21-Operations of Law-Agency Law Protecting Your Clients

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Operations of Law

In addition to the performance-related reasons for terminating an agency, there are four operations of law that account for why agency relationships may be terminated, including:

  1. Expiration
  2. Agency Achievement
  3. Incapacity or Death
  4. Destruction, Condemnation, or Modification

Expiration

In most instances, agency relationships are established for limited periods of time. When these time periods end, an agent’s and a principal’s requirement to each other also expire.

NOTE: Some states may require that an agent maintain the principal’s confidentiality. Indefinitely, despite the conclusion of an agency relationship. 

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In most instances relationships are established for limited periods of  .

Agency Achievement

Agency relationships end after their objectives have been achieved. That is after their purposes have been fulfilled. For example, the agent met the stipulations identified in the listing contract, and the property was successfully sold.

Incapacity or Death

Agencies are abolished when either the broker or the principal die and depending on the state; agencies are also terminated if one of the parties is determined to have a mental illness that would otherwise negate his ability to protect his own interests reasonably.

th (5)Destruction, Condemnation, or Modification

The term “direct condemnation” is used to describe the act of a government entity that exercises its power of eminent domain through judicial or administrative proceedings to transfer title to private property from its original owner to itself for the sake of public use. If direct condemnation proceeding begins after an agency relationship was begun, the agency is terminated because the basis of the relationship has changed.

Under this heading, agency termination would also occur when a property is modified or destroyed by an earthquake, flood, or another natural or human-related disaster which occurs after the agency relationship was originally agreed upon. When a portion of the property has been destroyed, condemned, or modified after the original agency agreement was established, the agency relationship is no longer valid.

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termination would also occur when a property is modified or .

Shopping Offers

Is a listing broker obligated to “shop” offers received from buyers, as part of the listing broker’s fiduciary duty to the seller? For example, if you are a listing broker and you receive two offers on the same property should you tell both buyers about the other’s offer? Should you divulge the price and terms of each offer? Are you breaching your fiduciary duty to the seller if you don’t?

A Listing Broker’s Duty to the Seller

A listing broker is obligated to exercise reasonable care to effect a sale to the best advantage of the seller, i.e., secure the best terms at the best price obtainable. See, e.g., Vivian Arnold Realty Co. v. McCormick, 19 Ariz. App. 289, 506 P.2d 1074 (1973); Morley v. J. Pagel Realty, 27 Ariz. App. 62, 550 P.2d 1104 (1976) (broker has duty to effect a sale for seller on best terms possible); Meerdink v. Krieger, 550 P.2d 42 (Wash. App. 1976) (broker has a duty to exercise reasonable care, skill, and judgment in securing best bargain possible).

In an Arizona case, Marmis v. Solot, Co., 117 Ariz. 499, 573 P.2d 899 (App. 1977), an unsuccessful prospective buyer filed a lawsuit against the listing broker for “shopping” his offer. In discussing the prospective buyer’s claims against the listing broker, the court stated:

Any efforts by [the listing broker] to obtain a better price were only in performance of its obligations to the seller and the broker cannot be penalized for fulfillment of those duties.Tortuous interference [with contract/economic relations] does not occur through lawful competition. Id. at 502 (citation omitted) (emphasis added).

The court further stated:

Even if the representative from [the listing broker] who was dealing with [the successful buyer] had intended to “bluff” [the prospective buyer] . . . the result was to obtain, through vigorous competitive bidding, a higher price than [the successful buyer] had bid initially, thereby benefiting the seller.

It is clear that a fiduciary relationship arose between [the listing broker] and [the seller]. Having undertaken to sell the property for its principal, [the listing broker] was obliged to effect a sale to the best advantage of the seller, i.e., on the best terms and at the best price obtainable. Id. (citations omitted) (emphasis added).

