strict, defined legal relationship. -In the case of real estate, the relationship is between buyers and sellers or between landlords and tenants. -In the law of agency, the body of law that governs these relationships, the following terms have specific definitions: -The agent is the individual who is authorized and consents to represent the interest of another. -In the real estate business, a firm's broker is the agent, and shares this responsibility with the licensees who work for the firm. -A subagent is the agent of an agent. -If permitted by the original agency agreement, an agent may delegate some authority or responsibility to another party, the subagent. -The subagent, because of this extension of the agent's authority, is also an agent of the principal. -The principal is the individual who hires the agent and delegates to that agent the responsibility of representing the principal's interests. -In the real estate business, the principal is the buyer or seller, the landlord or tenant. -Agency is the fiduciary relationship between the principal and the agent wherein the agent is authorized to represent the principal in a certain transaction. -A fiduciary relationship is one in which the agent is placed in the position of special trust and confidence to the principal. -The client is the principal to whom the agent gives advice and counsel. -The customer is the third party or nonrepresented consumer for whom some level of service is provided and who is entitled to fairness and honesty. -A nonagent (also referred to as a facilitator, intermediary, transactional broker, transactional coordinator, or contract broker) is a middleman between a buyer and a seller (or a landlord and a tenant) who assists one or both parties with the transaction without representing either party's interests. -Nonagents are often subject to specific statutory responsibilities. -Licensees may be known as nonagents with a customer relationship. In Pennsylvania -The real estate licensing law defines agency practices. -A consumer, as the recipient of any real estate service, is one who may engage a broker to provide services under a variety of working relationships, not all of which cast the broker as an agent or rise to the level of an agency relationship. -Section 201 of the law specifically defines agency relationship, buyer agent, designated agent, dual agent, principal, seller agent, subagent, and transaction licensee. (A licensee who provides services to a consumer without an agency relationship. -These definitions are intended to clarify the working relationships permitted between licensees and consumers) -In Practice The fundamentals of agency discussed in this text are consistent with Pennsylvania law that prevails as of this writing. Licensees must monitor legislative and regulatory developments to ensure that their practices are consistent with current laws, rules, and policies.

Environmental Hazards

-No matter whom licensees represent, they should ensure that their clients are aware of potential issues with environmental health hazards, which can render properties unusable for the buyer's intended purpose. -For instance, federal law requires the disclosure of lead-based paint hazards. -Frequently, the buyer or the buyer's mortgage lender requests inspections or tests to determine the presence or level of risk. -Sellers are required to complete a Seller Property Disclosure Statement in which they are obligated to note any deficiencies in the property. -This requirement applies only to sellers of one- to four-family dwellings, not commercial, industrial, or agricultural properties or even large apartment buildings. -In any case, buyers are responsible for discovery (i.e., protecting their interests by testing and asking questions). -In Practice -Licensees are encouraged to obtain advice from state and local authorities responsible for environmental regulation whenever the following conditions might be present: toxic-waste dumping; underground storage tanks; contaminated soil or water; nearby chemical or nuclear facilities; and health hazards such as radon, asbestos, and lead paint.

Answer Disclosure Scenario

-Obviously, Alanda's disclosure is the event which ends the contract. -Because the customer has a mobility impairment, the fact that the bus stop is being moved six blocks away is more than likely a material fact to that individual. -If the customer did not have a mobility impairment, it would probably not have been an issue. -To someone without a mobility impairment, the change in location of the bus stop would likely be more of an inconvenience than the challenge presented to the current purchaser. -Alanda is acting within her obligations to the public. Though harm may have been caused to Lester, Alanda is not liable for it.

Disclosure

-The agent has a duty to inform the principal of all facts or information that might affect the principal's position in a transaction. -Duty of disclosure includes relevant information or material facts that the agent knows or should have known. -The agent is obligated to discover facts that a reasonable person would feel are important in choosing a course of action, regardless of whether they are favorable or unfavorable to the principal's position. -The agent may be held liable for damages for failing to disclose such information. -This includes the following disclosures: 1. Once an offer is accepted, further offers unless instructed in writing not to 2. All offers unless directed by the seller to not present an offer after one has been accepted 3. The identity of the prospective purchasers, which may include any relationships they might have with the agent or the agent has to them (such as when the licensee or a relative is a purchaser) 4. The purchaser's ability to complete the sale or offer a higher price 5. Any interest the agent has in the buyer (such as the broker's agreement to manage the property after it is purchased) 6. The buyer's intention to resell the property for a profit 7. An incorrect market value of the property - A seller's real estate agent is also expected (and required under many states' laws) to disclose information about known material defects in the property to prospective buyers. -Sellers are required to disclose latent defects of which they are aware (i.e., a hidden structural defect that could not be discovered by ordinary inspection and that threatens the property's soundness or safety of its inhabitants). -In turn, the buyer's agent must disclose deficiencies of a property as well as provisions in a sales contract and financing terms that may affect the buyer's decision to purchase. -The buyer's agent would suggest the lowest price that the buyer should pay based on comparable values, regardless of the listing price. -The agent also would disclose other information such as how long the property has been listed or why the seller is selling, because such information would affect the buyer's ability to negotiate the lowest purchase price. -If the agent represents the seller, of course, disclosure of any of this information would violate the agent's fiduciary duty to the seller. **In Practice Selling a property "as is" does not negate provisions already in the contract. -If sellers truly mean "as is," they amend any printed provisions existing in the contract that relate to the condition of systems and appliances.

