ESSENTIALS OF REAL ESTATE AGENCY

Historical perspective

Basic roles

Types of agency

Creating an agency relationship

Terminating an agency relationship

 

Historical perspective

The most primary of relationships in real estate brokerage is that between broker and client, the relationship known in law as the agency relationship. The laws controlling agency grow out of two types of law: common law and statutory law. Common law is based on customary usage and the decrees and judgments of courts. Statutory law is the law written by legislatures. A body of law, generally called the law of agency, defines and regulates the legal roles of this relationship. The parties to the relationship are the principal (a client), the agent (a broker), and the customer (a third party).

The laws of agency are distinct from laws of contracts, although the two groups of laws interact with each other. For example, the listing agreement — a contract -¬≠establishes an agency relationship. Thus the relationship is subject to contract law. However, agency law dictates how the relationship will achieve its purposes, regardless of what the listing contract states.

The essence of the agency relationship is trust, confidence, and mutual good faith. The principal trusts the agent to exercise the utmost skill and care in fulfilling the authorized activity, and to promote the principal’s best interests. The agent undertakes to strive in good faith to achieve the desired objective, and to fulfill the fiduciary duties.

It is important to understand that the agency relationship does not require compensation or any form of consideration. Nor does compensation define an agency relationship: a party other than the principal may compensate the agent.

Basic roles

In an agency relationship, a principal hires an agent as a fiduciary to perform a desired service on the principal’s behalf. As a fiduciary, the agent has a legal obligation to fulfill specific fiduciary duties throughout the term of the relationship.

The principal, or client, is the party who hires the agent. The agent works for the client. The principal may be a seller, a buyer, a landlord, or a tenant.

The agent is the fiduciary of the principal, hired to perform the authorized work and bound to fulfill fiduciary duties. In real estate brokerage the agent must be a licensed broker.

The customer or prospect is a third party in the transaction whom the agent does not represent. The agent works with a customer in fulfilling the client’s objectives. A seller, buyer, landlord, or tenant may be a customer. A third party who is a potential customer is a prospect.

Types of agency

According to the level of authority delegated to the agent, there are three types of agency: universal, general, and special.

Universal agency. In a universal agency relationship, the principal empowers the agent to perform any and all actions that may be legally delegated to an agency representative. The instrument of authorization is the power of attorney.

General agency. In a general agency, the principal delegates to the agent ongoing tasks and duties within a particular business or enterprise. Such delegation may include the authority to enter into contracts.

Special, or limited, agency. Under a special agency agreement, the principal delegates authority to conduct a specific activity, after which the agency relationship terminates. In most cases, the special agent may not bind the principal to a contract.

In most instances, real estate brokerage is based on a special agency. The principal hires a licensed broker to procure a ready, willing, and able buyer or seller. When the objective is achieved, the relationship terminates, although certain fiduciary duties survive the relationship.

Creating an agency relationship

An agency relationship may arise from an express oral or written agreement between the principal and the agent, or from the actions of the parties by implication.

Written or oral listing agreement. The most common way of creating an agency relationship is by listing agreement, which may be oral or written. The agreement sets forth the various authorizations and duties, as well as requirements for compensation. A listing agreement establishes an agency for a specified transaction and has a stated expiration.

Implied agency. An agency relationship can arise by implication, intentionally or unintentionally. Implication means that the parties act as if there were an agreement. For example, if an agent promises a buyer to do everything possible to find a property at the lowest possible price, and the buyer accepts the proposition, there may be an implied agency relationship even though there is no specific agreement. Even if the agent does not wish to establish an agency relationship, the agent’s actions may be construed to imply a relationship.

Whether intended or accidental, the creation of implied agency obligates the agent to fiduciary duties and professional standards of care. If these are not fulfilled, the agent may be held liable

Terminating an agency relationship

Full performance of all obligations by the parties terminates an agency relationship. In addition, the parties may terminate the relationship at any time by mutual agreement. Thirdly, the agency relationship automatically terminates on the expiration date, whether the obligations were performed or not.

Involuntary termination. An agency relationship may terminate contrary to the wishes of the parties by reason of:

  • death or incapacity of either party
  • abandonment by the agent
  • condemnation or destruction of the property
  • renunciation
  • breach
  • bankruptcy
  • revocation of the agent’s license

Involuntary termination of the relationship may create legal and financial liability for a party who defaults or cancels. For example, a client may renounce an agreement but then be held liable for the agent’s expenses or commission.