Foundations in agency law
A listing agreement, the document that puts an agent or broker in business, is a legally enforceable real estate agency agreement between a real estate broker and a client, authorizing the broker to perform a stated service for compensation. The unique characteristic of a listing agreement is that it is governed both by agency law and by contract law.
The cornerstones of agency law in the context of a listing agreement are:
- definition of the roles of parties involved
- fiduciary duties of the agent
- agent’s scope of authority
Parties. The principal parties to the contract are the listing broker and the client. The client may be buyer, seller, landlord or tenant in the proposed transaction. Legally, the broker is the client’s agent. The principal party on the other side of the transaction is a customer or a potential customer, called a prospect. A broker or associate who assists the listing broker in finding a customer is an agent of the listing broker and a subagent of the client. A broker who represents the party on the other side of the transaction is an agent of that party, and not an agent of the listing broker.
Fiduciary duties. A listing agreement establishes an agency relationship between agent and client that commits the agent to the full complement of fiduciary duties to the client in fulfilling the agreement.
Scope of authority. Customarily, a listing is a special agency, or limited agency, agreement. Special agency limits the scope of the broker’s authority to specific activities, generally those which generate customers and catalyze the transaction. A special agency agreement usually does not authorize a broker to obligate the client to a contract as a principal party, unless the agreement expressly grants such authorization or the client has granted power of attorney to the broker. For example, a listing broker may not tell a buyer that the seller will accept an offer regardless of its terms. Telling the offeror that the offer is accepted would be an even more serious breach of the agreement.
Under agency law, a client is liable for actions the broker performs that are within the scope of authority granted by the listing agreement. A client is not liable for acts of the broker which go beyond the stated or implied scope of authority.
Thus, in the previous example, the seller would not be liable for the broker’s statements that the offer would be accepted or was accepted, since the broker did not have the authority to make such statements. A broker who exceeds the scope of authority in the listing agreement risks forfeiting compensation and perhaps even greater liabilities.
Types of listing agreements
A broker may represent any principal party of a transaction: seller, landlord, buyer, tenant. An owner listing authorizes a broker to represent an owner or landlord. There are three main types of owner listing agreement: exclusive right-to-sell (or lease); exclusive agency; and open listing. Another type of listing, rarely used today but legal in Florida, is a net listing. The first three forms differ in their statement of conditions under which the broker will be paid. The net listing is a variation on how much the broker will be paid. A listing contract in Florida may be written, oral, or implied. If the term is longer than one year, it must be written.
Exclusive-right-to-sell (or -lease). The exclusive right-to-sell, also called exclusive authorization-to-sell and, simply, the exclusive, is the most widely used owner agreement. Under the terms of this listing, a seller contracts exclusively with a single broker to procure a buyer or effect a sale transaction. If a buyer is procured during the listing period, the broker is entitled to a commission, regardless of who is procuring cause. Thus, if anyone-the owner, another broker– sells the property, the owner must pay the listing broker the contracted commission.
The exclusive right-to-lease is a similar contract for a leasing transaction. Under the terms of this listing, the owner or landlord must pay the listing broker a commission if anyone procures a tenant for the named premises.
The exclusive listing gives the listing broker the greatest assurance of receiving compensation for marketing efforts.
An exclusive right-to-sell listing must have an expiration date if it is in writing.
Exclusive agency. An exclusive agency listing authorizes a single broker to sell the property and earn a commission, but leaves the owner the right to sell the property without the broker’s assistance, in which case no commission is owed. Thus, if any party other than the owner is procuring cause in a completed sale of the property, including another broker, the contracted broker has earned the commission. This arrangement may also be used in a leasing transaction: if any party other than the owner procures the tenant, the owner must compensate the listing broker.
A written exclusive agency listing must have an expiration date.
Open listing. An open listing, or, simply, open, is a non-exclusive authorization to sell or lease a property. The owner may offer such agreements to any number of brokers in the marketplace. With an open listing, the broker who is the first to perform under the terms of the listing is the sole party entitled to a commission. Performance usually consists of being the procuring cause in the finding of a ready, willing, and able customer. If the transaction occurs without a procuring broker, no commissions are payable.
