Letter to the Editor: What is an agency relationship?

Question: What is an agency relationship?

Answer: In real estate, an agency relationship is created between brokers and members of the public, including clients and third parties. It requires a competent principal, mutual consent and fiduciary and general duties on behalf of the agent.

Agency relationship vs. employment relationship

Two types of relationships are created under a listing agreement:

• an employment relationship; and
• an agency relationship.

The employment relationship, established upon entering into a listing agreement between a broker and a client, specifies the scope of activities the broker and the broker’s agents undertake in their employment and authorizes the broker to follow through with them by contract. The employment relationship is the component which involves the payment of a fee.

For a broker to enforce a promise from a client to pay a fee, the fee agreement needs to be:

• in writing; and
• signed by the client. [Calif. Civil Code §1624(a)(4)]

The two types of relationships that occur under a listing agreement exist independently of one another. Thus, payment of a fee has no influence on the agency duties imposed on the broker or agent to act in the best interest of their client. In other words, the due diligence of the agent is implied in the agency relationship, rather than the employment relationship which deals with obtaining a fee for services rendered.

The agency relationship carries with it the fiduciary duty of loyalty and full disclosure owed by the broker and their sales agents to the client. An oral agreement to perform brokerage services on behalf of a client imposes an agency law obligation on the broker and agents to act as fiduciaries.

The Agency Law Disclosure is handed to all participants when listing, selling, buying or leasing for a term greater than one year:

• property containing one-to-four residential units;
• mobilehomes; and
• commercial property. [CC §2079.13(j), 2079.14]

The purpose of the Agency Law Disclosure is to inform the public about the duties licensees owe to their clients. At its core, the Agency Law Disclosure is a restatement of pre-existing codes and case law on agency relationships of licensees acting on behalf of another person in real estate transactions. [See RPI Form 305, 305-1 and 550-2]

Related article:

Change the law: apply use of the Agency Law Disclosure to all property transactions

How an agency relationship is created

The representation of others undertaken by a real estate broker is called an agency. An agent is one who is authorized to act for or in place of another. The person or entity being represented is called the principal. An agency relationship is created in a real estate transaction when a principal employs a broker to act on their behalf.

Agency and representation are synonymous in real estate transactions. A broker, by accepting an exclusive employment from a client, undertakes the task of using due diligence to represent the client and attain their objectives. Due diligence in practice consists of various steps towards getting the client what they are requesting, whether it be the selling, buying, leasing or financing of real estate. Gathering all material facts available on a property of interest which are readily available for the broker or their agent is one example of practicing due diligence and representing the client.

The extent of representation owed to a client by the broker and their agents depends upon the scope of authority given to the broker. Authority may be given:

• verbally;
• in writing; or
• through the client’s conduct with the broker.

Alternative ways of creating agency

An agency relationship may also be created through ratification and estoppel.

Ratification refers to the adoption or approval of an act performed on behalf of a person without previous authorization, such as a client’s approval of previously unauthorized acts of an agent, after the acts have been performed.

For example, consider a client who is represented by an agent without having any approval to do so, verbally or otherwise. The client decides to accept the agent’s actions retroactively, and the agency relationship becomes binding. This is an example of an agency relationship created through ratification.

Estoppel is a legal theory barring a person from later asserting or denying a condition based on the person’s previous acts or statements. For example, consider a person who claims that a client was represented by an agent authorized to act on the client’s behalf. When the client makes no objections to the agent representing them, the relationship is created by estoppel.

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