Real Estate Brokerage and the Law of Agency (Chapter 7...IMPORTANT!!)

Designated Dual Agency (cont.)

-To become a dual agent, the same firm must have a client relationship with both the seller and buyer -There cannot be a designated dual agency unless dual agency exists first -The firm owes the same fiduciary duties to both parties which has the effect of neutralizing the firm and its agents when acting as dual agents, but designated dual agents ow their fiduciary duties exclusively to the party they are designated to represent, even though the firm has an equal obligation to both parties -Designated dual agency is a form of dual agency that is optional, but it has the potential to result in both of the firm's clients receiving better representation -To practice dual or designated dual agency, the firm's policy must authorize it and both parties must give their written consent.

Material Facts

-facts about the property itself ( i.e. significant physical characteristics such as unpermitted space, a structural defect, or defective mechanical systems. -facts relating directly to the property (usually factors outside the property that may directly affect value, use, or desirability of the property, such as a pending zoning change or planned highway construction in the immediate vicinity) -facts relating directly to the ability of the agent's principal to complete the transaction (such as a pending foreclosure sale or buyer's inability to qualify for financing) -facts known to be of a specific importance to a party (most likely to be items of special interest to a purchaser's intended use of the property, such as zoning allowing home businesses or covenants allowing multiple pets)

Independent Contractor vs Employee

Associated brokers with an active license may be paid for tax purposes either as a Form W-2 employee or as a Form 1099 independent contractor. This distinction is relevant primarily for tax purposes and is determined by tests set forth by the IRS as to the degree of control exercised by the employer/principal over its employees/agents. Regardless of whether associated brokers are paid as employees or independent contractors, the real estate company has the right to determine company policy and to dictate certain procedures or rules governing how its associated brokers will conduct their brokerage business, as they are engaging in brokerage as agents of the company which remains liable for its broker's coduct.

Prohibited Conduct

NC real estate license law specifically prohibits the following types of acts in the broker's relationship with any party to the transaction -willful misrepresentation : intentionally misinforming any party involved in a transaction about a material fact -negligent misrepresentation : unintentionally misinforming any party involved in a transaction about a material fact -willful omission : intentionally failing to disclose a material fact to any party involved in a transaction -negligent omission : unintentionally failing to disclose a material fact to any party involved in a transaction

Subagency

Subagency is created when one broker/firm, usually the seller's agent, appoints other broker/firms (with the authority of the seller) to assist in performing client-based functions on the principal's behalf.

Agent Services

The NCREC strongly encourages the BIC of a real estate firm to have a written office policy as to the types of agency that the firm will practice; Seller single agency Buyer single agency Dual and designated agency

Oral Buyer Agency

a firm may use this agency option when the consumer is unwilling to commit to a written buyer agency relationship. A real estate broker may enter in to an oral buyer agency agreement at first substantial contact with a prospective buyer. A broker who works with and represents a buyer initially under an oral agreement must do so in a nonexclusive capacity. Any buyer agency agreement that seeks to bind the buyer to the broker firm for a particular time period or that prohibits the buyer from working with other brokers or firms must be in writing from the start.

Vicarious Liability

a legal concept that might allow a consumer to successfully sue the selling and/or the listing firm for illegal or inept actions performed by the subagent firm and/or its brokers.

Universal Agent

a person who is empowered to do anything the principal could do personally. This type of agency is seldom practiced by a real estate broker in a typical real estate transaction

Fiduciary

a relationship in which the agent is placed in the position of trust and confidence to the principal

Agency Relationships

a variety of agency relationships may be created. The distinctions between them are not always clear. The BIC must decide the agency policies and procedures for the firm, determine who will be represented, disclose the agency alternatives to each party, and then act according to the agency relationship defined. In NC every agreement for a brokerage service in real estate transactions much be in writing.

Implied Agreement

agency can also be created by "implied agreement" when principal and agent, without formally agreeing to the agency, act as if one exists. However, an implied contract will not be established simply on trade custom and practices. There must be sufficient evidence to show that the principal authorized the agent to perform acts under circumstances in which a reasonable principal would be expected to compensate the agent for the services. Implied agency agreements are illegal under NC real estate license law!

Disclosed Dual Agency

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. In NC, the key to lawful dual agency is that ALL parties (seller/buyer, lessor/lessee) must be INFORMED and must CONSENT to the broker representing both of them in the same transaction.

Termination of Agency

an agency agreement may be terminated at any time for any of the following reasons : -completion or fulfillment of the purpose -expiration of the terms of the agency -mutual agreement to end the agency -breach by one of the parties -by operation of law, as in a bankruptcy -destruction or condemnation of the property -death of incapacity of either party

Agent's Responsibilities to Principal

an agency relationship is a fiduciary relationship, one of trust and confidence between the broker and principal. The broker, by law, owes the principal specific duties - the duties of loyalty, obedience, accounting, disclosure of information, and skill, care, and diligence, easily remembered by the acronym OLD CAR

Classification of Agency Relationships

an agent may be classified as a universal agent, a general agent, or a special agent

Confientiality

an agent shall not disclose the principal's financial condition, motivation, or acceptable contract terms without the client's permission. However, the broker must disclose material facts about the condition of the property even if the seller chooses not to disclose such facts.

