LEARNING OBJECTIVES
When you've finished reading this Chapter, you should be able to:

► identify the various types of agency relationships common in the real estate profession and the characteristics of each.

► describe the fiduciary duties involved in an agency relationship.

► explain the process by which agency is created and terminated and the role of disclosure in agency relationships.

► distinguish the duties owed by an agent to his or her client from those owed to customers.

► define the following key terms: Agency, express agency, listing agreement, agency coupled with an express agreement, negligent misrepresentation, interest, fiduciary relationship, agent fraud, principal, buyer's agents, general agent, puffing, client, implied agency, special agent, customer, implied agreement, subagent

designated agent, latent defect, , universal agent, dual agency, law of agency.

REAL ESTATE PRACTICE & PRINCIPLES KEY WORD MATCH QUIZ --- CLICK HERE ---

I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory. 

 

The key for successful agents is to focus on the consumer. Consumers are increasingly knowledgeable and have access to most of the information they need that was formerly obtainable only through real estate professionals. In the absence of being information providers, real estate professionals must become information consult-ants, representatives, and advocates for their clients. They must provide a service that is valuable to their clients.

In addition to providing valuable service, there's an even more important reason to understand agency relationships. Agency is governed by state laws that establish the duties, responsibilities, and acceptable activities for agents in their relationships with clients, customers, and the general public. Adherence to these expectations is not just a matter of good business practice, which, of course, it is; you could lose your license if you don't. Further, agency is a legal relationship that creates duties—and liabilities—to the principal. This part of the Chapter does not provide details on Tennessee’s state's laws, but it will give you a solid grounding in the fundamental principles of modern real estate agency practice. We will provide you with detailed information concerning Tennessee laws of agency as it pertains to the real estate industry.

The relationship between a real estate licensee and the parties involved in a real estate transaction is not a simple one. In addition to the parties' assumptions and expectations, the licensee is subject to a wide range of legal and ethical requirements designed to protect the seller, the buyer, and the transaction itself. Agency is the word used to describe that special relationship between a real estate licensee and the person he or she represents. Agency is governed by two kinds of law: common law, the rules of a society established by tradition and court decisions, and statutory law, the laws, rules, and regulations enacted by legislatures and other governing bodies.

The basic framework of the law that governs the legal responsibilities of the broker to the people he or she represents is known as the common-law law of agency. The fundamentals of agency law have remained largely unchanged for hundreds of years. However, the application of the law has changed dramatically, particularly in residential transactions and especially in recent years. As states enact legislation that defines and governs the broker-client relationship, brokers are reevaluating their services. They must determine whether they will represent the seller, the buyer, or both (if that is permitted by state law) in a transaction. Where state laws permit, an increasing number of brokers are choosing to represent buyers exclusively. They also must decide how they will cooperate with other brokers, depending on which party each broker represents. In short, the brokerage business is undergoing many changes as brokers focus on ways to enhance their services to buyers and sellers.

 

Even as the laws change, however, the underlying assumptions that govern the agency relationship remain intact. The principal-agent relationship evolved from the master-servant relationship under English common law. In that relationship, the servant owed absolute loyalty to the master. This loyalty replaced the servant's personal interests as well as any loyalty the servant might owe to others. In a modern-day agency relationship, the agent owes the principal similar loyalty. As masters used the services of servants to accomplish what they could not or did not want to do for themselves, principals use the services of agents. The agent is regarded as an expert on whom the principal can rely for specialized professional advice.

The law of agency defines the rights and duties of the principal and the agent. It applies to a variety of business transactions. In real estate transactions, con-tract law and real estate licensing laws—in addition to the law of agency—interpret the relationship between licensees and their clients. The law of agency is a common-law concept; it is being widely replaced by state statute.

An agency relationship may be based on a formal agreement between the parties, an express agency, or it may result from the parties' behavior, an implied agency.

Express agency. The principal and agent may enter into a contract, or an express agreement, in which the parties formally express their intention to establish an agency and state its terms and conditions. The agreement may be either oral or written. An agency relationship between a seller and a broker is generally created by a written employment contract, commonly referred to as a listing agreement, which authorizes the broker to find a buyer or tenant for the owner's property. Although a written listing agreement is usually preferred, some states consider an oral agreement binding. An express agency relationship between a buyer and a broker is created by a buyer agency agreement. Similar to a listing agreement, it stipulates the activities and responsibilities the buyer expects from the broker in finding the appropriate property for purchase or rent.

Implied agency. An agency may also be created by implied agreement. This occurs when the actions of the parties indicate that they have mutually consented to an agency. A person acts on behalf of another as agent; the other per-son, as principal, delegates the authority to act. Even though the parties may not have consciously planned to create an agency relationship, nonetheless, they can create one unintentionally, inadvertently, or accidentally by their actions.

