Chapter 21 The PrincipalBroker Relationship: Agency

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Chapter 21The Principal-Broker Relationship
Agency

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Agency

• Agency An agency relationship in one in which
  one person has been authorized to act in behalf
  of another person. In other words, an agency
  relationship is created when one person delegates
  to another person the right to act on her or his
  behalf.
• Agent An agent, broadly defined, is someone who
  is delegated (or authorized) to act in behalf of
  some else. A broker serves as an agent of the
  person who hired her or him.
• Principal The person whom the agent acts in
  behalf of. The person who hired the broker is the
  broker's principal. The brokers client is
  his/her principal.
• Subagents an agent appointed by an agent to
  handle the affairs of a principal. Salespersons
  and cooperating brokers are subagents.
• In the traditional brokerage relationship, the
  principal is the property owner. However, buyer
  brokerage has been increasing in popularity, in
  which case the principal is the buyer.

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Agency (Continued)

• General agency/agent In a general agency the
  agent is delegated broad powers to act in behalf
  of the principal, and is given power to bind the
  principal. A general agent, in short. is given
  discretionary powers to act for and to bind the
  principal.
• An example of a general agent is an officer of a
  corporation.
• A salesperson is a general agent of her or his
  sponsoring broker.
• Special agency/agent A special agency is
  created to perform only specific acts. A special
  agent is an agent whose authority to act for the
  principal is limited to certain explicitly
  specified activities. Moreover, a special agent
  cannot bind the principal by her or his actions.
  The authority of a special agent to act for the
  principal is limited to the set of instructions
  given by the principal.
• A real estate broker is a special agent of the
  principal (typically, the property owner).

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Establishing Agency Authority

• An agency relationship and the authority of an
  agent can be created by an express agreement
  between both parties, or it can be created by the
  actions of the parties.
• The different ways that agency authority (the
  authority to act in behalf of another) can be
  created are
• Express Agency authority arises from an express
  agreement of the parties, which is contained in
  written or verbal statements. In real estate,
  agency is expressly created by a written
  contractual agreement.
• Implied Authority that arises from custom or
  convention (prevailing practice) in the industry.
  
• Ostensible A principal gives a third party
  reason to believe that a person is his/her agent
  because of the actions of the parties. Such a
  person is an ostensible agent, as opposed to an
  express agent (one who was expressly appointed).

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Establishing Agency Authority (Cont.)

• Ratification Agency authority that is
  established after the fact by the principal
  approving an act which he or she did not
  previously authorize.
• For example, a real estate salesperson finds a
  buyer for a property that is not up for sale, and
  he/she approaches the property owner with the
  offer. If the property owner accepts the offer
  from that buyer by signing a contract of sale, a
  court could hold that the act of acceptance
  ratified the sales efforts of the salesperson
  and made the salesperson an agent of the seller,
  and thus entitled to a commission.
• Estoppel A third party acts on the belief that
  an agent has powers to perform some deeds in
  behalf of its principal, even though those powers
  had not been granted to him or her by the
  principal. Arises primarily from the principals
  failure to exercise due diligence over the deeds
  of the agent.
• When a principal knowingly allows innocent third
  parties to believe that a person is acting as the
  principals agent, even though he or she is
  performing unauthorized acts, the principal may
  be held accountable for those unauthorized
  actions.

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Brokers Obligation to Principal

• The main duties of an agent to a principal are
• Reasonable Care Duty of competence,
  expertise, and due diligence
• Obedience Duty to obey principals instructions
• Loyalty Duty to place principals interest
  first
• Disclosure Duty to keep the principal informed
• Accounting Duty to account for all funds
  received, and not to co-mingle the funds of
  others with the agents own funds

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Duty of Reasonable Care

• An agent must exercise reasonable care and due
  diligence in handling the affairs of the
  principal. This means that the broker must
  demonstrate competence and follow standards of
  professional practice in performing tasks for the
  principal.
• A broker may be found negligent if he or she acts
  in an unreasonable, careless, or imprudent
  manner.
• A broker may be guilty of malpractice if he or
  she fails to exercise the level of care and
  competence generally expected of professionals in
  that field, or to recognize when the assistance
  of a person with the required expertise is
  needed.
• A broker under a listing agreement has the
  obligation to use best efforts and due diligence
  in finding a buyer and otherwise serving the
  interests of the principal.
• Standards of professional practice have become
  increasingly more demanding in recent years.
  That is, professionals are being held to
  stricter, more exacting standards of professional
  care and diligence.
• Errors and omissions insurance is commonly
  obtained by brokers.

