An agency relationship arises when one person authorizes another person to represent him or her, subject to his or her control when dealing with third parties. Therefore, the parties in an agency relationship are the agent (the person authorized to represent the principal), the principal (who authorizes and dictates the actions of the agent), and the third person(s) outside of the agency relationship who seeks to deal with the principal. It is important that the relationship between an agent and a principal becomes contractual. Under the agency contract, for instance, an agent has the authority to do specific things in the principal’s place. In exchange for the completion of the services rendered by an agent to act on his principal’s behalf, the agent, or broker, receives monetary compensation in the form of a fee or commission. Agents are not employees. The distinction between an agent and an employee is the degree of control and method of remuneration (payment or compensation received for services). A principal agrees on what the agent will do and then plans on the agent bringing about these results. In this way, agents are paid after the result have been achieved. In an agency relationship between a buyer and an agent, it is the buyer’s responsibility to compensate the agent at the close of escrow. The seller may or may not credit the buyer any compensation depending on the circumstances.
Agents work for property sellers, they also represent buyers and depending on specific state-regulated legislation, may represent both the seller and the buyer for the same listing.
NOTE: Under dual agency, an agent can represent the seller as a listing agent and the buyer by way of a buyer’s representation agreement. It is important to note that this stipulation is contracted through the terms and conditions identified in these contracts. When this occurs a Consent to Limited Representation must be agreed upon in writing by the seller and the buyer before writing a contract to sell a property to the buyer.
Laws that Govern Agency
Agency determines the relationship between an agent and the person he or she represents (the principal). Two types of law govern agency: 1) common law and 2) statutory law.
Traditional American rules of agency law were derived from establishing the social foundation of early society and continuing to be rooted in laws established in England decades ago. By the late 1700s, due to circumstances specific to geography, economy, and society, American colonial legislatures were already overriding the England-based laws to meet the individual needs of the American colonies. In general, this means that the body of real estate law that has grown out of legal customs and practices that developed in England continues to prevail unless superseded by other laws, for example, state law. In England’s common law, the principal-agent relationship was a master-servant relationship, in that the servant owed absolute loyalty to his or her master, and it required that this commitment replaces any of the servant’s personal interests as well as any loyalty the servant owed to any other person. Hence, the traces of common law can be identified in the modern-day agency. In today’s agency, the agent owes the principal similar loyalty as in common law. Just 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. In this way, the agent is regarded an expert on whom the principal can rely on specific professional advice.
Except for Louisiana, which uses a French-based regulatory system, all U.S. states use the common law as the foundation of their agency governance. The legal responsibilities of a broker are framed in the common-law form of agency. Driven by statutory law, although the fundamentals of agency law have been unchanged throughout history, the details of how these laws apply have changed significantly. This means that the foundation of common law dictates the basis of the agency but newer, more recent statute laws, which are primarily established by independent state legislatures, supersede common law for the regulation of agency relationship.
Statutory laws are written laws, as opposed to oral or customary laws that were established by a legislature or other governing authority in response to a need to clarify the functioning of government on the basis of improving social order.