FOR EXAMPLE     Nancy tells Betsy, a real estate broker, that she is thinking about selling her home. Betsy immediately contacts several prospective buyers. One of them makes an attractive offer without even seeing the property. Betsy goes to Nancy's house and presents the offer, which Nancy accepts. Although no formal agency agreement was entered into either orally or in writing, Betsy's actions implied to prospective buyers that Betsy was acting as Nancy's agent. If Betsy made any misrepresentations to the buyer, Nancy may be held liable.

 

Even though licensees may be required to disclose their agency status, it is often difficult for customers to understand the complexities of the law of agency. A buyer can easily assume that when he or she contacts a salesperson to show the buyer property, the salesperson becomes his or her agent, even though, under a listing contract, the salesperson may legally represent the seller. An implied agency with the buyer can result if the words and conduct of the salesperson do not dispel this assumption. Otherwise, one agency relationship is created in conflict with another. Dual representation, which will be discussed in greater detail later, may occur, even though it was not intended.

Compensation. The source of compensation does not determine agency. An agent does not necessarily represent the person who pays his or her commission. In fact, agency can exist even if no fee is involved (called a gratuitous agency). For instance, a seller could agree to pay a commission to the buyer's agent, even though the agent is representing the buyer. The written agency agreement should state how the agent is being compensated and explain all the alternatives available.

Real estate brokers and salespersons are commonly called agents. Legally, however, the term refers to strictly defined legal relationships. In the case of real estate, it is a relationship with buyers and sellers or with landlords and tenants. In the law of agency, the body of law that governs these relation-ships, the following terms have specific definitions:

► Agent—the individual who is authorized and consents to represent the interests of another person. In the real estate business, a firm's broker is the agent, and he or she shares this responsibility with the licensees who work for the firm.

► Subagent—the agent of an agent. If the original agency agreement permits it, an agent may delegate some of his or her authority or responsibility to a third party. The subagent is also an agent of the principal.

► Principal—the individual who hires the agent and delegates to him or her

the responsibility of representing the principal's interests. In the real estate

business, the principal is the buyer or seller, landlord or tenant.

► Agency—the fiduciary relationship between the principal and the agent.

► Fiduciary—the relationship in which the agent is held in a position of special trust and confidence by the principal.

► Client—the principal.

► Customer—the third party for whom some level of service is provided and who is entitled to fairness and honesty.

► Nonagent—(also referred to as a facilitator, intermediary, transactional broker, transactional coordinator, or contract broker) a middleman between a buyer and seller (or landlord and tenant) who assists both parties with the transaction without representing either party's interests. Nonagents are often subject to specific statutory responsibilities. Transactional brokers are discussed in Chapter 5.

IN PRACTICE , The general discussion in this Chapter is limited to the concepts and principles that govern traditional common-law agency relationships. In many states including Tennessee, agency reform legislation that includes language superseding the common-law of agency has been passed, drafted, or is under consideration.

 

It should be noted, however, that many agency statutes make the common-law duties a matter of statutory law rather than (or in addition to) creating totally new legal relationships. While this Chapter provides an overview of current agency legislation, a licensee should be familiar with the specific terms of any agency statute adopted by his or her state legislature.

There is a distinction between the level of services an agent provides to a client and those services that the agent provides to a customer. The client is the principal to whom the agent gives advice and counsel. The agent is entrusted with certain confidential information and has fiduciary responsibilities (discussed in greater detail later) to the principal. In contrast, the customer is entitled to factual information and fair and honest dealings as a consumer but does not receive advice and counsel or confidential information about the principal. The agent works for the principal and with the customer. Essentially, the agent supports and defends the principal's interests, not the customer's.

The relationship between the principal and agent must be consensual; that is, the principal delegates authority, and the agent consents to act. The parties must agree to form the relationship. An agent may be authorized by the principal to use the assistance of another, who may or may not, depending on local state law, become a subagent of the principal. The practice of subagency, while still legal in most states, is seldom practiced in most real estate markets due to the increased liability it entails for listing brokers.

Just as the agent owes certain duties to the principal, the principal has responsibilities toward the agent. The principal's primary duties are to comply with the agency agreement and cooperate with the agent, that is, the principal must not hinder the agent and must deal with the agent in good faith. The principal also must compensate the agent according to the terms of the agency agreement.

IN PRACTICE , Subagency is rapidly becoming the dinosaur of the real estate industry. In some areas, the multiple-listing service (MLS) or individual companies are refusing even to accept subagency. The general acceptance of buyer agency has led to much less use of subagency.