Similarly, in a New Jersey case, Melveney v. McCrane, 351 A.2d 385 (N.J. App. 1976), both the actual buyer and the unsuccessful prospective buyer sued the listing broker for “shopping” the buyer’s offers. In this case, the listing broker’s “shopping” of the offers resulted in sale of the property well in excess of the listed price. In the dismissing both buyers’ claims against the listing broker, the Court stated:

It bespeaks only an agency relationship between her [the listing broker] and her principals, [the sellers], throughout which she kept them fully informed and, following their instructions, secured for them a purchaser for their property at the highest price obtainable through vigorous competitive bidding.

Id. at 461.

The court went on to state:

In the circumstances it was [the listing broker’s] ‘duty to obtain the terms most advantageous to the principal’ [the sellers]. (Citations omitted). She was required to transmit to the [sellers] each of the more favorable offers as they were submitted to her. (Citations omitted). All of her negotiations with [the prospective buyer] and all of her negotiations with [the actual buyer] were directed toward fulfillment of these duties. She cannot be penalized for doing what she was obligated to do.

Id. at 462.

In a 1928 case, a seller sued a broker for failing to “shop” an offer. In this case, Smith v. Fidelity & Columbia Trust Co., 12 S.W. 2d 276 (Ky. App. 1928) the seller listed the property (a “handsome” house) with the broker for a purchase price of $30,000. A prospective buyer submitted an offer of $22,500, which was declined. Two days later, another buyer submitted an offer of $25,000. When the first buyer was advised of second buyer’s offer, he increased his offer to $26,000, which he indicated was his limit. When the broker informed the second buyer of the first buyer’s offer, the second buyer advised the broker that he would not “bid against anybody for a piece of property,” but would consider a counteroffer from the seller. The broker informed the seller, and the second buyer accepted the seller’s counteroffer of $27,500.

A month later, the seller filed a lawsuit against the broker seeking to recover damages, alleging that the broker was negligent for failing to give the first buyer the opportunity to bid a higher price. The court stated:

The particular breach of duty alleged in the petition is the failure of the broker to give [the first buyer] an opportunity to bid $30,000 for the property, when he was ready, able, and willing to do so.

However, the court found that because the first buyer told the broker that his offer of “$26,000 was as far as he would go” that “it was reasonable and natural for the broker to conclude that [the first buyer] had gone his limit. Therefore, the broker was not negligent for failing to seek a higher bid from the first buyer because the broker “had reached a stalemate in playing one bidder for the place against the other, and the second buyer had flatly refused further to be a party to that game.”

Thus, the courts recognize that a listing broker has a duty to follow the seller’s instructions, keep the sellers informed, and exercise reasonable efforts to sell the seller’s property on the best terms with the highest obtainable price. Depending on the circumstances and the seller’s instructions, this duty may require “shopping” the offer and disclose price and terms.

Representing the Seller Professionally

Despite the obligation to obtain the best price on the best terms for the seller, some believe that shopping offers turn the transaction process into unprofessional “deal-making.” However, REALTORS® should always act professionally. There is no reason that “shopping” offers should grant REALTORS® permission to act otherwise. “Shopping” offers can be done in a professional manner without alienating other buyers or other REALTORS®.

In all potential “shopping” situations, the listing REALTOR® should discuss the situation with the seller client before proceeding. The REALTOR® should outline all options and risks, then proceed with seller’s instructions. There are some situations where it would clearly be in the seller’s best interest to shop the price and terms, and there are sometimes when it would not be. Sometimes disclosure could greatly increase the chances of a higher offer and other time’s disclosure of the price and terms to others could drive away all buyers from the negotiations. Only the seller, with the listing broker’s counsel and advice, should make this decision.

Based on the foregoing, a listing broker, as part of the listing broker’s fiduciary duty to the seller, has an obligation to follow the seller’s instructions and obtain an offer at the best price and terms available. There may be some situations in which the seller requests that the listing broker “shop” an offer and other times when the seller requests that the listing broker keep other offers confidential. Therefore, you should talk to your seller before you “shop.”


About the Author

Michelle Lind

K. Michelle Lind, CEO of Arizona REALTORS®, is also an attorney, State Bar of Arizona board-certified real estate specialist, and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice. Please note that this article is of a general nature and may not be up-to-date or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.

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