L7 General Principles of Agency
The duties owed by agents to their clients are known as fiduciary duties. {{OLDCAR}}
* Obedience (license holders have the fiduciary duty to obey their clients, clients are the decision makers in a real estate transaction: such as sale price, earnest money, etc) * Loyalty * Disclosure (In Michigan, the fiduciary duty of disclosure owed to principals is often described as full disclosure to acknowledge the fact that there is a greater degree of disclosure owed to a principal than is owed to a customer.) {{APO= Always Present Offer}} * Confidentiality * Accounting * Reasonable care/skill/diligence
A cooperating broker can be a subagent, too, if they accept an offer of subagency from an unaffiliated broker. Here's how that looks:
1. A broker representing a principal is the agent of the principal 2. A cooperating broker is the agent of the broker who is serving as the agent of the principal 3. A cooperating broker is an agent of the agent of the principal 4. A cooperating broker is a subagent of the principal Sub
Acts of the Parties: Revocation
A client (principal) may, at any time, fire their agent — usually by way of written notice of the revocation. If the agency agreement signed by the client contains a specific termination date, the client may be found in breach of contract. If the agency agreement is open-ended (legal in some states), client liability is usually limited to reimbursing the broker for any expenses incurred on behalf of the client.
General agency = binding authority
A listing agent, for example, generally cannot accept a buyer's offer on the seller's behalf because that action would be outside the special agency authority granted to the listing agent by the seller. On the other hand, while operating under general agency, a licensee will regularly bind their sponsoring broker to agency agreements with clients.
With respect to property condition disclosure, the seller and the listing agent have a duty to disclose latent defects, which are any structural defects that cannot be detected by ordinary inspection.
Additionally, in Michigan, licensees have a should have known disclosure standard to live up to based on the expertise and experience they are assumed to have. If license holders have cause to wonder about possible latent defects, they should discuss that possibility with their clients.
A Gratuitous Example Broker Bob's sister is looking to sell her house, and Broker Bob tells Sis that, if she wants, he can represent her in the transaction. Broker Bob then says that he won't charge her any commission. What a nice brother! But is this acceptable? It can be. In fact, it's not uncommon for a broker to gratuitously market a property for a friend or family member, or gratuitously help a friend or family member purchase a property.
Again, even though no payment changes hands, the agent is still held to all responsibilities, liabilities, duties, and obligations of an agency relationship. As with every other agency relationship, it is highly recommended that the agent have all terms and expectations put in writing — maybe even more so when creating gratuitous agency with family and friends since the likelihood of false assumptions can be greater in these instances.
Agency by ratification is created when an agent takes an unauthorized action on behalf of a principal which is accepted after the fact by the principal. The principal accepting the action of the agent (such as a seller accepting an offer brought by an agent) establishes the agency relationship. The principal might not have been a client at the time of the agent's action, but they became a client when they accepted the agent's action (such as accepting an offer).
Agency by Ratification Example An agent representing a seller (with a client-principal relationship) holds an open house for the property while the seller is absent, but with the seller's consent. Lo and behold, the agent shows up a few hours before the open house to find that some vandals have knocked over the seller's mailbox. The agent calls a handyman to rush out to fix it before the first visitors arrive and instructs the repairman to send the seller the bill. The seller, happy with the agent's quick thinking, agrees to pay for the mailbox repair, thereby ratifying the action taken by the agent. Happy or not, once the principal agrees to the action in question, they have created agency by ratification. (The agent took a risk here, though. They could have ended up paying the fee themselves and/or losing the client!)
Agency by estoppel is agency that is imposed by law when it is determined that ostensible agency existed.
Agency by estoppel is created after the actions giving the impression of agency have already occurred. It is used to create legal accountability for the agent or the principal responsible for creating the impression of agency. So, agency by estoppel occurs in an environment of ostensible agency.
Two Primary Types of Disclosure: Agency disclosure and Disclosure of material facts
Agency disclosure typically happens upfront, per statutory requirement, but can be required at a later date as well, should that agency relationship change at any point. Disclosure of material facts, on the other hand, will happen anywhere along the way in a real estate transaction as needed — but always in a way that an informed decision can be made.