The agency agreement usually authorizes the broker to act for the principal. The agent's fiduciary relationship of trust and confidence with the principal means that the broker owes the principal certain specific duties. These duties are not simply moral or ethical; they are the law—the common-law of agency or the statutory law governing real estate transactions. Under the common-law of agency, an agent owes the principal the five duties of care, obedience, accounting, loyalty (including confidentiality), and disclosure. Table 4.1 illustrates the differences between client and customer services provided to a buyer and seller.

Care. The agent must exercise a reasonable degree of care while transacting the business entrusted to him or her by the principal. The principal expects the agent's skill and expertise in real estate matters to be superior to that of the aver-age person. The most fundamental way in which the agent exercises care is to use that skill and knowledge in the principal's behalf. The agent should know all facts pertinent to the principal's affairs, such as the physical characteristics of the property being transferred and the type of financing being used.

If the agent represents the seller, care and skill include helping the seller arrive at an appropriate and realistic listing price, discovering and disclosing facts that affect the seller, and properly presenting the contracts that the seller signs. It also means making reasonable efforts to market the property, such as advertising and holding open houses, and helping the seller evaluate the terms and conditions of offers to purchase.

An agent who represents the buyer is expected to help the buyer locate suitable property and evaluate property values, neighborhood and property conditions, financing alternatives, and offers and counteroffers with the buyer's interest in mind.

An agent who does not make a reasonable effort to properly represent the interests of the principal could be found by a court to have been negligent. The agent is liable to the principal for any loss resulting from the agent's negligence or carelessness. The standard of care will vary from market to market and depends on the expected behavior for a particular type of transaction in a particular locale.

IN PRACTICE , Because real estate licensees have, under the law, enormous exposure to liability, some brokers purchase what is known as errors and omissions (E&O) insurance for their firms. Similar to malpractice insurance in the medical and legal fields, E&O policies cover liability for errors and negligence in the usual listing and selling activities of a real estate office. Individual salespersons might also be insured. Licensing laws in several states now require E&O insurance for brokers and, in some cases, for individual salespersons as well. However, no insurance policy will protect a licensee from a lawsuit or prosecution arising from criminal acts. Insurance companies normally exclude coverage for violation of civil rights and antitrust laws as well.

Obedience. The fiduciary relationship obligates the agent to act in good faith at all times, obeying the principal's instructions in accordance with the contract.

However, that obedience is not absolute. The agent may not obey instructions that are unlawful or unethical. Because illegal acts do not serve the principal's best interests, obeying such instructions violates the broker's duty of loyalty. On the other hand, an agent who exceeds the authority assigned in the contract will be liable for any losses that the principal suffers as a result.

FOR EXAMPLE A seller tells the listing agent, "I don't want you to show this house to any, you know, minorities." Because refusing to show a property to some-one on the basis of race is illegal, the agent may not follow the seller's instructions and should withdraw from the agency.

Accounting. The agent must be able to report the status of all funds received from or on behalf of the principal. Most state real estate license laws require that a broker give accurate copies of all documents to all parties affected by them and keep copies on file for a specified period of time. Most license laws also require the broker to deposit immediately, or within a statutory time frame, all funds entrusted to the broker (such as earnest money deposits) in a special trust, or escrow, account. Commingling such monies with the broker's personal or general business funds is strictly illegal. Conversion is the practice of using those commingled funds as the broker's own money. It is illegal as well.

Loyalty. The duty of loyalty requires that the agent place the principal's interests above those of all others, including the agent's own self-interest. The agent must be particularly sensitive to any possible conflicts of interest. Confidentiality about the principal's personal affairs is a key element of loyalty. An agent may not, for example, disclose the principal's financial condition. When the principal is the seller, the agent may not reveal such things as the principal's willingness to accept less than the listing price or his or her anxiousness to sell unless the principal has authorized the disclosure. If the principal is the buyer, the agent may not disclose, for instance, that the buyer will pay more than the offered price if necessary, or that the buyer is under a tight moving schedule, or any other fact that might harm the principal's bargaining position. Under the laws of most states, the agent must disclose material facts about the condition of the property itself. Some states, however, permit a seller disclaimer—essentially a statement that the property is sold "as is," with no promises regarding its quality.

Because the agent may not act out of self-interest, the negotiation of a sales con-tract must be conducted without regard to how much the agent will earn in commission. All states forbid agents to buy property listed with them for their own accounts or for accounts in which they have a personal interest without first disclosing that interest and receiving the principal's consent. Neither brokers nor salespersons may sell property in which they have a personal interest without informing the purchaser of that interest.