Agency Relationships in Real Estate Rentals

another type of brokerage contract that creates an agency relationship is the Property Management Agreement, which is entered into by a management firm/broker and a property owner who wishes to hire someone to manage rental properties. As with all agency agreements involving a property owner, it must be in writing from the formation of the relationship

Common-law Agency Relationships

can be created in the following ways: -with a written listing contract -with a buyer agency contract -with a dual agency contract -with a property management contract -with an in-house brokerage employment contract -by the conduct of the parties (implied agency)

Compensation

creation of an agency relationship must include promise of compensation to the agency by the principal. An agent owes his loyalty to the party who EMPLOYS him; that party may or may not be the party who PAYS him. All agency agreements should state how the agent is being compensated

Duties to Third Parties

historically, real estate transactions were governed by the doctrine of caveat emptor, or let the buyer beware. The principal was liable to a buyer only of the principal willfully misrepresented the property. It was up to the buyer to thoroughly examine and research the property and the buyer, for all intents and purposes, expected to purchase the property as is. This is still true in North Carolina, however there are now more consumer protection laws.

Dual Agency

in a dual agency situation, the broker/firm represents the buyer and the seller in the same transaction. Dual agency requires that the agent be equally loyal to two separate principals at the same times. Because agency originates with the broker/firm, dual agency arises when the broker/firm is the agent of both parties in the same transactions.

Single Agency

in a single agency, the agent represents only one party in any single transaction. The real estate agent must provide either fiduciary (trust and confidential) or statutory duties exclusively to one principal within that transaction. The customer is the party NOT represented by the agent. While a single agency broker may represent sellers and/or buyers, that broker will not represent BOTH the buyer and seller in the SAME transaction because that would require dual agency.

First Substantial Contact

in every real estate transaction (residential and commercial) the broker shall review available agency options to any prospective buyer or seller no later than first substantial contact, which occurs when conversation between a broker and a consumer shifts from facts about the property to possible confidential information about the consumer's needs, wishes and abilities or when the consumer or broker begins to act as if there is a fiduciary relationship.

Special Agent

is authorized to represent the principal in only one specific act or business transaction, and under limited, detailed instructions with no power to bind the principal. A real estate broker is usually a special agent.

Disclosure of Information

it is the firm/broker's duty to keep the principal fully informed at all times of all facts of information the broker obtains that could affect the principal's decision in the transaction. Examples of facts an agent for the seller has a duty to disclose to the seller include : -all offers -the identity of the prospective purchasers, including the agent's relationship, if any, to them (such as a relative of the broker being a participating purchaser) -the ability of the purchaser to compete the sale or offer a higher price -any relationship the broker has with the buyer (such as an agreement for the broker to manage the buyer's property after it is purchases) -the buyer's intention to resell the property for a profit.

Agent's Duties

it's important to remember that an agent's duties to the principal are greater than the agent's duties to the customer. However, a dual agent represents both parties equally. Therefore the agent and subagents are generally restricted by the dual agency agreement from disclosing to either client the following types of information about the other party without that party's written permission : -Willingness to accept any terms of sale other than those offered -Motivation for participating in the transaction -Any confidential information unless disclosure is mandated by statute. HOWEVER, a dual agent is REQUIRED BY LAW to disclose all material facts about the property to both principals

General Agent

may represent the principal in a broad range of matters related to a particular activity or business. The general agent may, for example, bind the principal to any contracts within the scope of the agent's authority.

Designated Dual Agency

might be used when a transaction is an in-house sale. It involves appointing one or more brokers of a firm to exclusively represent the seller as an agent and appointing another broker of the same firm to exclusively represent the buyer as an agent in the same real estate transaction. However, it must be done with prior express approval of both the seller and the buyer, The firm continues to act as a dual agent; the individual brokers do not.

Subagent

one who is employed by a person already acting as an agent (such as a provisional broker licensed under a BIC who is employed under the terms of a listing agreement. Simply stated, a subagent is an AGENT of and AGENT

Puffing

opinion statements that exaggerate a property's benefits are called puffing. Although puffing is legal and a common practice, it must not constitute a misrepresentation of the property. Brokers must ensure that none of their statements can be interpreted as involving fraud, which is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person.

Creation of Agency

provision of services does not itself create an agency relationship. No agency exists without mutual consent between the principal and the agent.

The Law of Agency

the basic framework of the law that governs the legal responsibilities of the broker to the people the broker represents is known as the LAW OF AGENCY!

Accounting

the broker must be able to account for all funds received from, or on behalf of, the principal. It's illegal for the broker to commingle such monies with personal funds. Commingling is a term used to descibe when trust funds and the firm/broker's personal/business funds are placed in the same account.