Acts of the Parties: Renunciation
An agent may, at any time, decide to leave an agency relationship. The correct term for this is renunciation. (written usually) An agent will usually give written notice of the renunciation, and the agent could be liable for damages if renouncing a contract containing a specific termination date. (If the agency agreement is open-ended, a broker can usually renounce the agreement without liability.)
Dual agency is an agency relationship wherein both the buyer and the seller are represented by the same broker in an in-house real estate transaction. And any agent involved in an in-house transaction is a dual agent.
As soon as your single agency relationship becomes one of dual agency, disclose it and document it! Even if advance consent to dual agency was previously given in writing, you should still inform all parties that you'll be moving forward according to dual agency procedures and get the consent in writing yet again.
Agency Stage 2: The Signed Agreement
At Mooncents, Larry shares his marketing plan to sell Shane's house. After discussing Larry's marketing plan and negotiating the commission, Shane signs a listing agreement with Larry. Relationship Status: With a mutual agreement, Larry and his broker (Bob) have now entered into an agency relationship with Shane. Larry and his broker are now looking out for Shane's best interests. Note: Even though Larry is the sales agent, Shane officially signs an agency agreement with Larry's broker, Bob. The agreement is between Broker Bob and Seller Shane, but Agent Larry represents his broker in the transaction.
Retainer - up-front fee a broker might take from a client in exchange for the broker's efforts to market a property.
Because this form of compensation is not dependent on the sale of the property, it is usually significantly less than what would be earned by way of commission on the final sales price. Buyer agent retainers are pretty rare and can be tied to or independent of any other form of compensation due the agent.
Acts of the Parties: Breach of Agreement If either party fails to uphold their obligations or duties as outlined in the contract, they are considered to have breached the agreement and are potentially liable for resulting damages.
Breach of Agreement - Client (by doing such things as being uncooperative e.g., a seller refusing to make a home available for viewings or failing to keep commitments e.g., backing out on a signed offer) Breach of Agreement - Agent (agent is not actively pursuing the goals of the agency agreement, they have breached the agreement via abandonment, and the principal can likely terminate the agreement with cause. This is true whether the agent's acts are ones of commission or omission.) ** Should never happen - If an agent cannot, or no longer wishes to, live up to the responsibilities of the agency agreement, they should approach their client and pursue mutual rescission.
Undisclosed dual agency is the term for when both parties to a real estate transaction are unknowingly represented by the same broker. The practice of undisclosed agency is a violation of fiduciary duties to both parties in the transaction.
DO NOT WANT THIS!
Vicarious liability, the common law concept which states that a person is liable for the actions of those acting with authority on that individual's behalf. An employing broker's vicarious liability exists even if the license holder assisting the employing broker is NOT sponsored by the broker but IS operating as agent of the broker. That would be the case when utilizing brokers and licensees from a cooperating brokerage as sub-agents.
EXAMPLE Leanna is a broker and owner of Newbie Realty. Her client (principal) is Audrey, a homeowner looking to sell her bungalow in Traverse City for big bucks because of its glorious view of the bay and its proximity to the major activities of the National Cherry Festival. Sarah, a cooperating broker from Cusco Realty, is operating as Leanna's agent to help accomplish the mission of finding a buyer for Audrey.
Paid by the Buyer When a buyer enters into a buyer-broker agreement with a broker, they negotiate how the buyer broker will be compensated. Often there is language stating that the buyer broker's compensation will come from the commission split offered by the seller (as outlined in the MLS).
Even then, there is usually language in the agreement that ensures compensation for the buyer broker in the event compensation is not derived from the seller.
Agency relationships are created on the broker level.
For example, when a seller signs a listing agreement, they are agreeing to an agency relationship with the broker.
A subagent is an agent of an agent.
Here's how you arrive at that simple but potentially confusing statement: 1) A broker representing a principal is the agent of the principal 2) A sponsored licensee is an agent of the broker who is serving as the agent of the principal 3) A sponsored licensee is an agent of the agent of the principal 4) A sponsored licensee is a subagent of the principal
Just because someone licensed as a broker or salesperson performs a brokerage service, an agency relationship is not automatically created. Creation of agency requires more than just providing services to clients and customers.