Disclosure. It is the agent's duty to keep the principal informed of all facts or information that could affect a transaction. Duty of disclosure includes relevant information or material facts that the agent knows or should have known.

The agent is obligated to discover facts that a reasonable person would feel are important in choosing a course of action, regardless of whether those facts are favorable or unfavorable to the principal's position. The agent may be held liable for damages for failing to disclose such information. For example, an agent for the seller has a duty to disclose

► all offers;

► the identity of the prospective purchasers, including any relationship the agent has to them (such as when the licensee or a relative is a purchaser);

► the purchaser's ability to complete the sale or offer a higher price;

► any interest the agent has in the buyer (such as the broker's agreement to manage the property after it is purchased);

► the buyer's intention to resell the property for a profit; and

► the agent's best judgment of the fair market value of the property.

 

However, a seller's agent is also expected (and required under many states' laws) to disclose information about known material defects in the property to prospective buyers. While this seems a violation of the agent's duty of total allegiance to the seller, this requirement falls under the real estate professional's broader duty to serve the general public and is in the agent's long-term best interest.

An agent for the buyer must disclose deficiencies of a property as well as sales contract provisions and financing that do not suit the buyer's needs. The agent would suggest the lowest price the buyer should pay based on comparable values, regardless of the listing price. The agent also would disclose information—about how long a property has been listed or why the owner is selling—that would affect the buyer's ability to negotiate the lowest purchase price possible. If the agent represents the seller, of course, disclosure of any of this information would violate the agent's fiduciary duty to the seller.

IN PRACTICE , Remember that saying the condition of property is "as is" does not preclude provisions already in the contract. "As is" sellers sometimes complain because they are still expected to have plumbing, electrical, and mechanical systems, plus all appliances, in working order as is often specified in the contract. If sellers truly mean "as is,,, they must cross out any printed provisions existing in the contract that relate to the condition of systems and appliances.

An agency may be terminated for any of the following reasons:

► Death or incapacity of either party (notice of death is not necessary)

► Destruction or condemnation of the property

► Expiration of the terms of the agency

► Mutual agreement by all parties to the contract

► Breach by one of the parties (in which case the breaching party might be liable for damages)

► By operation of law, as in bankruptcy of the principal (bankruptcy terminates the agency contract, and title to the property transfers to a court-appointed receiver)

► Completion, performance, or fulfillment of the purpose for which the agency was created

An agency coupled with an interest is an agency relationship in which the agent is given an interest in the subject of the agency, such as the property being sold. An agency coupled with an interest cannot be revoked by the principal or be terminated upon the principal's death.

FOR EXAMPLE A broker agrees to provide the financing for a condominium building being constructed by a developer in exchange for the exclusive right to sell the units once the building is completed. The developer may not revoke the listing agreement once the broker has provided the financing because this is an agency coupled with an interest.

 

What an agent may do as the principal's representative depends solely on what the principal authorizes the agent to do.

Limitations on an Agent’s Authority

A universal agent is a person empowered to do anything the principal could do personally. The universal agent's authority to act on behalf of the principal is virtually unlimited. This type of agency can be created by a general power of attorney, which makes the agent an attorney-in-fact. A real estate broker typically does not have this scope of authority as an agent in a real estate transaction.

A general agent may represent the principal in a broad range of matters related to a particular business or activity. The general agent may, for example, bind the principal to any contract within the scope of the agent's authority. A property manager typically is a general agent for the owner.

A special agent or limited agent is authorized to represent the principal in one specific act or business transaction only, under detailed instructions. A real estate broker is usually a special agent. If hired by a seller, the broker is limited to finding a ready, willing, and able buyer for the property. A special agent for a buyer would have the limited responsibility of finding a property that fits the buyer's criteria. As a special agent, the broker may not bind the principal to any contract. A special power of attorney is another means of authorizing an agent to carry out only a specified act or acts.

FOR EXAMPLE You are very busy with an important project, so you give your col-league $5 and ask him to buy your lunch. Your colleague is your general agent: You have limited his scope of activity to a particular business (buying your lunch) and established the amount that may be spent (up to $5). Still, he has broad discretion in selecting what you will eat and where he will buy it. However, if you had told your colleague, "Please buy me a Number 3 salad at Lettuce Eat Lettuce," you would have further limited his authority to a very specific task. Your colleague, therefore, would have been your special agent.

Finally, a designated agent (or designated representative) is a person authorized by the broker to act as the agent of a specific principal. A designated agent is the only agent in the company who has a fiduciary responsibility toward the principal. When one salesperson in the company is a designated agent, the others are free to act as agents for the other party in a transaction. Thus, two salespersons from the same real estate company may end up representing opposite sides in a property sale. In designated agency situations, the broker is often put in the position of being a dual agent, so disclosure of that status is required. Again, the availability of designated agency varies from state to state. Licensees should be sure to find out their states' positions on designated agency.

