This article discusses the agency relationship between a real estate broker, his agents and his client.
Introduction to agency
Webster defines an agent as “a person…empowered to act for another.” [Webster’s New World Dictionary, Third College Edition (1988)]
Black’s Law Dictionary describes agency as a “relation where one person acts for or represents another by the latter’s authority…” [Black’s Law Dictionary, Fifth Edition (1979]
The agency relationship can be as principal and agent, master and servant, or employer/proprietor and employee/independent contractor.
When the agency involves real estate as its subject matter, the California legislature has devised a licensing scheme to establish a minimum level of professional competency for licensing of individuals who act as agents in real estate related transactions.
A governmental agency, the Department of Real Estate (DRE), was created to oversee licensing and police a minimum level of competency for individuals desiring to represent others as real estate agents. Presently, this goal is pursued through the education of individuals who seek a license or are up for relicensing. The education is offered in the private and public sectors under government certification.
Agency in real estate related transactions includes relationships between:
- brokers and members of the public (clients or third parties);
- licensed sales agents and their brokers; and
- finders and their brokers or principals.
The extent of representation owed to a client by the broker and his agents depends on the scope of authority the client gives the broker, whether it is given orally, in writing or through the client’s conduct with the broker. Also, minimum acceptable standards of diligence are set by the California legislature, the DRE and the courts.
Agency and representation are synonymous in real estate transactions. A broker, by accepting exclusive employment from a client, undertakes the task of aggressively using due diligence to represent the client and attain the objectives sought by the client. An open listing only imposes a best efforts standard of representation.
Real estate jargon
Real estate jargon used by brokers and sales agents tends to create confusion among members of the public. When the jargon is used in legislative schemes, it adds a high degree of statutory chaos, academic discussion and judicial and public consternation over the duties of the real estate licensee.
For example, the words real estate agent, as used in the brokerage industry, mean a real estate salesperson employed by and representing a real estate broker. Interestingly, real estate salespeople rarely refer to themselves as sales agents. Instead, they call themselves “realtors” or “broker associates.”
Legally, however, a client’s real estate agent is defined as a real estate broker who undertakes representation of a client in a real estate transaction. A salesperson is legally an agent of the agent.
The word “subagency” suffers from even greater contrasts. Subagency serves both as:
- jargon for fee-splitting agreements between Multiple Listing Service (MLS) member brokers; and
- a legal principle for the authorization given to one broker by another (listing) broker to also act as an agent on behalf of the listing broker’s seller.
What is clear about real estate agency is the primary duties a broker and his agents owe the client, rather than the general duties owed to all parties regarding the real estate involved in the transaction. Primary duties owed a client, based on the best of the broker’s knowledge, include:
- evaluating the financial impact of the proposed transaction on the client;
- advising on the legal consequences of documents which touch and affect the client in the proposed transaction;
- considering the tax aspects of the transfer, except in one-to-four unit residential sales; and
- reviewing the suitability of the client’s exposure to a risk of loss on the transaction.
Clients can rescind all real estate contracts in a transaction when dual agency circumstances go undisclosed at the time of acceptance. The broker has misrepresented his agency to others in the transaction.
To protect both their clients and themselves, all real estate licensees must:
- know the scope of authority given to them by the employment agreement;
- document the agency tasks undertaken; and
- possess sufficient knowledge, determination and ability to perform the agency tasks they have undertaken.
In all tasks undertaken, a licensee must conduct himself at or above the minimum acceptable levels of competency to avoid liability to the client or disciplinary action by the DRE.
What is an agent?
An agent is an individual or corporation who represents another, called the principal, in dealings with third persons. Thus, a principal can never be his own agent since a principal acts for his own account, not on behalf of another.
The representation undertaken by a real estate broker is called an agency . Three parties are referred to in agency law: a principal, an agent and third persons. [Calif. Civil Code §2295]
In the brokerage of real estate transactions:
- the agent is the real estate broker retained to represent a client for the purposes hired;
- the principal is the client, such as a seller, buyer, landlord, tenant, lender or borrower who has retained a broker to sell, locate, lease or arrange a loan on real estate with other individuals; and
- third persons are individuals, or associations (corporations, limited partnerships and limited liability companies) other than the broker’s client, with whom the broker has contact as an agent acting on behalf of his client.
Creation of the agency relationship
An agency relationship is created in a real estate transaction when a person, called the client or principal, employs and authorizes a broker, called the agent, to act on his behalf in the future. [CC §2307]
A broker’s representation of a client, such as a buyer or seller, tenant or landlord, borrower or lender is properly undertaken and the fee agreement enforceable only after a written employment agreement has been signed by both the client and the broker. This employment contract is loosely referred to in the real estate industry as a “listing agreement.” [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]
The broker’s agency can also be created by an oral agreement or conduct of the client with the broker or other individuals. However, the fee arrangements would be unenforceable since no written agreement exists.
Also, some pre-printed, pre-1989 purchase agreements still in use contain a brokerage fee provision located below the signature of the buyer. The provision improperly stated the seller employs both the listing and selling brokers.
However, the intent of the brokers using the form is merely to split the fee being paid by the seller. This acceptance/fee provision becomes the seller’s employment or ratification of the buyer’s selling broker as an agent of the seller – even though the selling broker may never have acted on behalf of the seller, acting exclusively as the agent for the buyer.
This ill-conceived and combined acceptance/fee provision establishes the buyer’s broker as the seller’s subagent, or joint agent with the listing broker, a generally unacceptable legal consequence for the seller since representations to the buyer by the selling broker are binding on the seller. [Johnston v. Seargeants (1957) 152 CA2d 180]
These acceptance/fee provisions were finally altered to avoid imposing liability on the seller for representations made by the buyer’s broker. The revision was necessary to avoid conflicts with the agency confirmation law enacted in the late 1980s for one-to-four unit residential sales.