Accounting

-The agent must be able to report the status of all funds received from or on behalf of the principal. -Brokers are required to deposit and account for escrow funds in the manner prescribed in Pennsylvania's licensing law. -Commingling ( blend) client monies with personal or general business funds is strictly illegal. -Conversion is the illegal use of such entrusted money. Brokers are also required to give copies of all documents to all parties affected by them and keep records of these documents for at least three years.

Loyalty

-The duty of loyalty requires that the agent place the principal's interest above those of all others, including the agent's own self-interest. -The agent must be particularly sensitive to any possible conflicts of interest. -Because the agent may not act out of self-interest, the negotiation of a sales contract must be conducted without regard to how much the agent will earn in commission. -Agents may not buy property listed with them for their own accounts or for accounts in which they have a personal interest without first disclosing that interest and receiving the principal's consent. -Neither real estate brokers nor real estate salespersons may sell property in which they have a personal interest without informing the purchaser of that interest.

Obedience

-The fiduciary relationship obligates the agent to act in good faith at all times, obeying the principal's instructions in accordance with the contract. -However, that obedience is not absolute. -The agent may not obey instructions that are unlawful or unethical. -On the other hand, an agent who exceeds the authority assigned in the contract will be liable for any losses that the principal suffers as a result.

Agency Concepts

-The law of agency defines the rights and duties of the principal and the agent. -It applies in a variety of business relationships. -In real estate transactions, contract law and real estate licensing law—in addition to the law of agency—interpret the relationship between licensees and their clients (principal). -While the law of agency is a common-law concept (law from the judgments and decrees of courts as opposed to the legislature), it is being widely replaced by state statute.

Express agency

-The principal and agent may enter into a contract, or an express agreement, in which the parties formally express their intention to establish an agency and state its terms and conditions. -The agreement may be either oral or written. -An agency relationship between a seller and a broker is generally created by a written employment contract, commonly called a listing agreement: ( A contract between an owner (as principal) and a real estate broker (as agent) by which the broker is employed as agent to find a buyer for the owner's real estate on the owner's terms, for which service the owner agrees to pay a commission.) which authorizes the broker to find a buyer or a tenant for the owner's property. -Although a written listing agreement is usually preferred, some states consider an oral agreement binding. -An express agency relationship between a buyer and a broker is created by a buyer agency agreement. -Similar to a listing agreement, it stipulates the activities and responsibilities the buyer expects from the broker in finding the appropriate property for purchase or rent. -In Pennsylvania All exclusive contracts of employment must be in writing. -Furthermore, the Real Estate Commission's regulations prohibit a licensee from marketing or advertising the sale or lease of real estate or otherwise soliciting prospective buyers without the written authority of the seller or owner (or the owner's agent).

Key Terms:

1) Agency: is the relationship between a real estate licensee (agent) and the parties represented by the agent in a real estate transaction 2)Agency coupled with an interest: is a relationship in which the agent is given an interest in the subject of the agency, such as the property being sold. 3)Agent: is the individual who is authorized and consents to represent the interest of another. 4)Client: Is the principal to whom the agent gives advice and counsel. 5)Consumer: as the recipient of any real estate service, is one who may engage a broker to provide services 6)Consumer Notice: Is a disclosure summary that must be discussed prior to the purchase or sale of residential or commercial real estate 7)Customer: Is the third party or nonrepresented consumer for whom some level of service is provided and who is entitled to fairness and honesty. 8)Designated agency: is the practice where two different agents in a single office represent the parties in a transaction. 9)Dual agency: The agent represents two principals in the same transaction. 10)Express agency: the parties formally express their intention to establish an agency and state its terms and conditions. The agreement may be either oral or written 11)Fiduciary duties: 12)Fiduciary relationship: is one in which the agent is placed in the position of special trust and confidence to the principal. 13)General agent: May represent the principal in a broad range of matters related to a particular business or activity. 14)Implied agency: This occurs when the actions of the parties indicate that they have mutually consented to an agency. 15)Latent defect: Hidden structural defect that could not be discovered by ordinary inspection and that threatens the property's soundness or safety of its inhabitants 16)Law of agency: defines the rights and duties of the principal and the agent. 17)Listing agreement:An agency relationship between a seller and a broker is generally created by a written employment contract 18)Nonagent: Also referred to as a facilitator, intermediary, transactional broker, transactional coordinator, or contract broker) is a middleman between a buyer and a seller (or a landlord and a tenant) who assists one or both parties with the transaction without representing either party's interests. 19)Principal: Is the individual who hires the agent and delegates to that agent the responsibility of representing the principal's interests. 20)Single agency: The agent represents only one party in any single transaction. 21)Special agent: One who is authorized by a principal to perform a specified single act on behalf of a principal.) or limited agent, is authorized to represent the principal in one specific act or business transaction only. 22)Subagency: s created when one broker appoints other brokers, as subagents, to help perform client-based functions on the principal's behalf. 23)Subagent: Is the agent of an agent. -If permitted by the original agency agreement, an agent may delegate some authority or responsibility to another party, the 24)Transaction licensee: A nonagent who provides only customer-level service for either or both the buyer/tenant and seller/landlord in the transaction. 25)Universal agent: Is a person empowered to do anything the principal could do personally.

An agency may be terminated for any of the following reasons:

1) Completion, performance, or fulfillment of the purpose for which the agency was created 2) Death or incapacity of either party 3) Destruction or condemnation of the property 4)Expiration of the terms of the agency 5) Mutual agreement by all parties to cancel the contract 6) Breach by one of the parties 7) By operation of law, as in bankruptcy of the principal (bankruptcy terminates the agency contract and title to the property transfers to a court-appointed receiver)

Undisclosed dual agency

A broker may not intend to create a dual agency. -It might occur unintentionally or inadvertently. -Sometimes the cause is carelessness. - At other times, a salesperson does not fully understand the fiduciary responsibilities. -Some salespersons lose sight of other responsibilities when they focus intensely on bringing buyers and sellers together. -For instance, a salesperson representing the seller might suggest to a buyer that the seller will accept less than the listing price. -Or that same salesperson might promise to persuade the seller to accept an offer that is in the buyer's best interests. -Giving a buyer any specific advice on how much to offer can lead the buyer to believe that the salesperson represents the buyer's interests and is acting as the buyer's advocate. -Any of these actions can create an implied agency with the buyer and violate the duties of loyalty and confidentiality to the principal-seller. -Because neither party has been informed of the situation and given the opportunity to seek separate representation, the interests of both are jeopardized. -This undisclosed dual agency violates licensing laws. -It can result in the rescission (cancellation) of the sales contract, forfeiture of a commission, a lawsuit for damages, and possible license problems. Example -Using the previous large-mansion example, if the broker doesn't tell the prospective buyer that he represents the seller of the property, he will be an undisclosed dual agent. -The broker has two options. First, knowing the prospective buyer's comfortable financial situation and intense desire for the property, he might choose not to tell the buyer about the dual agency situation. -Instead, he could tell her that the mansion's owner will accept nothing less than the full asking price. -While this will ensure that the broker receives the maximum possible commission, it will also subject him to severe penalties for violating the state's licensing laws. -Alternatively, he can disclose his relationship with the seller and work out a dual agency agreement with both parties in which he legally represents both parties' interests. -A more common example of dual agency occurs when a broker, who employs two salespersons, has the first salesperson act as the listing salesperson for the mansion. -The second salesperson meets and begins representing the buyer. -Because both salespersons are associated with the broker's real estate brokerage, the broker might be construed as a dual agent and will have to enter into a disclosed dual agency agreement with the parties.

A subagency

A subagency is created when one broker appoints other brokers, as subagents, to help perform client-based functions on the principal's behalf. A subagent is a broker, not in the employ of the listing broker, who is engaged to act for or cooperate with the listing broker as an agent of the seller. The subagent assumes the same fiduciary obligations to the principal that the agent has (see Subagency). Although once common, Client -> Agent -> Subagent

Tenant as principal

A tenant may contract with a broker to locate property suitable for the tenant's specific purposes. In this case, the broker becomes the agent of the tenant (similar to the relationship a broker has with a buyer-client) and the tenant is the principal. The broker has fiduciary obligations to the tenant-client and the landlord/property owner is the broker's customer. Tenant representation is common in commercial transactions for brokers to represent tenants in their quest for suitable office or retail space.