Single Agency.  In single agency, the agent represents only one party in any single transaction. The agent owes either fiduciary or statutory duties exclusively to one principal, who may be either the buyer or the seller (or the landlord or ten-ant) in a transaction. Any third party is a customer.

 

While a single agency broker may represent both sellers and buyers, he or she cannot represent both in the same transaction and remain a single agent. This avoids conflicts and results in client-based service and loyalty to only one client. On the other hand, it traditionally rules out the sale of in-house listings to rep-resented buyers, although in designated agency states this may be permitted. The broker must establish policies for the firm that define for whom the client services are performed.

Seller as principal. If a seller contracts with a broker to market the seller's real estate, the broker becomes an agent of the seller; the seller is the principal, the broker's client. In single agency, a buyer who contacts the broker to review properties listed with the broker's firm is the broker's customer. Though obligated to deal fairly with all parties to a transaction and to comply with all aspects of the license law, the broker is strictly accountable only to the principal—in this case, the seller. The customer (in this case, the buyer) represents himself or herself.

The listing contract usually authorizes the broker to use licensees employed by the broker, as well as the services of other cooperating brokers in marketing the seller's real estate. These cooperating brokers may assist the broker (agent) as subagents, buyer's agents, or nonagents, or they may be the agents for other parties.

The relationship of a salesperson or an associate broker to an employing broker is also an agency. These licensees are thus agents of the broker and owe the same fiduciary duties as the broker to the principal.

IN PRACTICE , Under the agency statutes of some states, real estate agents are specifically prohibited from making offers of subagency through an MLS. Licensees should be aware of their states' laws regarding subagency.

Subagency. A subagency is created when one broker, usually the seller's agent, appoints other brokers (with the seller's permission) to help perform client-based functions on the principal's behalf. These cooperating brokers have the same fiduciary obligation to the seller as does the listing broker, helping produce a ready, willing, and able buyer for the property. This arrangement may be created through an offer of cooperation and compensation made in an MLS.

 

IN PRACTICE , Many broker transactions use cooperative agents. When a broker puts a seller's house in an MLS, the broker is basically inviting other agents from other companies to cooperate with the the broker in his or her representation of the seller. The broker is still the seller's agent, and the other agents are not the seller's agent. They represent the seller just as the broker does, under the broker's agency agreement. If a cooperative agent helps a broker sell a house, the broker pays the agent a co-op fee out of the broker's commission. The amount of the fee is noted in the MLS listing. For example, it might say, "CC:04," meaning the cooperative commission is 4 percent.

Participation in an MLS, by itself, does not necessarily create a subagency relationship. Because of widespread agency reforms, a cooperating broker cannot be presumed to be a subagent. The listing broker is liable for the conduct of all of the subagents and their salespersons. 

FOR EXAMPLE  If you give your colleague $5 and ask him to buy your lunch, your colleague is your agent. If your colleague is busy, he may hand your money to a friend, along with your instructions. The friend is a subagent—an agent of your agent. Your colleague's friend is still responsible for buying your lunch in accordance with your instructions. The subagent, like the agent, is ultimately responsible to you, the principal.

Buyer as principal. When a buyer contracts with a broker to locate property and represent his or her interests in a transaction, the buyer is the principal—the broker's client. The broker, as agent, is strictly accountable to the buyer. The seller is the customer.

In the past, it was simple: Brokers always represented sellers, and buyers were expected to look out for themselves. With the widespread use of MLSs and sub-agency, a buyer often had the mistaken impression that the subagent was the buyer's agent, although the reality was that both agent and subagent represented the seller's interests.

Today, however, most residential brokers and salespersons are discovering opportunities of buyer representation. Some brokers and salespersons have become specialists in the emerging field of buyer brokerage, representing buyers exclusively. Real estate commissions or boards across the country have developed rules and procedures to regulate such buyer's brokers, and local real estate associations develop agency representation forms and other materials for them to use. Professional organizations offer assistance, certification, training, and networking opportunities for buyer's agents.

 

A buyer agency relationship is established in the same way as any other agency relationship: by contract or agreement. The buyer's agent may receive a flat fee or a share of the commission or both, depending on the terms of the agency agreement. Buyer brokerage and buyer agency agreements are discussed in Chapter 6.

