Form-of-the-week: Agency Law Disclosure – Disclosure Regarding Real Estate Agency Relationships – Form 305
Legislated order to quell cultured chaos
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. [Calif. Civil Code §§2079.13(j), 2079.14]
At its core, the Agency Law Disclosure form 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 first tuesday Form 305]
Editor’s note — Among all types of real estate, only multi-family apartment sales of five or more units remain outside the agency disclosure law but not so for residential leases over one year.
The goal of the real estate agency disclosure law is to better inform the public (and licensees) about the duties licensees owe to members of the public. The law was put in place in an effort to eliminate developed misconceptions about licensee duties held by members of the public, also known as principals.
The agency disclosure law addresses two separate sets of agency-related information presented by brokers and their agents in real estate transactions:
- an Agency Law Disclosure form, setting out the “rules of agency” addressing the conduct of real estate licensees when dealing with the public in the capacity of an agent [See first tuesday Form 305]; and
- an agency confirmation provision, contained in purchase agreements, letters of intent (LOIs), leases for a term greater than one year, and any documents used to negotiate the purchase or lease of real estate with a term exceeding one year, declaring the agency relationships undertaken by each of the brokers with the participants in the transaction. [See first tuesday Form 150]
Uniform jargon and agency law
The Agency Law Disclosure was created for use by brokers and their agents to educate themselves and familiarize participants in real estate transactions with:
- the uniform jargon used in real estate transactions; and
- the various agency roles licensees undertake on behalf of their owners, buyers and tenants in a real estate transaction.
The rules of agency are presented in a two-page form. The exact wording of its entire content is dictated by statute and thus is the same across all form publishers. The only entries made by the form user are to identify the document and the participants to the transaction and obtain their signatures. [CC §2079.16; see first tuesday Form 305]
The second page of the Agency Law Disclosure defines words and explains phrases commonly used as jargon within the real estate industry.
Industry jargon is commonly used to express:
- the agency relationships of brokers to the participants in a transaction;
- broker-to-broker relationships; and
- the employment relationship between brokers and their agents.
A buyer’s agent and seller’s agent are mentioned but not defined. Legally, an agent is a licensed real estate broker. Thus, the word “agent,” when used in the disclosure, is not a reference to the agents of the brokers involved. Instead, “agent” is used to address the broker. Ironically, a broker rarely refers to themselves as an agent, which they legally are when using their license to earn a fee.
However, two sections on the face of the Agency Law Disclosure, entitled “seller’s agent” and “buyer’s agent,” address the duties owed to the seller-owner and buyer-tenant in a real estate transaction by these otherwise undefined brokers — buyer’s and seller’s agents.
The seller’s broker is correctly noted as being an agent for the seller, and is also known within the trade as a listing broker or listing office. The buyer’s broker is known as a buyer’s agent. However, peculiar to real estate brokerage, the buyer’s broker is also known as the selling agent.
One then wonders just who is the “buying agent” — an unmentioned phrase, but one plainly descriptive of the activities undertaken by a broker acting on behalf of the buyer. The buyer’s agent is selling nothing; they are locating property and negotiating to buy suitable property on behalf of their buyer client.
The Agency Law Disclosure does not mention, much less define, the broker’s role as an exclusive agent for either the buyer or seller. Yet the separate agency confirmation provision, included in the sale or lease (more than one year) of small residential and all commercial property, calls for the broker to determine their agency and disclose it to all participants. The mandated provision permits the broker to characterize their conduct with the participants as the agent of the “seller exclusively” or the “buyer exclusively.”
These exclusive characterizations of agency conduct have no relationship to employment under exclusive listings to sell or buy property. The seller’s agent under an exclusive right-to-sell listing understands the prospective buyer may turn out to be one of their buyer clients. This representation of opposing participants makes the broker a “non-exclusive” dual agent without concern for the exclusive employment of the broker by either the buyer or seller, or both beyond the disclosure of their dual agency.
Editor’s note – This article is worded primarily in the context of an agent representing a buyer or seller. However, the same rules of conduct and disclosure apply for an agent of a tenant or landlord.
The participants, their brokers and the duties owed to all
The Agency Law Disclosure states the principles of law governing the conduct of brokers who are acting as agents solely for a seller or a buyer (or tenant or landlord).
Broker obligations owed to the participants in a real estate transaction are divided into two categories:
- the special or primary agency duties of an agent owed by a broker and their agents to their principal, known as fiduciary duties; and
- the general duties owed by each broker to all participants in the transaction, requiring them to be honest and avoid deceitful conduct, known as general duties.
Avoidance and failure have adverse fee consequences
Failure of the owner’s agent to provide the owner with the Agency Law Disclosure form prior to entering into the listing agreement for the sale or lease of a property is a violation of real estate law. As a consequence of this up-front failure, the broker stands to lose their fee on a sale or lease if challenged by the owner prior to payment of the fee — closing.
The risk of loss of the fee by the owner’s agent cannot be eliminated by a later disclosure made as an addendum to an LOI, purchase agreement, lease agreement or escrow instructions. [Huijers v. DeMarrais (1992) 11 CA4th 676]
The Agency Law Disclosure form is treated by the owner’s agent as a preliminary and compulsory listing associated event. If not made part of the listing agreement by attachment, the broker cannot reasonably expect to enforce collection of their brokerage fee when the property is sold or leased — even after the transaction is in escrow and the brokerage fee has been further agreed to with the tardy delivery of the agency disclosures.
For commercial agents, this fatal defect in the initial handling of the fee agreement adversely affects fees on extensions, renewals and later sales of the property to the tenant which are otherwise earned.
Further, when the owner’s broker or their agent fails to hand the owner an Agency Law Disclosure form at the listing stage, the listing, and thus the agency, may be cancelled by the owner at any time. Further, payment of the fee may be avoided by the owner even when it has been earned. For the buyer’s or tenant’s broker to protect themselves against loss of their fee due to the failure of the owner’s broker to timely provide the Agency Law Disclosure form, the user’s broker needs to perfect their right to collect their portion of any brokerage fee to be paid by the owner.
Here, the share of fees earned by the user’s broker and payable by the owner needs to be agreed to by the owner directly with the user’s broker. This fee arrangement is stated in a boilerplate provision in each LOI, purchase agreement, lease agreement and the escrow instructions used by the buyer’s/tenant’s agent.
The seller’s payment of a fee earned by the user’s broker is not enforceable without an Agency Law Disclosure form attached to the initial written negotiations prepared by the user’s broker and signed by the user prior to submission to the owner or the owner’s agent.