Ideally, an agency relationship is created as the result of the mutual consent or agreement between the agent and the client (principal) in which the agent agrees to act on behalf of the client. In most cases, consent precedes the act (but not always). Control has to do with the idea that the agent (broker or sponsored license holder) has authority to act on behalf of the client. Written agreements, contracts, and forms all contribute to the support and clarification of this concept of control.
Landlord's Agents & Tenant's Agents
If the agent chooses to represent both sides in a lease agreement, they would operate as a dual agent and be subject to all the rules, restrictions, and obligations of a dual agent who was representing both sides of a real estate sales transaction.
Implied Authority vs. Implied Agency
Implied agency is a state of agency that should be clarified and elevated to express agency — written or oral — to avoid confusion or problems down the road. Implied authority, on the other hand, refers to legitimate actions an agent takes in order to complete duties that the principal has already expressly authorized. Implied authority rarely creates the level of concern that implied agency can.
Broker Responsible for Salesperson's Actions Whereas special agency is limited, general agency: - Gives agents a broader (than special agency) scope of authority to act AND - Holds principals (broker) responsible for actions performed by their agents
In a general agency relationship, the principal (broker) is responsible and beholden to their agent's (salesperson) actions. Brokers give sponsored agents the ability to perform general actions (including all the tasks required to represent sellers) and are responsible for every sponsored salesperson's actions. If a salesperson poorly represents the interests of their clients, the broker is responsible for that agents' actions. EXAMPLE Agent Selah signs a listing agreement with Seller Sam, Agent Selah has created an agency relationship between Seller Sam and Selah's broker. Because of the general agency relationship that exists between agents and brokers, the broker will honor Agent Selah's action of entering into the listing agreement on the broker's behalf. A seller's agent, for example, cannot accept a buyer's offer on the seller's behalf because that action would be outside the special agency authority granted to the seller's agent by the seller.
No agency occurs when a broker acts as a transaction coordinator in a transaction without entering into an agency relationship with either party to the transaction.
In absence of an agency relationship (and fiduciary duties), the transaction coordinator (or facilitator) does not represent the interests of one principal over the other but, instead, fulfills ministerial acts to assist in the completion of the transaction, including: * Accounting and handling of funds, documents, and other materials * Presenting of all offers and counter offers * Keeping parties informed of progress in the transaction * Assisting in closing the transaction
Paid by Multiple Parties There may even be occasions when a broker is eligible to receive compensation from both the buyer and seller. While that sounds like heaven, just know that a license holder needs to tread carefully in these situations to stay on the right side of licensing law.
In order to legally receive compensation from both parties in a real estate transaction, a license holder must: Fully disclose to all parties to the transaction that compensation from both sides will take place Receive informed consent (in writing) from both parties to this arrangement of joint compensation
Flat Fee - form of compensation used, it's typically negotiated in advance but not paid in advance. Instead, it is paid at closing as would be the case if the broker were being paid a commission of the final sales price.
Instead, it is paid at closing as would be the case if the broker were being paid a commission of the final sales price.
Property Management
License holders operating as property managers also require general agency to carry out their duties for a couple of reasons. Their duties are ongoing and multifaceted, so a wider scope of authority is needed They typically have the power to bind their principal (property owner) to rental agreements and other needed contracts
compensation ≠ loyalty, agency relationship, or fiduciary duty
Listing agreements and buyer-broker agreements should spell out who gets paid and how.
Referral Fee (Finde Note: This is NOT a commission based on the sale of a property's fee)
Money paid another broker for sending a client or customer A finders fee or referral fee is legal in Michigan, so long as: * The referral fee is paid only to a broker licensed in Michigan OR a broker holding an equivalent license from another state (or country like Canada.) * The individual being referred has given informed consent
Agency Stage 3: Fiduciary Relationship
Now that an agency relationship has been formed, Broker Bob is operating as a fiduciary on behalf of Shane. Shane trusts Bob to represent his best interests in selling his house. And Bob, as the broker, has fiduciary duties to perform — duties which Bob entrusts to his sales agent, Larry, to carry out in his stead.
