Chapter 2: Law of Agency

Fiduciary Duties

* The real estate agent serves as a fiduciary to the client. * A fiduciary relationship implies great confidence and trust. * As a fiduciary, the agent is in a position of great trust by the client. Use the acronym OLD CAR to remember the agent's fiduciary duties to their client. Obedience - Agent shall follow the legal instructions of their client. Loyalty - Agent shall work in the best interests of their client. Disclosure of Information (Full Disclosure) - Agent shall promptly communicate all information about the transaction to their client. This includes presenting all offers to the client. Confidentiality - Agent shall not reveal confidential information about the client to prospective buyers, without the express consent from the client. Such confidential information may harm the client. Accountability - (refers to financial accountability) the agent must account for and promptly remit all money or property entrusted to the agent. Reasonable Care and Duty to Account - Agent shall possess the necessary skills and training to perform their requested services.

Listing Contracts

A listing contract is created between a seller and a broker (NOT a salesperson). The listing agreement creates an express agency relationship. The following listing contracts are the most used by brokers: Exclusive Right to Sell Agreement: This listing contract offers the most security to the broker. The seller must work exclusively with the broker to sell their property. The broker is entitled to a commission even if the seller finds a buyer themselves. Exclusive Agency Agreement: The seller must work exclusively with the broker to sell their property, BUT the seller does not have to pay the broker a commission if they find a buyer themselves. Open Listing Contract: The seller is allowed to work with any broker who brings them a buyer. Only the broker who brings a buyer is entitled to a commission. This is the riskiest type of listing contract for a broker. An open listing contract is an example of a unilateral contract. Net Listing: A net listing is not technically a listing agreement, but a method of establishing the listing broker's commission as all money above a specified net amount to the seller. Net listings are illegal in New York.

Independent Contractor Relationship

A salesperson must work under a sponsoring broker. Their relationship must be that of an independent contractor. It is important that salespersons maintain their independent contractor status in the eyes of the Internal Revenue Service (IRS). Otherwise, if the salesperson is considered an employee, the sponsoring broker will be required to withhold income taxes and pay for health insurance. To maintain an independent contractor relationship, the following rules must be met: * The broker shall not withhold income taxes. The salesperson must pay their own taxes on commissions. * The salesperson is responsible for paying social security taxes and self-employment taxes. * Compensation is not based on hours worked (a salesperson can make their own hours). * A salesperson is not required to work in a specific location (a salesperson can work from home if they choose). * A salesperson can have outside employment. * Brokers can provide office facilities and supplies, but salespersons are responsible for their own expenses (transportation, cell phone, clothing). * The broker supervises the salesperson, but does not direct or control their activity. * Either party can terminate the relationship at any time. If a salesperson is not deemed an independent contractor under their sponsoring broker (the actions of the broker or salesperson instead suggest an employer/employee relationship), the broker is responsible for withholding income taxes. If this occurs, the salesperson cannot file a Schedule C of the federal income tax Form 1040 and deduct expenses incurred during the year. Salespersons should track their expenses and file yearly federal and State tax returns. The sponsoring broker must prepare and file IRS Form 1099-MISC for any salespersons who earn $600 or more in a year.

Estoppel

An agency by estoppel exists when a principal does not stop an individual from representing his or her interests, thus creating an agency relationship between the two.

Buyer Agency / Buyer Brokerage

Buyer agency occurs when a purchaser/renter hires a broker to represent them. The purchaser/renter employs a broker to locate a property. In this relationship, the buyer is the principal and the broker is the agent. A Buyer Representation Form should be signed between the buyer and broker.

