Anaya Nolan
In real estate, an agency relationship exists between the client (buyer or seller) and the real estate brokerage (company). This relationship can be further delineated into two types of agencies: common law agency and designated agency. A common law agency relationship is when both parties to a transaction are represented by the same brokerage, creating a conflict of interest. In contrast, a designated agency relationship exists between the client and a designated agent(s) from a particular brokerage, addressing the conflict of interest that arises in common law agency. Understanding the legal relationship between clients and brokerages is essential for real estate professionals to ensure ethical and legal duties are upheld.
| Characteristics | Values |
|---|---|
| Agency relationship | Exists between the client (buyer or seller) and the real estate brokerage (company) |
| Agency representation | Real estate agents must inform their clients whether they work for a common law brokerage or a designated agency brokerage |
| Agency disclosure | Real estate agents must disclose whom they represent so that buyers and sellers are aware of any conflicts of interest |
| Dual agency | When an agent represents both the buyer and the seller; illegal in some states |
| Designated agency | Addresses the conflict of interest in common law agency by creating an agency relationship between the client and a designated agent from a particular brokerage, rather than with the brokerage as a whole |
| Subagent | Represents the best interests of the principal (or client), such as a real estate salesperson |
| Special agent | Granted limited authority to act on behalf of the principal, typically for specific business transactions |
| Universal agent | Possesses all the legal rights needed to fully execute a sale, such as when an older person moving to a retirement community bestows their child with the authority to sell their home |
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What You'll Learn
Common law agency vs designated agency
In real estate, agency relationships refer to the legal relationship between the client and the brokerage. There are two types of agency relationships: common law agency and designated agency.
In a common law agency, 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, in common law agency, the reciprocal rights and liabilities between the client and agent reflect commercial and legal realities. For example, the agent has a duty of obedience to carry out all lawful instructions of their client and must keep the client's confidences.
Designated agency is a departure from traditional common law agency practices that addresses the conflict of interest issue. In designated agency, the agency relationship exists between the client and a designated agent(s) from a particular brokerage, and not with the brokerage as a whole. This means that designated agents can act as sole agents and provide full fiduciary duties to all clients, except when the same designated agent(s) represents both the buyer and seller in the same transaction. In this case, the client can be referred to another designated agent within the brokerage to resolve the conflict.
It is important to note that a real estate agent must inform their clients of what type of brokerage they work for, whether it is a common law brokerage or a designated agency brokerage. This information is typically outlined in a written service agreement that the client signs, confirming their choice of agency representation.
Both common law agency and designated agency have their own advantages and disadvantages. Common law agency may provide more stability and consistency in the agent-client relationship, as the agent is representing the brokerage as a whole. On the other hand, designated agency allows for more personalized service and a direct relationship between the client and the designated agent. However, it may also lead to higher costs for the client as they are paying for the services of an individual agent rather than a brokerage.
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The principal-agent relationship
In real estate, the principal-agent relationship is a form of agency where the principal (the client) employs an agent (a broker or salesperson) to carry out specific actions on their behalf when dealing with a third party. The agent acts as a representative of the principal, with the authority to make decisions and enter into contracts with the third party on the principal's behalf. For example, an individual selling their home may appoint their child as their universal agent, granting them the legal rights to handle all aspects of the sale without requiring the principal's direct involvement.
The principal, on the other hand, has certain responsibilities and powers in the relationship. They are required to compensate the agent for their services and may be obliged to pay for any losses caused by prematurely terminating the agency relationship. The principal cannot revoke the agent's authority after it has been partially exercised but can do so before such authority is exercised or for just cause. If the agency is for a fixed period, the principal cannot terminate it early without sufficient cause, or they may be liable for compensation.
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The role of subagents
In the real estate industry, a subagent is a real estate salesperson who is tasked by an agent with the responsibilities of serving the principal in the business at hand. The subagent represents the best interests of the principal (or client), just as an agent or broker would. In the event that a subagent encounters a situation where they must make a choice between two options, one being most beneficial to the agent they are working under and the other being most beneficial to the client, they must always choose the option that best serves the client.
For example, an older person moving to a retirement community might appoint one of their children as their universal agent, giving them all the legal rights needed to execute the sale of their house. In this case, the real estate salesperson may never even meet the principal and would conduct all business with the universal agent, who is acting as a subagent.
It is important to note that, as a subagent, one is always working first and foremost for the principal, not for the agent or broker. The subagent is bound by the same duties as the agent, including loyalty, obedience, confidentiality, competence, and disclosure.
The revocation or renunciation of an agency relationship also applies to subagents. According to Section 207, revocation or renunciation may be made expressly or implicitly by conduct. The termination does not take effect for the agent or third parties until they become aware of it.
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Fiduciary duties
In real estate, common law agency refers to the agency relationship between the client (buyer or seller) and the real estate brokerage (company). This means that the client employs the agent to carry out specific actions and deal with third parties on their behalf. The agent is authorised to act on the client's behalf and create legal relationships with these third parties.
In the context of real estate, fiduciary duties are the legal and ethical obligations of agents to their clients. These duties include:
- Loyalty: Agents must protect their client's negotiating position and work honestly in their best interests. This includes the duty to disclose any conflicts of interest. For example, in cases of dual agency, where an agent represents both the buyer and the seller, the agent must disclose this and represent the interests of both clients.
- Obedience: Agents must carry out all lawful instructions of their clients.
- Confidentiality: Agents must keep the confidences of their clients.
- Competence: Agents must exercise reasonable care and skill in performing their duties.
- Disclosure: Agents must disclose all relevant information that may influence their client's decisions.
- Accounting: Agents must account for all money and property held while acting for their client.
It is important to note that the specific fiduciary duties of real estate agents may vary depending on the state or territory's statutory code. For example, some states have adopted agency disclosure laws requiring agents to disclose whom they represent early in the transaction. Additionally, dual agency is regulated by law and is illegal in certain states.
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Disclosure requirements
Disclosure is a key requirement for real estate agents, who are legally bound to disclose all relevant information that may influence their client's decisions. This includes disclosing the type of brokerage they work for, whether that be a common law brokerage or a designated agency brokerage.
In a common law agency, 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, a conflict of interest arises. This is addressed by designated agency, where the agency relationship is between the client and a designated agent(s) from a particular brokerage, not the brokerage as a whole. This allows the agent to act as a sole agent and provide full fiduciary duties to their clients.
Real estate agents must disclose whom they represent so that buyers and sellers are aware of any conflicts of interest. This is required by law in most states, which have adopted agency disclosure laws mandating that licensees disclose early in the transaction whom they represent and verify this in writing. This is particularly important in cases of dual agency, where an agent represents both the buyer and the seller. Dual agency is regulated by law and is illegal in some states, so disclosure is of the utmost importance to ensure the agent is still fulfilling their fiduciary duty to represent the interests of both clients.
In addition to disclosing whom they represent, real estate agents must also disclose any other relevant information that may influence their client's decisions. This could include any personal relationships with clients, such as being related to a client, which could be seen as a conflict of interest. It is the duty of the agent to ensure their client is fully aware of any pertinent details.
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Frequently asked questions
In common law agency, 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, there is a conflict of interest.
An agent in real estate is authorised to act on behalf of the principal (client) and create a legal relationship with a third party. The agent carries out specified actions and deals with a third party on behalf of the principal.
Agents in real estate have a fiduciary duty to act in the best interests of their clients. This includes obedience, confidentiality, competence, disclosure, and accounting.
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