Termination by: Operation of Law or Acts of the Parties Note: The term force of law is sometimes used in lieu of operation of law to emphasize the legally compelling aspect of the circumstance (not necessarily welcomed by either of the parties).
Operation of law - Refers to circumstances or changes affecting the contract or the subject property that automatically result in agency termination Acts of the parties - Includes any action from one or more of the parties that results in the termination of the agreement
An agency agreement can be formed orally. If a buyer says, "I want you to find me a house" and the agent responds by saying "I would love to do that," oral agency has been created. The agent owes that buyer all the same fiduciary duties that they would owe a buyer with whom a written agreement had been signed. The agency relationship began the moment the buyer gave authorization for the agent to act, and the agent accepted.
Oral Agency Not-So-Fun Facts Here are a few of the reasons to shy away from oral agency: - It is NOT enforceable against the principal - It IS enforceable against the broker - It is more likely to lead to complaints and/or lawsuits (than is written agency) - It does not allow a listing agent to use the MLS
Operation of Law (Starting on a positive note, performance, completion, or fulfillment of the agreement is considered termination through operation of law.)
Other operation-of-law reasons for agency termination that I'll go into more detail on include: * Expiration of the agreement period (of the agency agreement period — whether or not performance or fulfillment of purpose has occurred) * Lack of legal elements (if the contract starts off as a legally invalid instrument, it can and should be terminated due to operation of law) * Destruction or condemnation (the subject property of the agency relationship ceases to exist, the relationship is dissolved.)(agency agreement is terminated due to the fact that the subject property has fallen under an eminent domain claim by the government and cannot be sold to a third party.) * Death, incapacitation, or bankruptcy (1. If the broker dies, all listing agreements or buyer-broker agreements are null and void 2. If the broker dies, all listing agreements or buyer-broker agreements are null and void 3. If the principal dies, both the broker and the licensee are out of luck.) (Bankruptcy by the seller will terminate the agency relationship. When a seller files for bankruptcy, they lose control of the property and the courts decide what will be done with it. The same holds true for foreclosed properties.) * Loss of broker license (deactivation or revocation of a broker's license invalidates all active written agreements that are in place at the time. In order for a sponsored salesperson to continue working with a client of a broker whose license has been revoked, they would need to find a new sponsoring broker to work through.)
The seller and the listing agent do NOT have a duty to disclosure what are known as patent defects.
Patent defects are those that ARE easily discoverable upon inspection. That being the case, the onus is on the buyer to inspect the goods (the property) before purchase.
There are three different types of agency relationships that define the scope of authority between parties: Special Agency General Agency Universal Agency
Recap: Universal agency in real estate is uncommon and, when needed, will usually be granted via a general power of attorney. Special Agency: The most common example of a special agency relationship is the relationship between a real estate broker and their clients. (Special agency is the most limited type of agency relationship.) General Agency: The classic example of a general agency relationship is the relationship between a broker and a sponsored agent (licensee). (The classic example of a general agency relationship is the relationship between a broker and a sponsored agent (licensee).) Universal Agency: Universal agency is the broadest type of agency. Universal agency gives agents the power to act on behalf of the principal and make decisions on behalf of the principal. Recap: Universal agency in real estate is uncommon and, when needed, will usually be granted via a general power of attorney.
Agency Stage 1: Pre-Agency Relationship
Seller Shane is referred to Licensee Larry. Shane and Larry agree to meet at Mooncents, a coffee shop, to discuss whether an agency relationship would be good for both parties (and to partake in some caffeinated beverages). During their conversation, Larry provides Shane with the required agency disclosures.
Special Agency ≠ Binding
Since special agency relationships are limited, special agents are unable to make decisions that would bind or obligate their principals. EXAMPLE When Seller Tim signed a listing agreement with Broker Sally, he authorized Sally to list his house on MLS, negotiate with potential buyers, and host open houses at his residence on the weekends. Seller Tim did not, however, authorize Sally to make decisions that bind him. Broker Sally cannot accept an offer from a buyer on behalf of Tim. Tim still makes the decision to accept buyer offers. Recap: From the perspective of a principal (seller, buyer, tenant, landlord), the broker is a special agent.