Designated Agency

Designated agency is a process that accommodates an in-house sale in which two different affiliated licensees are involved. -The broker designates one licensee to represent the seller and one licensee to represent the buyer. -The broker is still a dual agent. - Two licensees from the same real estate company might end up representing opposite sides in a property sale. -Disclosure of such status is required. - While license law states that licensees employed by a broker bear the same relationship to the consumer as the broker, designated agency is an exception to this rule.

Termination of Agency

-An agency may be terminated for any of the following reasons: -Completion, performance, or fulfillment of the purpose for which the agency was created -Death or incapacity of either party -Destruction or condemnation of the property -Expiration of the terms of the agency -Mutual agreement by all parties to cancel the contract -Breach by one of the parties -By operation of law, as in bankruptcy of the principal (bankruptcy terminates the agency contract and title to the property transfers to a court-appointed receiver)

Landlord as principal

-An owner may employ a broker to market, lease, maintain, or manage the owner's property. -Such an arrangement is known as property management. -The broker is made the agent of the property owner through a property management agreement. -As in any other agency relationship, the broker has a fiduciary or statutory responsibility to the client-owner. -Sometimes, an owner may employ a broker for the sole purpose of marketing the property to prospective tenants. - In this case, the broker's responsibility is limited to finding suitable tenants for the owner's property.

Client vs. Service

- There is a distinction between the level of services that an agent provides to a client and those services that the agent provides to a customer. -The client is the principal to whom the agent gives advice and counsel. -The agent is entrusted with certain confidential information and has fiduciary responsibilities (discussed in greater detail later in this unit) to the principal. -In contrast, any third party is the customer who is entitled to factual information and fair 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. -Essentially, the agent supports and defends the principal's interests, not the customer's. -In Pennsylvania, a licensee may choose to work only for the buyer, only for the seller, or with both (with the client's permission). -It is possible for a listing agent to show a property to a consumer and strictly work on behalf of the seller client. -Some agents mistakenly believe that showing a house or holding an open house means that any buyer who comes through the door automatically puts them in a dual agency position. -This is not true. -In Pennsylvania, the licensee must provide the Consumer Notice at first meeting and go over the possible agency relationships. -Licensees are not obligated to work with any consumer in a client capacity simply because they meet the person at the house. -They may choose to work only for one side or the other, as long as that choice is outlined to the consumer and the consumer agrees to the relationship. -For example, if a licensee representing a seller does not wish to do dual agency, and holds an open house, the agent would present each consumer who attends the open house with the Consumer Notice. -She would inform the open house attendees that she works for the seller alone. -If any consumers at the open house wish to write an offer on the property they may do so with the listing agent—but without representation by the agent. -In this case, the listing agent would check the box on page one of the PAR Agreement of Sale to say that the buyer is unrepresented, and that she represents the seller. -Similarly, in a case where a buyer's agent brings a buyer to a for sale by owner, the seller may be unrepresented. ? -The buyer's agent is not automatically a dual agent. -If the buyer wishes to make an offer, the buyer's agent would check the box on page one of the PAR -Agreement of Sale to say that the seller is unrepresented, and that she represents the buyer only. -Note that the issue of compensation and agency are two separate issues. -First, the listing contract is between the seller and the broker, outlining the fee to be paid to the broker and the terms. -In an exclusive right to sell listing contract, the fee is to be paid to the listing broker whether or not the buyer is represented by an agent. -Second, the listing agent may open a door, show the property, and write an offer on the house whether the buyer is represented by the agent (in a dual agency capacity) or unrepresented. -In the first case, of dual agency, both the seller and the buyer must agree that the listing agent may act as a dual agent. -In the second case, the agent must inform the buyer that he represents the seller alone and that the buyer is unrepresented. -These agency relationship choices are outlined in the Consumer Notice, and confirmed again on page one of the PAR Agreement of Sale. -The broker ultimately decides which forms of agency the company allows. -Some brokers refuse to allow dual agency of any form in the office. -Some brokers allow dual agency only if two separate agents in the office represent the parties. - Designated agency is the practice where two different agents in a single office represent the parties in a transaction. -In that case, the broker is a dual agent, but the agents are designated to represent each side. -Some brokers may strictly represent either buyers or sellers as their marketing position. -In rural areas, it is difficult for brokers to limit their practice to only buyers or only sellers, and dual agency may be difficult to eliminate. -In more populated urban areas, this is easier for the broker to mandate. -In cases where two brokers are involved in a transaction, the buyer is the client of the cooperating broker, and the seller is the client of the listing broker. - It is important to remember that no matter who the agent represents, compensation and agency/representation are two separate issues.