Open listings are rare in residential brokerage. Brokers generally shy away from them because they offer no assurance of compensation for marketing efforts. In addition, open listings cause commission disputes. To avoid such disputes, a broker has to register prospects with the owner to provide evidence of procuring cause in case a transaction results.
A buyer agency or tenant representation agreement authorizes a broker to represent a buyer or tenant. The most commonly used form is an exclusive right-to-represent agreement, the equivalent of an exclusive right-to-sell. However, exclusive agency and open types of agreement may be also used to secure a relationship on this side of a transaction.
Buyer and tenant agency agreements create a fiduciary relationship with the buyer or tenant just as seller listings create a fiduciary relationship with the seller. Generally, buyer and tenant representation agreements are subject to the same laws and regulations as those applying to owner listings. Thus:
- a representation agreement may be an exclusive, exclusive agency, or open listing. As with owner listings, the most widely used agreement is the exclusive. In this arrangement, the buyer agrees to only work with the buyer representative in procuring a property.
At the formation of the relationship, the buyer agent has the duty to explain how buyer or tenant agency relationships work. This is culminated by a signed agreement where the principal understands and accepts these circumstances. During the listing term, the buyer or tenant agent’s principal duties are to diligently locate a property that meets the principal’s requirements.
Net listing. A net listing is one in which an owner sets a minimum acceptable amount to be received from the transaction and allows the broker to have any amount received in excess as a commission, assuming the broker has earned a commission according to the other terms of the agreement. The owner’s “net” may or may not account for closing costs.
For example, a seller requires $75,000 for a property. A broker sells the property for $83,000 and receives the difference, $8,000, as commission.
Net listings are generally regarded as unprofessional today. The argument against the net listing is that it creates a conflict of interest for the broker. It is in the broker’s interest to encourage the owner to put the lowest possible acceptable price in the listing, regardless of market value. Thus, the agent violates fiduciary duty by failing to place the client’s interests above those of the agent.
Net listings are legal in Florida as long as the broker does not misrepresent the value of the property to the seller to the broker’s advantage. For example, if a property’s likely market value is $300,000, it would be a violation for a broker to lead the seller to believe the value is $275,000 for the purpose of retaining any selling amount over $275,000 instead of any selling amount over $300,000. To prevent this misrepresentation, the seller and the broker work together to determine a listing price. Then the broker retains any selling amount above the agreed-upon listing price minus any costs.
Transaction broker agreement. Recall from an earlier section that in a transaction broker relationship in Florida, the broker does not represent either party in a fiduciary capacity or as a single agent. Neither party has the right of the licensee’s undivided loyalty. The transaction broker relationship is between the brokerage and the client. Florida law makes the presumption that all licensees are operating as transaction brokers unless the broker and the customer have entered into a written single agent or nonrepresentation agreement.
A multiple listing service (MLS) is an organization of member brokers who agree to cooperate in the sale of properties listed by other brokers in exchange for a share of the broker’s resulting commission. Members of the service agree to enter all exclusive listings into the listing distribution network so that every member is promptly informed of new listings as they come on the market.
Most consumers expect brokers to make use of a multiple listing service in marketing and locating properties. Working with an MLS, however, requires that the listing or representation agreement contain the necessary provisions to allow the licensee to place the listing into a multiple listing service and to ensure that all parties understand and agree to the relevant policies and procedures.
The listing agreement used by members of a multiple listing service discloses relevant procedures and policies so that all principal parties to the agreement are aware of the pooling of the listing. A broker who works on a transaction listed in the MLS has all the duties and responsibilities inherent in the laws of agency as the client’s fiduciary agent. The listing agreement sets forth specific duties.
Exclusive right to sell listing clauses
A written listing, particularly an exclusive, is a formal contract which contains the entirety of all agreements between the parties. If an agreement is left out, it is assumed not to exist. An agreement that is included is assumed to exist and is generally enforceable. If a written agreement contains mistakes, it is probably not valid or enforceable. For these reasons, it is extremely important for a listing agreement to be accurate, error-free, and complete.