Types of Agents: Single Agent, Seller's Agent, Buyer's Agent, Landlord's Agent, Tenant's Agent
Single Agent- represents only one party to the transaction, documented by listing agreement or buyer-broker agreement (works for the client and with the customer) Seller's Agent- works for the client and with the customer, documented by listing agreement (works for the seller and with the buyer) Buyer's Agent- single agent who has agreed to represent the buyer's interests, documented by a buyer-broker agreement (works for the buyer and with the seller) Landlord's Agent - single agent who has agreed to represent the landlord's interests, landlord is the principal/client of the landlord's agent, and the landlord's agent owes all fiduciary duties to the landlord; documented by listing agreement (works for the landlord and with the tenant) Tenant's Agent - single agent who has agreed to represent the tenant's interests, documented in a tenant-broker agreement (works for the tenant and with the landlord)
Subagency is a form of agency that arises when an agent enlists the use of other agents to accomplish the goal of the principal of the agent.
Subagents in Michigan real estate can be: * Sponsored licensees of a broker who is serving as an agent to a principal * Unaffiliated cooperating brokers (and their sponsored licensees) who have accepted a subagency offer in a cooperative sale to assist a broker who is serving as an agent to a principal
Termination by: Acts of the Parties
Termination may occur by lapse of time, fulfillment of purpose, occurrence of a specific event, mutual agreement by the parties, revocation of authority, or renunciation by the agent.
Listing Agent Disclosures: Property Value Even while listing agents disclose property condition to customers and third parties, they have a separate fiduciary duty to disclose true property value to their seller-client so that the principal can make an educated decision regarding sales price.
That's a material fact about their own property that a seller might not otherwise know. It is expected, then, that the listing agent will use their expertise to guide their seller-client on the subject of price, typically with a comparative market analysis (CMA).
Listing Agent Disclosures: Disclosure of All Offers As with the disclosure of true property value, the obligation to disclose all offers stems from a listing agent's duty to put their client's interests ahead of their own.
The agent should ALWAYS disclose ALL offers to their client. The listing agent should carefully explain the pros and cons associated with each offer, reminding the seller that price isn't the only consideration. And while their advice and expectations are based on experience, the agent needs to remember that there is no way to predict how any specific seller will respond to an offer.
Express agency can be created in written or oral form. Both forms are considered valid, with the written form offering more clarity and protection for both parties. In either case, express agency is created when the principal explicitly appoints the broker/agent to act on their behalf. Note: Express agency is the most popular (with reason) way that agency is created.
The best tools used to express express agency (see what I did there?) are the listing agreement and the buyer-broker agreement. Another tool would be any verbal or written instructions — known as express authority — given by a principal to an agent to carry out specific tasks... perhaps those not explicitly covered in the written agreements above. Express agency and express authority can also come by way of instructions given via email, text, fax, snail mail.
The broker has a special agency relationship with their client in which the client has entrusted the broker to perform specific actions on their behalf (sell their home), but the client is not beholden to the broker's actions (the broker cannot sell the client's home without their permission.)
The broker has a special agency relationship with their client in which the client has entrusted the broker to perform specific actions on their behalf (sell their home), but the client is not beholden to the broker's actions (the broker cannot sell the client's home without their permission.)
Agency Disclosure (First Substantive Contact: The Listing Agent)
The disclosure form should be given to the seller prior to: * The signing of a listing agreement * The creation of a comparative market analysis for the seller * Engaging in any other activity related to the marketing and selling of the property A broker operating as a listing agent needs to disclose, via the disclosure form, their existing agency relationship to any buyer or buyer's agent who: * Comes to the listing agent's office to discuss a general interest in purchasing real estate * Begins to share with the listing agent any details of the buyer's financial status and their motivations to buy
There are some things a dual agent shouldn't disclose. Things like: - The willingness of a party to pay more or take less for a property - The motivations to buy or sell a property - The willingness to accept different terms than appear in the offer - The financial condition of either party
The exception to this would be if the principal has explicitly permitted or requested the information be shared. If so, protect yourself and get that permission/request documented in writing.
