Creation of an Agency Relationship
The law of agency identifies the responsibilities and rights of the principal and the agent. It provides directives that govern real estate transactions for the protection of all parties involved in the transaction process. Except for the consent of both sides, there are no particular formalities required to form an agency relationship. In general, based on the wording of the contractual agreement between a principal and an agent, an agency agreement can be created in five different ways: express, implied, by ratification, estoppel, or a combination.
Express agreements can be formed in writing (for example within a listing agreement) or they may be oral; however, they all must state in explicit terms the authority that a principal gives a broker. Express authority is actual, distinctly stated, and specific authority given by a principal to an agent through written or oral enacting words. These agreements represent valid authority. The principal and the agent formally express their interest to form an agency by stating the terms and conditions of their relationship. The listing agreement authorizes the broker to find a buyer (or tenant) for the principal’s property.
You would always want to have agency in writing as it is much easier to prove a relationship this way. A listing agreement must be in writing and be agreed upon with a commencement date and a termination date and have the terms of the commission written out with any other special requirements of the seller.
Implied agency agreements occur when the actions of a principal and an agent informally indicate that they have mutually agreed to an agency relationship. The important word here is “actions.” Implied agency is derived from actions not words. In this way the principal delegates the authority to represent him or her, even though the two parties did not create a formal agency relationship, their actions have implied one.
Agreement by Ratification
Sometimes an agent’s authority to act on behalf of a principal can be established retroactively. An agency is created by ratification when a principal gives authority to act after the fact.
Great care should be taken when making promises that you should know will be reasonably relied on by someone else. “Estoppel” relates to a legal standard that, if someone makes a statement that they know will be relied on by another, and that person does rely on it, then the first person cannot withdraw that statement later. They are prevented from denying they made such a statement and have to accept the other side’s reliance as binding them to that statement.
For example, a tenant who has been renting a home has learned that the home he lives in is now for sale. He also learns that the property owner is working with a real estate agent. Because the tenant does not want to move, he contacts the owner’s agent expressing interest in purchasing the property. After speaking with the principal the agent tells the renter that if he makes specific improvements to the property he can purchase the home for less than the asking price. The renter then spends his own time and money to make the improvements to the home.
Later, the principal informs the agent that the improvements will not qualify the tenant to purchase the property for a discounted price. In this example, through estoppel, the principal could be obligated for the creation of an agency relationship with the broker that binds the principal to what he had said regarding improvements and a discounted price.
NOTE: In agency by estoppel, the principal is required to acknowledge that an agency relationship exists to protect a third party’s interests.
The Agency form explains the fiduciary duties a broker owes when representing a buyer or seller exclusively, such as; loyalty, obedience, disclosure, confidentiality and accounting. The form also notifies the buyer or seller that the broker may represent others interested in buying or selling the same or similar properties. As long as what the principal or client is asking of the agent is legal, the principal dictates the actions of the agent.
Take a look at the form below at the READE or Real Estate Agency Disclosure and Election form below.
Always make sure you go over the very first part of this form: No representations are made as to the legal validity, adequacy, and/or effects if any provision, including tax consequences thereof. If you, the buyer or seller, desire legal, tax or other professional advice, please consult your attorney, tax advice or professional consultant. This is also printed on other forms as well such as the purchase contract.
Line 1: Remember to print you full brokerage name. If you work for a Keller Williams, ReMax or any other office that has more than one office, you must print the entire legal name of the brokerage.
If the agent is representing the buyer and shows a home that is listed by the same brokerage then this would constitute dual agency. Before a contract is even considered, both the buyer and the seller must agree and sign a Consent to Limited Representation. Important: Remember that this would have to be agreed to and signed by the buyer and seller prior to writing the contract to purchase. This section of the Real Estate Agency Disclosure and Election explains this to the buyer and the seller.
As you learned before, if the buyer and seller are using the same agent for the same transaction, Consent to Limited Representation or Dual Agency will need to be explained, understood by the buyer and seller and a document called the Consent to Limited Representation signed by both parties prior to writing the contract to purchase. If the buyer has an agent and the seller a different agent however, the agents are both under the same brokerage, Limited Representation for Dual Agency form will also be required.
When filling out the agency form you want to always talk about this prior to showing homes as it may come up. Here is a drawing of dual agency.
The election box for the buyer or seller is where the agents have the most problem filling out, so let’s take a look at this.
Of course, you would check box on line 34 because you are representing the buyer. What about line 36 though? If you do not check this box, you are saying that you will not show properties that are listed with your broker. This is where you would have the conversation regarding dual agency.
When you represent the seller, you will fill in the seller election box. Lines 41 and 42.
Then, of course, your client would sign, and date and the appropriate box would be checked as buyer or seller.
What boxes would you use and check if you were having an unrepresented buyer or unrepresented seller sign this form? Well, if it is a buyer, then you would fill out the BUYER ELECTION box and check the box on line 35. This makes your unrepresented buyer know that you are only representing the SELLER.
Do the same for an unrepresented seller. Use the SELLER ELECTION box and check box on line 40 telling the seller that you are only working for the buyer.
The selling agent is the agent that brings the buyer. The listing agent is that agent that markets the listing. The buyer’s agent is called the selling agent, and the listing agents work for the seller or owner of the property.
If you should happen to have a buyer that loves a house but it is NOT listed, the owner may or may not compensate a buyer’s agent. Have a talk with the seller/owner to see if they would compensate the buyer’s agent. If they will have them sign an Unrepresented Seller Compensation Agreement prior to writing the contract. Be careful not to represent the seller in any way. Of course, you would treat them with honesty.
This is why you would want to have your buyer also agree to the Buyer Broker Employment Agreement. If you do not have that and they purchase the For Sale By Owner property, you are out of luck in receiving any compensation. The agency disclosure is just stating what your fiduciary obligations are to your principal or client. The buyer broker is an employment agreement between the agent and the buyer.
You would want to contact the unrepresented seller and ask if they would consider paying a buyer agent a commission. If yes, then have them sign an Unrepresented Seller Compensation Agreement. If no, then ask your buyer if they would be willing to pay your commission. You would have to have a Buyer Broker in place to guarantee your commission. If the buyer says no and you have no Buyer Broker in place then you may be out of luck if the buyer goes directly to the seller. If you had the Buyer Broker in place and the buyer did go behind your back so to speak, you could go after you commission once the transaction is complete. Think about what the cost to go after your commission would be though as you may spend more time, money and energy on that than if you just let it go.