Charles J. Jacobus

TEXAS REAL ESTATE LAW 11E

2

Chapter 8

Agency

3

Law of Agency

• The law of agency has long been considered by courts as the fundamental relationship between clients and brokers.

• Historically, the real estate agent was hired by the seller to assist in marketing and sales.

• The concepts of buyer brokerage, dual agency, and intermediary have added new dimensions to the traditional theories.

4

Creation of the Agency Relationship

• Recall that in order to maintain an action for a commission, a broker must have an employment agreement in writing.

• This is not generally true of agency relationships.

• One can be deemed to be an agent through written or verbal authority.

• Brokers frequently think that the person who pays the commission is the principal. Who pays the commission is not determinative.

• TRELA even provides that a real estate agent can get a commission from both sides as long as all parties are aware of it.

• The agency can even arise if the agency relationship is specifically rejected because a jury may make the ultimate decision.

• The agency relationship can arise before any written agreements are signed because confidences can be exchanged in the earliest stages of negotiating the listing agreement!

5

Types of Agency

• Agency by actual authority where the agent is employed by the principal by an express or oral contract. May be expressed or implied.

• Agency by ostensible authority exists because the principal causes a third party to believe that another was his agent.

• Agency by ratification occurs after the fact when a principal later agrees and often benefits from the agent’s unauthorized acts.

• Agency coupled with an interest where the agent has an interest or estate in the property as part or all of his compensation.

6

Agency Liabilities

• It is important to know where the ultimate liability will lie between the principal and agent once the agency relationship has been created.

• Recent Texas court rulings seem to indicate a strong trend toward suing licensees, not only for deceptive trade practices but also for: • misrepresentation as to encumbrances• terms of an agreement• slandering title• failure to disclose defects• failing to inform client as to appreciation in value of this property• engaging in conduct that constitutes real estate fraud• expressions of opinion

• The legislature made an attempt to limit some of this liability stating that a party is not liable for misrepresentation or concealment of material fact made by a license holder unless the party knew of the falsity of the misrepresentation or concealment and failed to disclose the party’s knowledge of the falsity of the misrepresentation or concealment.

7

Special Agency vs. General Agency

SPECIAL AGENCY

Relationship between a listing broker and the seller.

Principal is not responsible for the acts of the agent.

Broker’s responsibility is limited to marketing the house.

Seller has little control over agent.

Misrepresentations result in broker being liable, not seller.

GENERAL AGENCY

Relationship between salesperson and sponsoring broker

Principal is always responsible for the acts of the agent.

Wide authority for salesperson, who signs contracts for broker.

Broker is responsible for the acts of his agent.

Owner and property manager is often general agency.

8

Duties of the Agent to the Principal

The agent acts in the capacity of a fiduciary.

Trust, confidence, and honesty are owed to the principal.

TrustConfidence

Honesty

9

Specific Disclosure Issues

Sales InformationA licensee may provide information about real property sales prices or terms of the sale for purposes of facilitating, selling, leasing, financing, or appraising real property unless this disclosure is specifically prohibited by statute or written contract.

HIV IssuesDisclosure of HIV issues is prohibited under the Fair Housing Act.

DeathLicensee has no duty to disclose death on the property by suicide, natural causes, or accidents unrelated to the condition of the property. Must disclose death due to murder, condition of premises, or unnatural causes.

Sex Offender RegistrationLicensee does not have a duty to make a disclosure about registrants under the statute. However, best practice is to provide the website:www.txdps.state.tx.us.

10

Performance

TRELA speaks to these obligations of performance which provides for license revocation if the broker or salesperson has been guilty of:

(1) making a false promise to induce entry into a contract.(2) offering property under a scheme or program that constitutes a lottery.(3) acting in dual capacity of broker and undisclosed principal.(4) placing a sign on real property without written consent of the owner.(5) negotiating directly with another agent’s exclusive client.(6) offering property for sale or lease without consent of the owner.(7) misleading advertising or not disclosing ad is by agent.(8) having an unlicensed person do acts of brokerage.(9) acting negligently or incompetently in the work.