Owner as principal: property management. An owner may employ a broker to market, lease, maintain or manage the owner's property. Such an arrangement is known as property management. The broker is made the agent of the property owner through a property management agreement. As in any other agency relationship, the broker has a fiduciary or statutory responsibility to the client-owner. Sometimes, an owner may employ a broker for the sole purpose of marketing the property to prospective tenants. In this case, the broker's responsibility is limited to finding suitable tenants for the owner's property. Property management is discussed further in Chapter 17.

In dual agency (sometimes called limited agency), the agent represents two principals in the same transaction. Dual agency requires equal loyalty to two separate principals at the same time. Because agency originates with the broker, dual agency arises when the broker is the agent of the buyer and either the agent or subagent of the seller. The salespersons, as agents of the broker, have fiduciary or statutory responsibilities to the same principals as well. The challenge is to fulfill the fiduciary or statutory obligations to one principal without compromising the interests of the other, especially when the parties' interests may not only be separate, but even opposite. While practical methods of ensuring fairness and equal representation may exist, it should be noted that a dual agent can never fully represent either party's interests.

Because of the obvious risks inherent in dual agency—ranging from conflicts of interest to outright abuse of trust—the practice is illegal in some states. In those states where dual agency is permitted, however, all parties must consent to it, usually in writing.

FOR EXAMPLE Mary, a real estate broker, is the agent for the owner of Roomy Manor, a large mansion. Jody, a prospective buyer, comes into Mary's office and asks Mary to represent her in her search for a modest home. After several weeks of activity, including two offers unsuccessfully negotiated by Mary, Jody spots the For Sale sign in front of Roomy Manor. She tells Mary she wants to make an offer and asks for Mary's advice on a likely price range. Mary is now in the difficult position of being a dual agent: Mary represents the seller (who naturally is interested in receiving the highest possible price) and the buyer (who is interested in making a successful low offer).

Disclosed dual agency. Real estate licensing laws may permit dual agency only if the buyer and seller are informed and consent to the broker's representation of both in the same transaction. Although the possibility of conflict of interest still exists, disclosure is intended to minimize the risk for the broker by ensuring that both principals are aware of the effect of dual agency on their respective interests. The disclosure alerts the principals that they may have to assume greater responsibility for protecting their interests than they would if they had independent representation. The broker must reconcile how, as agent, he or she will discharge the fiduciary duties on behalf of both principals, particularly providing loyalty and protecting confidential information. Because the duties of disclosure and confidentiality are limited by mutual agreement, they must be carefully explained to the parties in order to establish "informed con-sent."

Dual agency has existed in everyday real estate practice in every state for more than a century. In small, mostly rural market areas, there was often only one broker available. Because of the limited population of the market, the broker knew most of the local properties and residents (and possibly their parents and grand-parents) very well. In situations like this, it was virtually impossible to avoid dual agency. Of course, in such circumstances, there is usually no problem because the parties all know and trust each other. Such situations are rare today, having been complicated by changes in society and in the license laws.

Designated agency is a process that accommodates an "in-house" sale where two different agents are involved. The broker designates one agent to represent the seller, and one agent to represent the buyer. Designated agency is currently legal in about half the states. However, designated agency does not apply to a single agent who represents both parties at the same in the same transaction.

Undisclosed dual agency. A broker may not intend to create a dual agency. However, like any other agency, it may occur unintentionally or inadvertently. Sometimes the cause is carelessness. Other times a salesperson does not fully understand his or her fiduciary responsibilities. Some salespersons lose sight of other responsibilities when they focus intensely on bringing buyers and sellers together. For instance, a salesperson representing the seller might suggest to a buyer that the seller will accept less than the listing price. Or that same sales-person might promise to persuade the seller to accept an offer that is in the buyer's best interests. Giving a buyer any specific advice on how much to offer can lead him or her to believe that the salesperson represents the buyer's interests and is acting as the buyer's advocate.

Any of these actions can create an implied agency with the buyer and violate the duties of loyalty and confidentiality to the principal-seller. Because neither party has been informed of the situation and been given the opportunity to seek separate representation, the interests of both are jeopardized. This undisclosed dual agency violates licensing laws. It can result in the rescission of the sales contract, forfeiture of a commission, a lawsuit for damages, and possible license problems.

 

FOR EXAMPLE Using the previous Roomy Manor example, if Mary doesn't tell Jody that Mary represents the seller of the property, Mary will be an undisclosed dual agent. Mary has two options. First, knowing Jody's comfortable financial situation and intense desire for the property, Mary might choose not to tell Jody about the dual agency situation. Instead, Mary could tell her that Roomy Manor's owner will accept nothing less than the full asking price. While this will ensure that Mary receives the maximum possible commission, it will also subject Mary to severe penalties for violating the state's licensing laws. Alternatively, Mary may disclose her relationship with the seller and work out a dual agency agreement with both parties in which Mary legally represents both parties' interests.