Different agreement types may contain a variety of required clauses. Generally, a written listing agreement requires as a minimum:
- names of all owners
- address or legal description of the listed property
- listing price
- expiration date
- commission terms
- authority granted
The following clause descriptions are found in a typical exclusive right-to-sell listing agreement.
Parties and authorization. The agreement should name all legal owners of the property, or duly authorized representatives of the owners, as the client party. It must also name the broker.
An authorization clause sets forth the nature of what the broker is allowed to do, i.e., the type of listing. Note that the phrase “right-to-sell” is a misnomer. A broker cannot legally sell the property without proper power of attorney. The usual right is to effect a sale or find a buyer.
Real Property. A written listing agreement must include a property description. The real property description may include an address.
It is critical to identify both the real property and any personal property that are for sale and included in the listing price.
Fixtures. Typical agreements list what fixtures are included in the sale specifically, and “all other things attached or affixed to the property” generally. The seller must then enter which items are excluded from the sale.
Personal Property. The listing agreement should include all personal property that is to be included in the transaction and listing price.
Listing price. A clause usually sets forth the gross price for the property and possibly the financing terms the owner will accept, particularly if seller financing or assumption of the seller’s loan is involved.
The listing price is the seller’s asking price for the property. This may or may not be the price the seller ultimately accepts. The full listing price does not have to be obtained for the broker to earn a commission. The listing price clause may also state the seller’s agreement to pay customary closing costs.
Listing term. In Florida, written listings must have a specific ending date. Failure to name a termination date in a written listing is grounds for revocation of the real estate license. Any provision for renewal of the listing term should be very specific. Automatic renewals are illegal.
To protect the broker, some listings contain a provision to extend the listing period in the event an expiration occurs during the period in which a sale contract is pending.
Agent’s duties. This clause specifies the broker’s responsibilities and authorization to carry out certain activities. These typically include marketing activities, multiple listing service activities, property access and showings, authority to allow other parties access, permission to inspect existing mortgage financing documents, and authority to accept deposits. Commonly, the clause specifically bars the broker from executing any contract on behalf of the owner.
Agent’s compensation. A clause will identify the broker’s fee and the necessary conditions for the fee to be earned. For instance, it may state that a commission is earned if a buyer is procured, a contract is executed, or the seller voluntarily transfers the property for any price during the listing period.
A fee clause usually provides for remedies in the event of default by the buyer or seller. In effect, if the seller breaches the listing without grounds after a buyer has been procured, the commission is payable. If the owner cannot sell the property for reasons beyond the owner’s control, the owner is not liable for a commission. If the buyer breaches a sale contract, the seller typically claims the buyer’s earnest money deposit as liquidated damages.
Protection period. Many listings include a protection clause stating that, for a certain period after expiration, the owner is liable for the commission if the property sells to a party that the broker procured, unless the seller has since listed the property with another broker.
Multiple listing. This provision obtains the seller’s consent to placing the listing in a multiple listing service and authorization to disseminate information about the listing to members.
Cooperation with other agents. This clause requires the seller to agree or refuse to cooperate with subagents or buyer agents in selling the property, under what terms, and whether the seller agrees to compensate these parties. Recent agreements stipulate that subagents and buyer agents must disclose their relationships to the buyer upon initial contact and subsequently in writing. There may also be a warning to the seller not to disclose confidential information to a buyer broker insofar as this agent is required to disclose all relevant information to the buyer.
Non-discrimination. Most exclusive listings contain an affirmation that the agent will conduct all affairs in compliance with state and federal fair housing and nondiscrimination laws.
Other disclosures by agent. In addition to agency, other disclosures might be included to cover any direct or indirect interest the broker has in the transaction and special compensation the broker might be receiving from other parties connected with the transaction.
Seller’s representations and promises. In this clause, the owner represents that he or she in fact owns the property in the manner stated in the listing, and is legally capable of delivering fee simple, marketable title. The clause may further require the owner to warrant that he or she
- is not represented by another party and will not list the property elsewhere during the listing period
- will not lease the property during the listing period without approval
- agrees to provide necessary information
- will refer all prospects directly to the broker without prior direct negotiation
- has reviewed a sample “Offer to Purchase and Sell” contract
- will make the property presentable and available for showing at reasonable times upon notice by agent.