Performance

11

Loyalty

TRELA has provided for license revocation for disloyalty if the licensee has been found guilty of any of the following actions:

(1) the licensee, when selling, trading, or renting real property in his own name, engaged in misrepresentation or dishonest or fraudulent action.(2) making a false promise to induce entry into a contract.(3) failing to make clear to all which party he is acting for, or receiving compensation from more than one party without consent of all parties.(4) receiving an undisclosed profit on expenditures made for a principal.(5) acting in the dual capacity of broker and undisclosed principal.(6) conduct which constitutes dishonest dealings, bad faith, or untrustworthiness.(7) failing on demand to produce a document to TREC.(8) failing without just cause to surrender to the rightful owner, on demand, a document or instrument coming into his possession.

Loyalty

12

Full Disclosure

• Licensee must convey all known information that would affect the principal’s decision to accept or reject offers, and to keep the principal informed of all applicable, significant information.

• Amount of information that needs to be disclosed appears to be total.

• Listing agent must disclose if property appreciates in value while listed.

• Must disclose if agent acquires the property from his principal and intends to “flip”.

• A broker must also disclose if agent owns an interest in the purchaser.

• Written disclosure required if agent is acting on behalf of self, a business in which the licensee is more than a 10% owner, or for spouse, parent, or child.

• Also been held to include submitting all offers.

13

Reasonable Care

TRELA provides for license revocation if the duty of reasonable care has been breached, including the following:

(1) making a material misrepresentation, or failing to disclose to a potential purchaser any latent structural defect or any other defect known to the broker or salesman.(2) pursuing a continued and flagrant course of misrepresentation or making of false promises through agents, salesmen, or advertising.(3) having knowingly withheld from or inserted in a statement of account or invoice, a statement that made it inaccurate in a material particular.(4) failing or refusing on demand to furnish copies of a document pertaining to a transaction dealing with real estate to a person whose signature is affixed to the document.

Reasonable Care

14

Accounting

The areas that deal specifically with escrow and accounting for funds are set out in the following sections, which prohibit:

(1) accepting, receiving, or charging an undisclosed commission, rebate, or direct profit on expenditures made for a principal.(2) failing within a reasonable time to deposit money received as escrow agent in a transaction, either in trust with a title company, or in a custodial, trust, or escrow account maintained for that purpose.(3) disbursing money deposited in a custodial, trust, or escrow account, before the transaction has been consummated or terminated.

Accounting

15

Duties of the Principal to the Agent

PerformancePrincipal is expected to do whatever he reasonably can to help accomplish the purpose of the agency.

CompensationCompensation is normally specified in the listing agreement or in the employment contract.

ReimbursementPrincipal must reimburse the agent for expenses made on the principal’s behalf.

IndemnificationArises when the agent suffers a loss through no fault of his own while performing his duties on behalf of the principal.

16

Duties to Third Parties

Broker does have a duty of care to third persons of utilizing fair and honest business practices. TRELA specifically prohibits:

(1) material misrepresentation, or failing to disclose to a purchaser any latent structural defect or any other defect known to the broker.(2) making a false promise to induce entry into a contract.(3) pursuing a continued and flagrant course of misrepresentation or making of false promises through agents, salespeople, or advertising.(4) failing to make clear to all which party he is acting for, or receiving compensation from more than one party except with the consent of all.(5) offering for sale real property under a lottery or deceptive practice.(6) guaranteeing that future profits will result from a resale of property.(7) negotiating directly with another agent’s exclusive client.(8) misleading advertising or failing to disclose license status in an ad.(9) failing to advise a purchaser in writing that the purchaser should either have the abstract reviewed or get title insurance.(10) failing on demand to produce a document to TREC.(11) failing to surrender a document to the rightful owner.

17

Seller’s Disclosure Statement

• Required for all 1 to 4 family residential real estate transactions. • Form is set out in statute but can use another if substantially the same. • The form is signed by both parties. • Enables the seller to make disclosures rather than the broker.• Form is a representation and liability can result if filled out incorrectly.