A more common example of dual agency would be if Mary employed two salespersons, Ryan and Sally. Ryan is the listing salesperson for Roomy Manor, and Sally meets and begins representing the buyer, Jody. Because both Ryan and Sally are associated with Mary's real estate brokerage, Mary may be construed as a dual agent and will have to enter into a disclosed dual agency agreement with the par-ties.

Licensees are required to reveal for whom they provide client-based services. Understanding the scope of the service a party can expect from the agent allows a customer to make an informed decision about whether to seek his or her own representation.

Mandatory agency disclosure laws now exist in every state. These laws stipulate when, how, and to whom disclosures must be made. They may, for instance, dictate that a particular type of written form be used. The laws might state what information an agent must provide to gain informed consent where disclosed dual agency is permitted. The laws might even go so far as to require that all agency alternatives be explained, including the brokerage firm's policies regarding its services. Frequently, printed brochures outlining agency alternatives are available to a firm's clients and customers.

Whether or not the law requires it, licensees should explain to both buyers and sellers what agency alternatives exist, how client and customer services differ, and how these services affect the interests of each party. Once a client-based relationship is established, it is critical that customers understand how this affects their interests. If the broker represents two principals in the same trans-action, the impact on both parties must be explained. A general rule of thumb is to make the disclosure before any confidential information is disclosed about an individual's motivation or financial situation.

Agency Statutes

A rapidly growing number of state legislatures are enacting agency reform legislation. Such laws are either in place or under consideration in most states. While each state's agency statute is different, many still incorporate the common-law fiduciary principles discussed here. For instance, most statutes contain language requiring agents to

► exercise reasonable care and skill in performing his or her duties,

► obey the client's specific directions,

► account for all money and property received,

► promote the client's best interests at all times (i.e., loyalty),

► disclose material facts concerning the transaction,

► perform according to the terms of the brokerage agreement,

► keep confidential all confidential information received from the client, and

► generally comply with the terms of the statute.

If a state's agency law does not specifically replace the common law of agency, a licensee will be subject to the requirements of both the statute and common law.

Even though an agent's primary responsibility is to the principal, the agent also has duties to third parties. Any time a licensee works with a third party, or customer, the licensee is responsible for adhering to state and federal consumer protection laws as well as the ethical requirements imposed by professional associations and state regulators. In addition, the licensee's duties to the customer include

► reasonable care and skill in performance,

► honest and fair dealing; and

► disclosure of all facts that the licensee knows or should reasonably be expected to know that materially affect the value or desirability of the property.

As part of the recent trend toward public protection of purchasers, many states now have statutes requiring disclosure of property conditions to prospective buyers. Prepurchase structural inspections, termite infestation reports, or other protective documentation may also be used. The actual disclosures that sellers are required to make vary according to each state's law.

Disclosure of environmental health hazards, which can render properties unusable for the buyer's intended purpose, may be required. For instance, federal law requires the disclosure of lead-based paint hazards. Frequently, the buyer or the buyer's mortgage lender requests inspections or tests to deter-mine the presence or level of risk.

IN PRACTICE , Licensees are urged to obtain advice from state and local authorities responsible for environmental regulation whenever the following conditions may be present: toxic waste dumping; underground storage tanks; contaminated soil or water; nearby chemical or nuclear facilities; and health hazards such as radon, asbestos, and lead paint.

Brokers, salespersons, and other staff members must always be careful about the statements they make. They must be sure that the customer understands whether the statement is an opinion or a fact. Statements of opinion are permissible only as long as they are offered as opinions and without any intention to deceive.

Statements of fact, however, must be accurate. Exaggeration of a property's benefits is called puffing. While puffing is legal, licensees must ensure that none of their statements can be interpreted as fraudulent. Fraud is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person. That includes not only making false statements about a property but also intentionally concealing or failing to disclose important facts.

The misrepresentation or omission does not have to be intentional to result in broker liability. A negligent misrepresentation occurs when the broker should have known that a statement about a material fact was false. The fact that the broker may actually be ignorant about the issue is no excuse. If the buyer relies on the broker's statement, the broker is liable for any damages that result. Similarly, if a broker accidentally fails to perform some act—for instance, if he or she forgets to deliver a counteroffer—the broker may be liable for damages that result from such a negligent omission.

FOR EXAMPLE  While showing a potential buyer a very average-looking house, broker Dan described even its plainest features as "charming" and "beautiful." Because the statements were obviously Dan's personal opinions designed to encourage a positive feeling about the property (or puff it up), their truth or falsity is not an issue.

