Kara Sears
When it comes to real estate, there are two types of agency relationships: common law and designated agency. The main difference between the two is that in a common-law agency, the relationship is between the client and the brokerage, whereas in a designated agency, the relationship is between the client and a designated agent from a particular brokerage. This distinction is important because it can impact the level of representation and confidentiality that a client receives. For example, under common law, if two clients are represented by the same brokerage, there may be a conflict of interest as all agents within the brokerage are deemed to know everything about each client and their property. On the other hand, designated agencies can provide full representation to both parties in a single transaction, as the agency relationship is only with the designated agent and not the brokerage as a whole.
| Characteristics | Common Law | Designated Agency |
|---|---|---|
| Agency Relationship | Exists between the client (buyer or seller) and the real estate brokerage (company) | Exists between the client and a designated agent(s) from a particular brokerage, and not with the brokerage as a whole |
| Conflict of Interest | Conflict of interest arises when two industry members in the same brokerage represent the buyer and seller in the same transaction | Eliminates conflict of interest as the client can be referred to another designated agent within the brokerage |
| Deemed Knowledge | Everyone in the brokerage knows everything about every property the brokerage has listed, as well as everything they knew about everyone's clients | No "deemed knowledge" as the designated agent cannot share any information about their clients with any other agents |
| Forms | Common Law forms are different from Designated Agency forms | Designated Agency forms explicitly mention "Designated Agency" in the title |
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What You'll Learn
Conflict of interest
In the context of common law versus designated agency, a conflict of interest arises when a brokerage represents both the buyer and the seller in the same transaction. Under common law, this is considered a conflict of interest because of the concept of "deemed knowledge", which means that everyone in the brokerage is assumed to know everything about every property and client. This makes it challenging to provide full disclosure and confidentiality to both clients.
On the other hand, designated agency avoids this conflict by establishing an agency relationship between the client and the individual agent rather than the entire brokerage. This allows different agents within the same office to provide full representation to multiple clients involved in the same transaction without sharing information with each other.
Conflicts of interest are not limited to the real estate industry and can occur in various sectors, including law, public administration, social work, academia, and government. In law, for example, a conflict of interest may arise when an attorney or law firm represents multiple parties with adverse interests to those of a current client. Similarly, in government agencies, conflicts of interest are taken seriously and are regulated to ensure that officials act in the public's best interest rather than their own.
To address conflicts of interest, disclosure is essential. Disclosure policies help maintain transparency and accountability, allowing organisations to evaluate and address potential and actual conflicts. Additionally, recusal or removal from participation in certain decisions may be necessary to minimise conflicts, as seen in the example of a governing board member refraining from voting or discussing the selection of a consulting firm with which they have a personal connection.
In summary, conflicts of interest can arise in various sectors, including real estate, law, and government. Designated agency helps mitigate conflicts in real estate transactions by establishing individual agent-client relationships, while disclosure and recusal are important tools for managing conflicts across industries.
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Agency relationship
The designated agency model addresses this conflict of interest issue. In a designated agency relationship, the agreement is still between the brokerage and the client, but the agency relationship is strictly between the client and a designated agent from the brokerage, not the brokerage as a whole. This means that only the designated agent represents the client, and other licensees in the brokerage do not have a relationship with that particular client. This helps maintain client confidentiality and ensures that each client receives full representation and loyalty from their designated agent.
For example, consider a scenario where a real estate brokerage is facilitating a transaction between a buyer and a seller. In a common-law brokerage, if two different agents from the same brokerage represent the buyer and seller, respectively, a conflict of interest arises as both agents are deemed to know everything about both clients. However, in a designated agency brokerage, each client would have their own designated agent, eliminating the conflict of interest and ensuring that each client receives full representation.
The designated agency model aligns with consumer expectations, as clients often view their relationship as being with the individual agent they interact with. It provides a more personalised and dedicated approach to client representation in real estate transactions. However, it is important to note that designated agency relationships may vary across different jurisdictions, and specific regulations and practices may differ.
Ultimately, both common law and designated agency models have their advantages and considerations. While common law provides a broader representation structure, designated agency focuses on individualised relationships and conflict avoidance. It is essential for clients to understand the nature of their agency relationship and for industry members to uphold their fiduciary duties, ensuring a smooth and ethical real estate transaction process.
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Client confidentiality
Common Law
In common law, the agency relationship exists between the client (buyer or seller) and the real estate brokerage (company). If both parties to a transaction are represented by the same brokerage, the brokerage has a conflict of interest. This is because of the concept of "deemed knowledge", where everyone in the brokerage knows everything about every property the brokerage has listed, as well as everything about each client.