Performance of the agreement
The most desirable way to terminate an agency relationship is through the fulfillment of its purposes — such as the home getting sold or bought.
In the real estate world, the fiduciary is the broker and, by extension, any sponsored license holder who is acting on the broker's behalf.
The principal (but NOT customer) of the broker is the client. The obligations of a broker to a customer or third party are significantly less than those owed to a client.
Implied dual agency brings with it many of the same potential problems as does implied agency of any form.
The words or deeds of a license holder can lead a customer to mistakenly feel that an agent, who is representing the other party, is looking out exclusively for their best interests. For example, if, after selling their home with the help of an agent, a couple wants to look at and make an offer on a property listed by that agent's brokerage. Given their previous relationship, the former clients might assume they are still being exclusively represented by that agent. In truth, however, the previous agency relationship ended when its objective was achieved (sale of the client's home). And now that the former clients want to look at a home listed with that agent's brokerage, the agent can only work for the former clients in a dual agency relationship.
Dual Agency: Dual Compensation While we'll talk more about dual agency later in this level, it's worth noting that dual agency is an environment in which a broker represents both sides of a transaction and can get paid by both parties to the transaction.
There are many, many caveats to dual agency, however, because of the difficulty (impossibility?) of a broker to provide undivided loyalty to both parties - not to mention the heightened need to provide disclosure and obtain informed consent of both parties before proceeding.
A net listing is a controversial form of agent compensation that is discouraged in many states and illegal in others, including Michigan.
This type of compensation agreement is one in which the seller pre-determines a specific amount that they will accept on the sale of their property and anything that comes in over and above that amount is considered earned compensation by the broker.
Listing Agent Disclosures: Stigmatized Properties Stigmatized properties are those with suppressed market value unrelated to their physical condition or features; frequently as a result of death of an occupant, murder, suicide, or a belief the property is haunted.
Under Michigan law, license holders are not obligated to disclose this type of history about a property so long as it has no material effect on the condition of the real property or improvements located on the real property. So, generally, occupant history is NOT considered a material fact.
Paid by the Seller When a listing broker takes on a seller client as their principal, they negotiate how compensation is earned, what form it will take, and who will be eligible for compensation — including cooperating brokers operating either as the principal's subagent or a buyer's agent.
Understandably, the amounts or percentages a seller agrees to pay a cooperative broker could vary, based on which of those roles the cooperating broker plays.
Designated agency is a form of agency similar in construct to that of dual agency with appointed agents, both in set up and in objective.
When a brokerage commits to practice designated agency, they are saying that a client will have an exclusive agency relationship with only the named individuals in the agency agreement and no one else in the brokerage. This differs greatly from the standard practice that "a client of one agent in a brokerage is a client of all agents in that brokerage."
Agency Disclosure (First Substantive Contact: The Buyer's Agent)
When a buyer's broker (or their sponsored salesperson) has a face-to-face meeting about real estate with a buyer prospect, the need for agency disclosure is triggered. The disclosure form should be given to the buyer prior to: * The signing of a buyer-broker agreement * The sharing of any confidential financial information or motivations to buy * The showing of any properties to the buyer — whether listed by that broker or not **** A buyer's agent must disclose, via the disclosure form, their existing agency relationship when encountering a seller or seller's agent who: * Greets the buyer's agent at an open house or a showing * Begins to share seller confidential financial information or motivations
A cooperating broker generally finds out up front what the offered commission split between brokerages will be from the MLS. The compensation to be paid to cooperating brokers is also something the seller will have negotiated with the listing broker when the listing agreement is first signed.
When there is a cooperating broker involved, the total commission earned on the sale of a property gets split between the two brokers BEFORE they can each turn around and split their portion with their respective licensees (if involved) in the transaction.
When a mutual agreement to terminate does happen, both parties are released from liability for breach of contract.
best form of early termination of agency - get it in writing!