Office Hours with Professor Bill is a multimedia learning experience covering fundamental real estate concepts.
In Episode 2, Professor Bill responds to questions about:
the different agency relationships and representations; and- the different types of duties owed within those relationships in real estate transactions.
What’s the difference between agency and representation?
In real estate transactions, agency and representation are synonymous.
The Department of Real Estate (DRE) was created to oversee licensing and police a minimum level of professional competency for individuals who represent others as real estate agents.
Agency in real estate related transactions includes relationships between:
- brokers and members of the public (this includes the clients and third parties).
- licensed sales agents and their brokers; and
- finders and their brokers or principals.
An agent is an individual or corporation who represents another, called the principal, in dealings with third persons.
Thus, a principal can never be their own agent.
The extent of representation owed to a client by the broker and their agents depends on the scope of authority the client gives the broker. Authority can be given:
- in writing; or
- through the client’s conduct with the broker.
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.
This representation of others undertaken by a real estate broker is called an agency. An agency relationship is created in a real estate transaction when a principal employs a broker to act on their behalf.
Three parties are referred to in agency law: a principal, an agent and third persons.
In 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 or lease property, locate a buyer or tenant, or arrange a real estate loan with other persons; 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 their client.
Legally, a client’s real estate agent is defined as a real estate broker who undertakes representation of a client in a real estate transaction.
Thus, a salesperson is legally an agent of the agent – their employing broker.
Fundamental to a real estate agency are the primary duties a broker and their agents owe the principal.
These duties are distinct from the general duties owed by brokers and agents to all other parties involved in a transaction.
What’s the difference between these duties?
Primary duties owed to a client in a real estate transaction include:
- a due diligence investigation into the subject property.
- evaluating the financial impact of the proposed transaction.
- advising on the legal consequences of documents which affect the client.
- considering the tax aspects of the transfer; and
- reviewing the suitability of the client’s exposure to a risk of loss.
To care for and protect both their clients and them, all real estate licensees are to:
- know the scope of authority given to them by the employment agreement.
- document the agency tasks undertaken; and
- possess sufficient knowledge and ability to perform the agency tasks undertaken.
Collectively, these are known as fiduciary duties.
Fiduciary duties are the duties owed by an agent to act in the highest good faith toward the principal and not to obtain any advantage over their principal by the slightest misrepresentation, concealment, duress, or undue influence.
Again, these are the highest standards owed to the principal the broker represents.
Alternatively, the broker owes a limited, non-client general duty to voluntarily provide critical factual information to the opposing party in a transaction.
In all regards, a licensee needs to conduct themselves at or above the minimum acceptable levels of competency to avoid liability to the client or disciplinary action by the DRE.
An agency relationship is properly undertaken on a written employment agreement signed by both the client and the broker.
A written employment agreement is necessary for the broker to have an enforceable fee agreement. This employment contract is loosely referred to in the real estate industry as a “listing agreement.”
The broker’s agency can also be created by an oral agreement or conduct of the client with the broker or other individuals. However, fee arrangements are unenforceable if no written agreement exists. Simply: no written agreement, no fee.