Designated Agency
Designated agency is a departure from common law practices, addressing the conflict of interest issue. In designated agency, the agency relationship is with an individual agent from a particular brokerage, not with the brokerage as a whole. This means that under designated agency, an agent cannot share any information about their clients with other agents in the same brokerage, so there is no "deemed knowledge".
The duty of client confidentiality continues even after the client-lawyer relationship has ended. Lawyers are obliged to protect client information and can only disclose it in limited circumstances, such as when authorised or required by law, or to prevent harm to another person. For example, a lawyer may disclose information to prevent their client from committing a crime that is reasonably certain to result in substantial injury to another person's financial interests.
Attorney-Client Privilege
Attorney-client privilege is a legal doctrine that protects confidential communications between lawyers and clients. It applies in judicial and other proceedings where a lawyer may be called as a witness or required to produce evidence concerning a client. However, it is not absolute and can be waived if, for example, a communication is witnessed by a third party.
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Brokerage consent
In a common law brokerage, the agency relationship is between the client (buyer or seller) and the brokerage company as a whole. This means that if two agents from the same brokerage represent the buyer and seller in the same transaction, a conflict of interest arises due to the concept of "deemed knowledge". All agents within the brokerage are deemed to know everything about each client and their properties. To address this conflict, one option is for the buyers' agents to make their clients customers, but this limits the buyers' representation.
On the other hand, a designated agency eliminates this conflict of interest by establishing the agency relationship directly between the client and a designated agent from the brokerage, rather than the brokerage company. This allows different agents from the same brokerage to represent both parties in a transaction without sharing confidential client information with each other.
The choice between common law and designated agency depends on the specific circumstances and preferences of the client. However, it is important to note that not all brokerages can offer designated agency due to factors such as size. Additionally, the forms used in common law and designated agency brokerages differ, indicating the type of brokerage relationship.
In terms of consent, it is crucial for real estate agents to obtain informed consent from their clients regarding any conflicts of interest. Investment advisers must disclose all material facts relating to a conflict that might influence their advice or recommendations. This disclosure should be specific, clear, and tailored to the client's needs, allowing them to make informed decisions.
Furthermore, when transitioning between common law and designated agency brokerages, the seller and buyer must consent to the move and sign a new brokerage agreement. This agreement includes a clause stating that if the designated agent loses their license, the brokerage will assign another licensed industry member to act as the designated agent.
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Designated agent
A designated agency is a way for a brokerage to provide agency representation services to consumers, as an alternative to the traditional common-law agency model. In a designated agency, the agreement to provide brokerage services is between the brokerage and the consumer, but the agency relationship is strictly between the consumer and the individual designated agent.
In a designated agency, the agency relationship exists between the client and a designated agent from a particular brokerage, and not with the brokerage as a whole. This means that if a conflict arises, the client can be referred to another designated agent within the brokerage who may provide the client with sole agency representation. This is in contrast to a common-law brokerage, where if one associate writes an offer for a buyer on a home listed by another associate at the same brokerage, and neither client wants to be treated as a customer, then transaction brokerage applies.
Under designated agency, the brokerage is still responsible for keeping client information confidential when dealing with third parties. However, the designated agent is obligated to keep their client's information confidential from other designated agents within the brokerage. This means that there is no "deemed knowledge", and each agent can fully represent their clients without any conflicts of interest.
As a client, your designated agent has the duty to protect and promote your negotiating position at all times, provide obedience to lawful instructions, maintain confidentiality, provide full disclosure, and account for all money and property held while acting for you.
In summary, a designated agency can be beneficial as it eliminates conflicts of interest that may arise under common law, and allows for full representation of clients by individual agents.
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Frequently asked questions
Under common law, the agency relationship is between the client and the brokerage. Under designated agency, the agency relationship is between the client and a designated agent from a particular brokerage, not the brokerage as a whole.
Under common law, if an associate writes an offer for a buyer on a home listed by another associate at the same brokerage, and neither client wants to be treated as a customer, then transaction brokerage applies. In the same situation under designated agency, both agents could fully represent their clients.
You won't know unless they tell you, you ask, or it is explained to you. When it comes time to complete contracts, the forms are different as they will say "Common Law" or "Designated Agency" in the title.
Not every brokerage can be for a variety of reasons. Size is one of the criteria.
If it wasn't believed to be better for clients, brokerages wouldn't make the change to designated agency. You would only notice a difference if a situation arose where there was a conflict in representing you and another party.