18

Cooperating Brokers

• Usually “subagents” and do not have a contractual relationship with the seller/principal and, in many cases, may think they represent the purchaser (and don’t have a buyer/tenant representation agreement).

• Can one broker (the co-op) can make a misrepresentation that will create a liability for the listing broker?

• TRELA provides that a party or a license holder is not liable for a misrepresentation or a concealment of a material fact made by a subagent in a real estate transaction unless the party or license holder knew of the falsity of the misrepresentation or concealment and failed to disclose the party's or license holder's knowledge of the falsity of the misrepresentation or concealment.

19

Buyer Brokerage

• The alternative to traditional seller brokerage and the co-op confusion is the concept of buyer brokerage.

• In this situation the broker represents the purchaser through a buyer representation agreement, contrary to the typical listing situation.

• The buyer hires the broker to represent him, creating a single agency and fiduciary duty solely to the buyer, not the seller.

20

Duties of Care

• One would presume that the buyer agent would have the same duties of performance, accounting, reasonable care, and loyalty.

• The buyer broker’s duty should be to get the lowest price in the marketplace.

• The duties of care of buyer’s brokerage have not really been clearly defined under either case law or under traditional theories of agency.

• Buyer agency is still a new concept, and, as such, there are many unanswered questions.

21

Compensation

• As stated previously, who pays the commission is not determinative of whom the agent represents.

• It would be anticipated that listing brokers would still be willing to split their commissions under the MLS system.

• If a listing broker refuses to split the commission with a buyer’s broker the buyer’s broker would have to look to the purchaser for recovery.

• Remember that a cooperating broker does not have an agreement with a seller and therefore cannot sue him for a commission.

22

Fee for Services

• Charging compensation which is not based on sales price, but rather on services performed.

• Some buyers prefer to do their own research, obtain their own financing, and may not need any help until contract or closing.

• Sellers, too, may choose to pay a lower fee to the listing broker if the broker provides a more limited range of services.

• This has added a whole new level of competition in the marketplace as well as provided a number of cheaper alternatives.

• Some companies are publishing a list of fees for various services, others are merely offering a rebate back to the buyer or seller.

23

Minimal Level of Services

A minimum level of service is required under TRELA.

A broker who represents a party under an exclusive agreement must:

(1) inform the party of material information relating to the transaction, including the receipt of an offer by the broker.

(2) answer the party’s questions.

(3) present any offer to or from the party.

24

Dual Agency

• The License Act now provides “a broker must agree to act as an intermediary if the broker agrees to represent in the transaction:

(1) a buyer or tenant; and (2) a seller or a landlord.”

• This puts a duty on the broker who represents both parties to get written consent from each party to act as an intermediary in the transaction, which also discloses the source of any expected compensation to the broker.

Seller and Buyer

25

Single Agency

• Broker would be limited to representing only one party.

• Buyer may employ the broker, but the broker could not show the buyer any of the broker’s own listings.

• Seller may employ the broker, but the broker could not show her home to any buyers that the broker represents.

• In either case, there will be a segment of the market that will be omitted.

Seller or Buyer

26

Intermediaries

A real estate broker who acts as an intermediary between the parties: (1) may not disclose to the buyer or tenant that the seller or landlord will accept a price less than the asking price unless otherwise instructed in a separate writing by the seller or landlord. (2) may not disclose to the seller or landlord that the buyer or tenant will pay a price greater than the price submitted in a written offer to the seller or landlord unless otherwise instructed in a separate writing by the buyer or tenant. (3) may not disclose any confidential information or any other information parties specifically instruct the real estate broker in writing not to disclose unless otherwise instructed in a separate writing by the prospective party or required to disclose such information by this act or a court order, or if the information materially relates to the condition of the property. (4) shall treat all parties to the transaction honestly.

27

Intermediaries

A real estate broker may act as an intermediary between the parties if: (1) the real estate broker obtains written consent from each party to the transaction for the real estate broker to act as an intermediary. (2) the written consent of the parties states the source of any expected compensation to the real estate broker.

A written employment agreement, which also authorizes the real estate broker to act as an intermediary, is sufficient to establish that written consent if the written agreement sets forth, in conspicuous bold or underlined print, the real estate broker’s obligations.

