Question:
Does a broker create an agency relationship only when they or their agent enter into a written employment agreement with a client? Is a written agreement required, say from a buyer or tenant, to receive a fee?
Answer:
Broker employment
An agency relationship is created in a real estate transaction when a broker acts on behalf of another person, called a principal or client. The employment may be created by an oral or written agreement.
Though not in writing, an oral agreement to perform brokerage services on behalf of a principal imposes agency law obligations on the broker. Thus, the broker and all the king’s men act at all times as fiduciaries of their client. These are the same duties a trustee owes their beneficiaries, or partners owe partners. The employment requires the broker, themselves or through their agent, to work diligently in the best interest of the client, a “care for and protect” issue.
Receiving a fee when earned
While an oral agreement creates an agency relationship and allows the broker to receive a fee, it does not entitle the broker to enforce collection of the promised fee from the client. To pursue collection of a promised fee earned and due the broker — and indirectly their agent — the fee agreement needs to be in writing and signed by the client. The signed writing as a prerequisite to collection is mandated by California’s Statute of Frauds. [Calif. Civil Code §1624(a)]
A written employment agreement entered into to memorialize an agency relationship with an owner, buyer, tenant or lender binds the client to perform as agreed. Further, the existence of the writing is almost always sufficient inducement for the client to cause the broker to be paid a fee, since it can be enforced by a court.
Written listings — both the Buyer’s Listing Agreement and Tenant’s Exclusive Authorization to Locate Space — contain fee provisions for the client to either pay a fee themselves or cause a fee earned to be paid by someone else. A buyer or tenant who is a client needs to cause someone to pay the agreed fee when earned by a broker. Often it is the owner as the seller or landlord who pays the fees when buyers or tenants acquire ownership or possession to property of the type described in their listing agreement with the broker. [See RPI Forms 103 §4 and 111 §4]
The broker’s promise to use due diligence in their efforts to meet the objectives sought is given in exchange for the client’s reciprocal promise to pay a fee, evidenced in writing. Thus, the written agreement both:
- creates an agency relationship; and
- assures the broker a fee will be received.
An oral agreement to work for a client in expectation of a fee, while creating an agency duty of the highest level, does not assure payment of a fee. The client is not bound by their promise to pay unless stated in a written document they have signed.
Generally, seller’s agents do not face issues about oral agreements. Thus, they rarely have a fee collection issue. The reason: unlike buyer’s agents, seller’s agents are trained by their broker (and most trainers) to enter into exclusive listing agreements with an owner or they will not work for them. In the process, they are assured they will be paid a fee. If not paid voluntarily, then the promise is enforced under provisions in the signed listing agreement.
However, buyer’s and tenant’s agents are mysteriously allowed to drift into and out of the world of tricky oral agreements. Again, lack of proper training and oversight about representation of buyers and tenants is the culprit.
With these agents, the hope of collecting a fee is but a bet on their belief they are such great sales agents that the buyer or tenant will not wander away.
For a more in-depth look at the significance of a written contract, see first tuesday’s article “Inking the handshake.”
This article was previously posted in 2014, and has been updated.