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Duty of Obedience

• The agent has the duty to obey the instructions
  of the principal when acting in the principal's
  behalf.
• For example, the broker should obey the
  principal's instructions with respect to such
  matters as asking price, terms of sale, and
  practices involved with the marketing of the
  property (e.g., use of signs on the property,
  conditions for showing the property, use of an
  "open house," etc.).

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Duty of Loyalty

• The agent has the duty to put the rightful
  interests of the principal ahead of his or her
  own interests. This means that in matters where
  the broker is acting in behalf of the principal,
  the broker must advance the interests of the
  principal even if they are adverse to his or her
  own interests.
• To be faithful to this duty the broker should
  avoid situations that create a conflict of
  interest between the broker and the principal.
• An example of a situation that presents the
  possibility of a conflict of interest between a
  broker and the principal is where the broker
  seeks to buy the property of its principal. In
  general, a broker may not purchase property of
  the principal unless the principal is given
  complete knowledge of all the facts surrounding
  the purchase and the principal freely consents to
  it. The purpose of this rule is to prevent a
  broker from taking advantage of a less
  sophisticated principal.
• Imagine how a jury may react if it a wily real
  estate broker is accused of inducing a naive
  widow into selling valuable property at a bargain
  price.

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Loyalty (Continued)

• Dual agency refers to an agent who represents
  more than one party to a transaction for a
  broker this would mean representing the buyer as
  well as the seller (or the lessee as well as the
  lessor).
• Dual agency is permitted under law, but only if
  the broker fully discloses to both parties that
  he has a dual contract and if both parties agree
  to the dual agency.

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Loyalty (Continued)

• If a broker enters into a dual agency it should
  be created intentionally through a written
  agreement with both parties.
• Both parties should agree in writing to common
  representation by the same broker.
• A dual agency can be created unintentionally by
  actions of the broker.
• The most common way that a dual agency is created
  unintentionally is by conduct or representations
  of the broker that induce a buyer to reasonably
  assume that the broker is acting as its
  representative. A broker must be careful to
  avoid giving such an impression. It is one thing
  to be helpful, but helpfulness should not spill
  over to representation by word or deed that the
  broker is acting in behalf of the buyer if he or
  she is not.
• Being a buyers broker up front is a way to
  overcome some of the issues involved with dealing
  with buyers.

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Disclosure

• The broker, as an agent, must make a complete
  disclosure of all material facts acquired in the
  course of the agency that might influence the
  decisions of the principal regarding the matter
  for which the agency was created.
• Thus, the broker must disclose information
  pertaining to the principals property which
  comes to his/her attention that might affect the
  interests of the principal or which might
  influence its actions.
• An obvious implication of this duty is that the
  broker must inform the principal of any offers to
  purchase the property of which he or she is
  aware, even if the broker thinks the offer is
  ridiculously low.
• Disclosure also requires the broker to keep the
  principal informed of changes in market
  conditions, laws and regulations, and other
  matters that could affect the principals
  interests.

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Duty of Accounting

• The duty of accounting requires an agent to keep
  accurate and complete records of the funds,
  documents, and other items which it holds in its
  possession on behalf of others, and also of their
  disposition. It also requires the agent to
  render an account of their amounts and
  disposition upon demand.
• Moreover, this duty requires an agent to keep any
  and all funds that he or she has collected in
  behalf of the principal and other parties to a
  real estate transaction in separate trust
  accounts, or else to place them in the trust
  accounts of designated agents, such as the escrow
  agent.
• In addition, a broker must not commingle funds in
  trust accounts with his or her own personal or
  business funds.
• Conversion of funds held for others to the
  brokers own use is a criminal offense.
• The broker, in short, must act as a trustee for
  money, documents, and other valuable items that
  he or she holds for others.

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Duties of Principal to Agent

• The principal has the following obligations to
  the agent
• Compensation
• Performance
• Reimbursement
• Indemnification

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Compensation

• The principal has the duty to compensate the
  agent for services rendered on the principal's
  behalf.
• In the case of a broker this means the principal
  owes compensation if and when the broker
  completes the task he or she was hired to do.
• When is the broker said to have earned his/her
  commission?
• The traditional view is that the broker earns his
  commission when he procures a "ready, willing,
  and able buyer."
• A modern view gaining wider acceptance in the
  courts is that a broker does not earn his or her
  commission unless and until the transaction is
  completed, unless the principal is the cause of
  the failure to complete the deal.