Consumer Notice

-Mandatory agency disclosure laws now exist in every state. -Real estate licensees are required to disclose to the parties with whom they work the scope of the service the party can expect from the agent. -The intent of the disclosure is to educate consumers so that they may make an informed decision about the level of service they may expect from the real estate licensee. -The Pennsylvania Consumer Notice is a disclosure summary that must be discussed prior to the purchase or sale of residential or commercial real estate or for the lease of residential or commercial real estate when the licensee is working on behalf of the tenant. -A different disclosure is required for the lease of residential or commercial real estate when the licensee is working on behalf of the owner. - No disclosure is required when the transaction is for the sale or lease of commercial property to consumers who are not individuals, such as corporations or other business entities. -The major provisions of the Consumer Notice are: 1. A statement advising the party that a licensee is not representing the consumer unless an agency relationship is selected by signing a written agency agreement; 2. General duties a licensee owes all consumers, regardless of the nature of the business relationship; 3. Descriptions of the business relationships permitted in Pennsylvania: seller agency, buyer agency, dual agency, designated agency, and transaction licensee; 4. Contractual terms that must be included in all agreements; and 5. A statement about the Real Estate Recovery Fund. -In Pennsylvania licensees must discuss the Consumer Notice at the initial interview or the first substantive discussion between a licensee and a consumer about the consumer's needs before the licensee provides any services, and before they enter into an agency agreement or agreement of sale (see Consumer Notice). -Good business practice is to have the discussion before any confidential information is disclosed about an individual's motivation or financial situation. -Licensees should explain to the consumer what agency alternatives exist. -The licensee is to retain a copy of the signed/refused acknowledgment for six months and provide the consumer with a copy of the entire disclosure summary. -The law contemplates that this will be the first face-to-face meeting between a licensee and a consumer. -However, in practice, telephone conversations or email communications can involve substantive discussions before an in-person meeting. -If that occurs, the licensee is required to make the following disclosure to the consumer: -The real estate law requires that I provide you with a written Consumer Notice that describes the various business relationship choices that you may have with a real estate licensee. -Since we are discussing real estate without you having the benefit of the Consumer Notice, I have the duty to advise you that any information you give me at this time is not considered to be confidential, and any information you give me will not be considered confidential unless and until you and I enter into a business relationship. -At our first meeting I will provide you with a written Consumer Notice which explains those business relationships and my corresponding duties to you. -This disclosure statement intends to make sure consumers are aware that they may be divulging personal information to a licensee who is not, and may not ever become, the consumer's agent. - Hopefully, the consumer will be discouraged from sharing confidential information that should not be entrusted to a licensee without the benefit of an agency relationship. -The disclosure process does not end with the Consumer Notice. The broker of the real estate firm must establish procedures for disclosing 1. the specific types of services the firm provides, 2. the party the licensee represents in a specific transaction, 3. company policies regarding dual agency and designated agency, and 4. company policies regarding cooperation with other brokers. In Practice -Licensees must be familiar with the various business relationships permitted in Pennsylvania and the activities involved when serving clients versus customers so they can properly explain their services to consumers. -Equally important is that licensees must also conduct themselves in ways that are consistent with the level of service a consumer engages them to provide. -Consumer Notice Information About Consumer Notice Source: Reprinted with permission of the Pennsylvania Association of REALTORS®

Creation and Termination of Agency

-The relationship between the principal and the agent must be consensual; that is, the principal delegates authority and the agent consents to act. -The parties must agree to form the relationship. Just as the agent owes certain duties to the principal, the principal has responsibilities toward the agent. -The principal's primary duties are to comply with the agency agreement and cooperate with the agent; -that is, the principal must not hinder (create difficulties) the agent and must deal with the agent in good faith. -The principal also must compensate the agent according to the terms of the agency agreement.

Compensation

-The source of compensation does not determine agency. -An agent does not necessarily represent the person who pays the agent's commission. -In fact, agency can exist even if no fee is involved (called a gratuitous agency). For instance, a seller might agree to pay a commission to the buyer's agent, even though the agent is representing the buyer. The written agency agreement should state how the agent is being compensated and to explain all alternatives.

Agency Relationships

An agency relationship may be created with a formal agreement between the parties, an express agency, or it may result from the parties' behavior, an implied agency.