Dual Agency

Dual agency occurs when a broker represents both the buyer and seller in a transaction. Dual agency is permitted in New York State; however, advanced informed consent by BOTH parties is required. Dual agency inherently puts the agents fiduciary duty of loyalty at risk. Undisclosed Dual Agency is illegal in New York State. Instead, the agent should notify both parties and have them sign the Agency Disclosure form, which states that the agent is acting as a dual agent. This is known as Advance Consent to Dual Agency. Dual Agency with Designated Agents: A broker may elect to have designated agents within his/her office to represent both sides in the transaction. In this case, one designated agent will represent the seller and another designated agent will represent the buyer. This helps reduce the broker's risk of violating their fiduciary duties to the client.

Types of Agency

General Agent: Someone authorized to transact every kind of business for the principal. Example: Property Manager Special Agent: An agent with limited authority to act on behalf of the principal, such as created by a listing. Example: Real Estate Agent / Real Estate Broker Universal Agent: A universal agent has complete authority over any activity of the principal. Example: Power of Attorney

Misrepresentation

Misrepresentation means making an intentionally false statement to induce someone to contract. Misrepresentation consists of: 1) A false representation of a material fact. 2) A person making the false representation knew or should have known it to be false. 3) A person acts or does not act based on the misrepresentation. 4) A person who relies on the misrepresentation in acting or not acting. Positive misrepresentation means the broker concealed a material defect from the buyer. Self-dealing is another example of positive misrepresentation. Unintentional misrepresentation occurs when the broker makes a false statement to the buyer about the property and the broker does not know whether the statement is true or false.

Commissions

Real Estate Salespersons/Agents DO NOT collect money or commissions. Any commissions earned are paid to the salesperson's broker, who in turn, pays the salesperson his/her portion of the commission. Commissions are determined between the client and broker and are always negotiable (there is no 'standard' commission rate). Commissions are typically calculated as a percentage of the sales price (not the listing price). Commission between the broker and salesperson are always negotiable. A commission is technically earned when the agent finds a "ready, willing and able buyer" for the seller.

Agency Disclosure Form

The Agency Disclosure Form is a written explanation, to be signed by a prospective buyer or seller of real estate, explaining to the client the role that the broker plays in the transaction. This Agency Disclosure Form is known as the 'New York State Disclosure Form for Buyer and Seller'. The Agency Disclosure Form outlines the following: * The agent's duties to the client. * Explains that an agent owes a fiduciary duty to the client. * Allows for advance consent to dual agency. The Agency Disclosure Form is not required for the sale of vacant land. According to Section 443 of the NYS Real Property Law, licensees must present a written Agency Disclosure Form that details consumer choices about representation at the first substantive contact. If a seller or buyer refuses to sign the Agency Disclosure Form, the agent should do the following: * Document the names and time, date, and reasons for refusal to sign the disclosure form. * Complete the declaration form stating the facts, have it acknowledged, and retain a copy for their records for at least 3 years. * The declaration form should say the following: "Although I indicated to the buyer/seller that New York State Law required that I request that he/she sign to acknowledge receipt of the disclosure notice, he/she refused to sign the acknowledgement to the disclosure form when presented. The reason given for this refusal was as follows..."

Property Condition Disclosure Statement

The Property Condition Disclosure Act requires the seller to submit to the buyer, a 'Property Condition Disclosure Statement, prior to signing the contract of sale. If the statement is not signed, the buyer shall receive a $500 credit against the purchase price of the property. Most seller attorneys advise their clients NOT to sign the statement, as it opens them up to a vast amount of liability.

Sherman Anti-Trust Act

The Sherman Anti-Trust Act made the following actions illegal: 1) Price fixing 2) Group boycotts 3) Market allocation 4) Tie-in arrangements

Agent / Client Relationships

The buyer and/or seller is known as the Principal or Client. The broker is known as the Agent. The salesperson is a Sub-agent of their broker.

Vicarious Liability

Vicarious liability is a situation in which one party is held partly responsible for the unlawful actions of a third party. According to Section 442-c of the New York Real Property Law, a broker is vicariously liable for a salesperson's actions only when "the broker had actual knowledge of such violations or if the broker retains the benefits from the transaction after he knows that the salesperson has engaged in some wrongdoing".