Reasonable Skill and Care

the broker must exercise a reasonable degree of skill, care, and diligence while transacting the business entrusted by the principal. The most fundamental way in which a broker meets this standard is to use the broker's skill and knowledge on the principal's behalf. The broker has an affirmative duty to try to discover and disclose to the principal all facts that are pertinent to the principal's decision-making process in the transaction. Skill, care, and diligence also means making reasonable efforts to market the property, such as advertising and holding open houses as well as helping the seller evaluate the terms and conditions of all offers to purchase. A broker who represents the buyer will be expected to help the buyer locate suitable property and evaluate property values, neighborhood and property conditions, and financing alternative, as well as to prepare offers and counteroffers with the buyer's best interest in mind.

Loyalty

the broker/firm owes the principal the utmost loyalty. That means placing the principal's interests above those of all others, including the broker's own. The agent must be particularly sensitive to any possible conflicts of interest. Confidentiality about the principal's personal affairs is a key element of loyalty.

Brokerage

the business of bringing buyers and sellers together in the market place

Agent's Responsibilities to Third Parties

the duties of an agent to a third party comes from three sources : 1) North Carolina license law 2) the North Carolina Unfair or Deceptive Trade Practices Act 3) common law agengy as interepreted by court opinions. These duties include -being honest and fair -complying with NC Real Estate License Law and NCREC rules, including disclosure of material facts relating to a property or transaction about which the agent has knowledge or should reasonably have acquired knowledge.

Agency

the fiduciary relationship between the principal and the agent

Subagency

the fiduciary relationship between the subagent and the principal

Obedience

the fiduciary relationship obligates the broker to act in good faith at all times, obeying the principal's instructions in accordance with the contract. However, the broker may not obey any instructions that are unlawful or unethical/

Agent

the individual who is authorized and consents to represent the interest of another person. In the real estate industry, principals are hiring an entire company and all the company's affiliated brokers to represent them. Even though the FIRM is the AGENT, the broker-in-charge would be personally accountable for agency law compliance

Principal

the person who hires and delegates to the agent through a brokerage contract the responsibility of representing that person's best interests. In the real estate business, the principal can be the buyer, seller, landlord, or tenant

Client

the principal

Duties to Agent

the principal has two basic duties to the agent : -To act in good faith - To pay the agent the agreed-on compensation when the agent finds a ready, willing, and able buyer. Once the agent brings the seller a buyer who is ready, willing, and able to purchase the property on the seller's terms, the agent has earned a commission, whether or not the seller decides to sell the home.

Tort

the principal may also be held liable and accountable for the agent's misconduct, which is a wrongful act by an agent while representing the principal and acting within the scope of the employment agreement that created the agency.

Liabilities and Consequences of Breach of Duty

the principal who violates the principal's duties either to the agent or to a third party is liable for the damage caused. The principal may be subject to both a civil lawsuit and criminal prosecution.

Customer

the third party for whom some level of service is provided by an agent of another party, but who is not represented by the agent

The "Working with Real Estate Agents" Brochure

this contains information on the various agency relationships available such as 1) seller's agent 2) dual agent 3) buyer's agent 4)seller's agent working with a buyer If the first substantial contact does not occur face-to-face, then the brochure must be mailed, faxed, or e-mailed to the prospective buyer or seller as soon as possible, but in no event later than three calendar days from the date of first substantial contact

Undisclosed Dual Agency

this is NOT permitted! In order to act as a dual agent, a broker MUST first obtain written authorization from all parties. By a broker associate's words and actions, this can occur unintentionally or inadvertently. Sometimes the cause is carelessness. Other times the subagent does not fully understand the fiduciary responsibilities.

Express Agreement

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 through an expression of agreement rather than through implication. Principal and agent should have an "express agreement", either written or oral

Buyer Agency

when a buyer contracts with a firm/broker to locate property and represent the buyer's interests in the transaction, the buyer is the principal - the broker's client! The broker as agent is strictly accountable to the buyer. The seller is the third party. Buyer agency agreements may be oral initially, but must be reduced to writing before the presentation of an offer to any party to the transaction

Negligent Omission

when brokers do not have actual knowledge of a material fact but should reasonably have known of such fact.

Willful Omission

when brokers have actual knowledge of a material fact, and a duty to disclose such fact to a buyer, seller, tenant, or landlord, but deliberately fail to disclose such fact.

Negligent Misrepresentation

when brokers unintentionally misinform a buyer, seller, tenant, or landlord concerning a material fact because they do not have actual knowledge of the fact, because they have incorrect information or because of a mistake by the agent.

Willful Misrepresentation

when brokers who have actual knowledge of a material fact deliberately misinform a buyer, seller, tenant, or landlord concerning such fact. Also, when a broker who does not have actual knowledge of a matter material to the transaction intentionally provides information concerning such matter to a buyer, seller, tenant, or landlord without regard for the truthfulness of the information

Ratification

when someone claims to be an agent but there is no express agreement, the principal can establish an agency relationship by ratification (apparent authority)- in other words, by performing any act that accepts (ratifies) the conduct of the agent as that of an agent