Broker Gil was asked by a potential buyer if a particular neighborhood was safe. Although Gil knew that the area was experiencing a skyrocketing rate of violent crime, Gil assured the buyer that no problem existed. Gil also neglected to inform the buyer that the lot next to the house the buyer was considering had been sold to a waste disposal company for use as a toxic dump. Both may be examples of fraudulent misrepresentation.

If a contract to purchase real estate is obtained as a result of fraudulent misstatements, the contract may be disaffirmed or renounced by the purchaser. In such a case, the broker not only loses a commission but can be liable for dam-ages if either party suffers loss because of the misrepresentation. If the licensee's misstatements were based on the owner's own inaccurate statements and the licensee had no independent duty to investigate their accuracy, the broker may be entitled to a commission, even if the buyer rescinds the sales contract.

The seller has a duty to discover and disclose any known latent defects that threaten structural soundness or personal safety. A latent defect is a hidden structural defect that would not be discovered by ordinary inspection. Buyers have been able to either rescind the sales contract or receive damages when a seller fails to reveal known latent defects. For instance, sellers were found liable where a house was built over a ditch covered with decaying timber; a buried drain tile caused water to accumulate; and a driveway was built partly on adjoining property. The courts also have decided in favor of the buyer when the seller neglected to reveal violations of zoning or building codes.

In addition to the seller's duty to disclose latent defects, in some states the agent has an independent duty to conduct a reasonably competent and diligent inspection of the property. It is the licensee's duty to discover any material facts that may affect the property's value or desirability, whether or not they are known to or disclosed by the seller. Any such material facts discovered by the licensee must be disclosed to prospective buyers. If the licensee should have known about a substantial defect that is detected later by the buyer, the agent may be liable to the buyer for any damages resulting from that defect.

FOR EXAMPLE Broker Kim knew that a house had been built on a landfill. A few days after the house was listed, one of Kim's salespersons noticed that the living room floor was uneven and sagging in places. Both Kim and the salesperson have a duty to conduct further investigations into the structural soundness of the property. They cannot simply ignore the problem or place throw rugs over particularly bad spots and hope buyers won't look underneath.

In recent years, questions have been raised about stigmatized properties—properties that society has branded undesirable because of events that occurred there or because of a sexual offender who currently lives in an area. While the specifics may vary from state to state, under Megan's Law, residents are notified when a sexual offender is released to and resides in an area. The residence of a known sexual offender can deem a property stigmatized because buyers may not want to live in that vicinity.

However, the more common stigma is a criminal event, such as homicide, illegal drug manufacturing, gang-related activity, or a tragedy, such as suicide. Properties have even been stigmatized by rumors that they are haunted. Because of the potential liability to a licensee for inadequately researching and disclosing material facts concerning a property's condition, licensees should seek competent counsel when dealing with a stigmatized property.

Some states have laws regarding the disclosure of information about such properties, designed to protect sellers and local property values against a baseless psychological reaction. In other states, the licensee's responsibility may be difficult to define because the issue is not a physical defect but merely a perception that a property is undesirable. The stigmatized property issue can be even more complicated: In some cultures, a house in which someone has died is considered uninhabitable. While licensees must not discriminate based on nationality, culture, or religious beliefs, state laws on stigmatized properties may put the agent in an awkward position. That's why getting competent legal counsel is important.

IN PRACTICE , A disclosure that a property's previous owner or occupant died of AIDS or was HIV-positive constitutes illegal discrimination against the handicapped under the federal Fair Housing Act, discussed in Chapter 20.

 

The law of agency governs the principal-agent relationship. Agency relationships may be expressed either by the words of the parties or by written agreement or may be implied by the parties' actions. In single-agency relationships, the broker or agent represents one party, either the buyer or the seller, in the transaction. If the agent elicits the assistance of other brokers who cooperate in the transaction, the other brokers may become subagents of the principal. Many states have adopted statutes that replace the common-law of agency and that establish the responsibilities and duties of the parties.

What you have been learning and we’ll finish with it is “General Law of Agency”. The law of real estate agency governs the principal-agent relationship in Tennessee... In General Agency, relationships may be expressed either by the words of the parties or by written agreement or may be implied by the parties' actions. In single-agency relationships, the broker or agent represents one party, either the buyer or the seller, in the transaction. If the agent elicits the assistance of other brokers who cooperate in the transaction, the other brokers may become subagents of the principal. Many states have adopted statutes that replace the common-law of agency and that establish the responsibilities and duties of the parties. Tennessee DOES NOT. The video will caution you throughout, warning you of that fact. Tennessee agency will be covered separately.