Seller’s property condition disclosure. The listing form may require the seller to disclose the condition of the property to prospective buyers. Florida law may allow buyers to cancel a sale contract if they have not received the seller’s property condition disclosure before closing or occupancy or other deadline. In addition, the listing may include among the seller’s duties the requirement to complete and provide the agent with a Lead Paint Hazard addendum. A copy of the required notice to buyers may be attached to the listing agreement as part of the agreement.
Seller’s title and deed. A provision usually requires the owner to promise to deliver good and marketable title, title insurance, and to convey the property using a general warranty deed to a buyer. Without this covenant, the broker has no assurance that a transaction will occur, and in turn that he or she will be paid for procuring a buyer.
Flood hazard insurance. This clause requires the seller to disclose whether he or she is required to or presently maintains flood insurance on the property.
Limitation of liability. There is often a clause requiring the owner to indemnify the broker against liability resulting from casualty, loss, and owner misrepresentation during the listing period. In practice, liability and indemnification clauses do not necessarily absolve a broker from liability.
Escrow authorization. The seller authorizes escrow officers to disburse earned commission funds to the broker upon the broker’s instructions to do so.
IRS requirements; alien seller withholding. A clause may state that the seller will comply with IRS requirements for providing tax-related information. This ensures that a seller who is an alien understands that a buyer will be required to withhold a percentage of the sale price for the IRS.
Other listing provisions. An exclusive listing might also provide for:
- mediation: in the event of a dispute, the owner agrees to arbitrate differences before filing a lawsuit
- attorney fees: the losing party in a lawsuit must pay court costs and attorney fees
- acknowledgment: the owner acknowledges reading and understanding the agreement
- entire agreement: the listing cannot be changed without written agreement; the listing sets forth all agreements made
- binding effect: listing is binding and enforceable
- saving clause: if a portion of the agreement is invalid or unenforceable, the balance of the agreement remains valid as permitted by law
Notices to owner. Some listing agreements include notices to the seller concerning:
- fee negotiability: the broker’s fee is the result of negotiations with the seller
- fair housing laws: the broker and seller must comply with discrimination laws
- keyboxes; security: the seller should take prudent measures to protect personal property and remove dangerous items that could cause injury
- legal advice disclaimer: the broker cannot give legal advice
Signatures. All owners and the broker must sign the listing and indicate the date of signing.
Exclusive buyer agency clauses
The exclusive buyer agency agreement is very similar to the exclusive right-to-sell agreement, the only significant differences being the agent’s objectives and the fact that the principal is the buyer instead of the seller. The notable exception is how the agent is paid, as previously discussed.
The clauses which are virtually identical to the exclusive right-to-sell are:
- the identity of the principal and the agent’s authorized activity
- the description of the property desired in terms of location, price, size, etc.
- the term of the agreement and its automatic termination
- the buyer’s agreement to work exclusively through the agent
- the agent’s duties to locate a suitable property according to the buyer’s specifications
- the non-discrimination clause
- signatures of the parties
The following clauses distinguish the buyer agency agreement from the exclusive right-to sell agreement.
Buyer’s representation of exclusivity. Here the buyer affirms that he or she is not represented by another agent. In addition the buyer acknowledges an understanding of the agency relationship.
Agent compensation. This clause sets forth how the agent is to be paid, whether by retainer or commission, who is to pay the commission, and what the buyer owes the agent in the event the seller does not participate in the agent’s compensation. Second, the clause establishes the circumstances under which the agent has earned the commission. This includes finding a property during the agreement term or the buyer contracting to buy a property shown by the agent within a stipulated period of time following expiration. In addition, the clause provides that the agent will be paid in the event the buyer defaults on a sale contract.
Other buyers acknowledged. In this provision, the buyer acknowledges that the agent is working with other buyers who may be in competition for any property the buyer is shown by the agent.