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Performance

• The principal has the duty to do whatever is
  reasonable in order to assist the agent in
  accomplishing the purpose for which the agency
  was created.
• This would include referring prospects to the
  broker (in an exclusive-right-to-sell listing),
  allowing the broker access to the property to
  show potential buyers, allowing the broker to put
  a for sale sign on the property, etc.

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Reimbursement and Indemnification

• Reimbursement. The principal has the duty to
  reimburse the agent for any extraordinary
  expenses paid on the principal's behalf, that is,
  for expenses not related to the sale itself.
• An example would be costs of emergency repairs,
  such as broken water lines, that the broker paid
  when the principal was out of town.
• Indemnification. The principal has the duty to
  pay the broker for any losses suffered by the
  broker through no fault of its own as a result of
  actions or representations of the seller that
  causes harm to other parties, such as the buyer.

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Duties to Third Parties

• Although the agents (brokers) fiduciary duties
  are to his or her principal, state and federal
  laws require certain standards of behavior when
  dealing with third parties to an agency
  relationship.
• A third party is a person not a party to a
  contract, but who is affected by it.

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Duties to Third Parties (Continued)

• A buyer not represented by the broker is a "third
  party beneficiary" of the agency relationship
  established between the broker and the seller.
• A buyer receives the broker's services as a third
  party beneficiary of the agency relationship in
  that a buyer is necessary for the broker to
  successfully complete the task for which it was
  hired. In order to do what it was hired to do by
  the seller typically sell or lease real estate
  the broker must attract buyers to the property
  and solicit offers to buy from them.
• Services provided to the buyer by the broker who
  is the sellers agent are the result of the
  brokers need to attract buyers to complete the
  transaction he or she was hired to do.

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Duties to Third Parties (Cont.)

• Both the seller and the broker have a duty to
  disclose all known defects or hazards of the
  property.
• As we have seen, a number of, disclosure
  statements must be filled out by the broker and
  the seller.
• Under Calif. law, an agent has an affirmative
  duty to find out detrimental facts and to make
  those facts known to a the purchaser of one to
  four family residential units.
• The legislature has set a statute of limitations
  of 2 years from the close of escrow to bring
  action against an agent for inadequate disclosure.

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Disclosures

• Owner Disclosure In Calif., sellers of 1 to 4
  unit residential properties must furnish buyers
  with a complete disclosure statement, known as
  the real estate transfer disclosure statement.
• This disclosure statement details various facts
  about the condition of the property needed
  repairs, condition of appliances and building
  equipment, improvements added with or without
  building permits, the presence of any known toxic
  or dangerous substances, and so on. See pp.
  64-65 in Pivar.
• The broker must complete an agents inspection
  report. See Pivar, p. 66.
• A number of additional disclosures must also be
  made in a real estate transaction. See pp.
  104-105 in Pivar for a list.
• Disclosures have become numerous and cumbersome.
  Do you think the buyer really reads all of these?

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Disclosure Liability
Said Wrongly to Mislead
Facts Broker Knows
A
Unsaid in Order to Mislead
Said without checking the facts
Facts Broker Does not know
B
Not said and facts not checked
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Red Flags and Other Items

• Red Flags These are indications of possible
  problems. A broker has an affirmative duty to be
  watchful for these.
• As Is provisions in a purchase contract will
  not be held as fair to a buyer unless
• the buyer has been provided with a written
  disclosure of all known defects of the property,
  and
• a condition was not discoverable by a reasonable
  inspection of the property.
• Puffing extravagant statements that a
  reasonable person would recognize as an
  exaggeration are not a basis of liability.
• However, the line between puffing and
  misrepresentation is ambiguous and subjective.

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Buyer Agency

• Is based on the opposite theory from the
  traditional seller representation.
• Here the principal or client is the buyer!
• The agent owes the care of agency duties to buyer.

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Agency Disclosure

• As mentioned, agency relationships can be created
  without written agreements, and consumers must be
  informed who the agent represents so there is a
  clear understanding of the agents role in a
  transaction.
• Many states now require agency disclosure forms.
  
• For samples, see Jacobus, pp. 401-402, and Pivar
  pp. 58-59.

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Other Laws and Legal Matters

• Interstate land disclosure statements
• Antitrust laws
• Price fixing
• Boycotting
• Errors and Omission insurance a cost of doing
  business in today litigious world