28

Intermediaries

The broker may appoint, by providing written notice to the parties, one or more licensees associated with the broker to communicate with and carry out instructions of one party, as well as one or more other licensees associated with the broker to communicate with and carry out instructions of the other party or parties, so long as the parties consent and authorize the broker to make the appointment, which is presumably done in the listing and buyer representation agreements.

29

Middlemen

• The broker brings the buyer and seller together but the broker represents neither party.

• It is very important that the broker be a mere middleman.

• If the court construes that the agent is acting on behalf of either party, he owes fiduciary duties to that party even though he is a “middleman.”

• It may be more difficult to be a middleman than to be a party’s agent.

30

Agency Disclosures - If the Licensee Does Not Represents a Party

Licensee must furnish at first substantive dialogue, the written statement:Before working with a real estate broker, you should know that the duties of a broker depend on whom the broker represents. If you are a prospective seller or landlord (owner) or a prospective buyer or tenant (buyer), you should know that the broker who lists the property for sale or lease is the owner’s agent. A broker who acts as a subagent represents the owner in cooperation with the listing broker. A broker who acts as a buyer’s agent represents the buyer. A broker may act as an intermediary between the parties if the parties consent in writing. A broker can assist you in locating a property, preparing a contract or lease, or obtaining financing without representing you. A broker is obligated by law to treat you honestly.IF THE BROKER REPRESENTS THE OWNER: The broker becomes the owner’s agent by entering into an agreement with the owner, usually through a written listing agreement, or by agreeing to act as a subagent by accepting an offer of subagency from the listing broker. A subagent may work in a different real estate office. A listing broker or subagent can assist the buyer but does not represent the buyer and must place the interests of the owner first. The buyer should not tell the owner’s agent anything the buyer would not want the owner to know because an owner’s agent must disclose to the owner any material information known to the agent.IF THE BROKER REPRESENTS THE BUYER: The broker becomes the buyer’s agent by entering into an agreement to represent the buyer, usually through a written buyer representation agreement. A buyer’s agent can assist the owner but does not represent the owner and must place the interests of the buyer first. The owner should not tell a buyer’s agent anything the owner would not want the buyer to know because a buyer’s agent must disclose to the buyer any material information known to the agent.IF THE BROKER ACTS AS AN INTERMEDIARY: A broker may act as an intermediary between the parties if the broker complies with the Texas Real Estate License Act. The broker must obtain the written consent of each party to the transaction to act as an intermediary. The written consent must state who will pay the broker and, in conspicuous bold or underlined print, set forth the broker’s obligations as an intermediary. The broker is required to treat each party honestly and fairly and to comply with the Texas Real Estate License Act. A broker who acts as an intermediary in a transaction: (1) shall treat all parties honestly; (2) may not disclose that the owner will accept a price less than the asking price unless authorized in writing to do so by the owner; (3) may not disclose that the buyer will pay a price greater than the price submitted in a written offer unless authorized in writing to do so by the buyer; and (4) may not disclose any confidential information or any information that a party specifically instructs the broker in writing not to disclose unless authorized in writing to disclose the information or required to do so by the Texas Real Estate License Act or a court order or if the information materially relates to the condition of the property. With the parties’ consent, a broker acting as an intermediary between the parties may appoint a person who is licensed under the Texas Real Estate License Act and associated with the broker to communicate with and carry out instructions of one party and another person who is licensed under that Act and associated with the broker to communicate with and carry out instructions of the other party.If you choose to have a broker represent you, you should enter into a written agreement with the broker that clearly establishes the broker’s obligations and your obligations. The agreement should state how and by whom the broker will be paid. You have the right to choose the type of representation, if any, you wish to receive. Your payment of a fee to a broker does not necessarily establish that the broker represents you. If you have any questions regarding the duties and responsibilities of the broker, you should resolve those questions before proceeding.

Substantive dialogue is

defined by the Real Estate

License Act as a meeting or

written communication that

involves a substantive

discussion relating to

specific real property.

31

Exemptions

A licensee is not required to provide this written information if:

(1) the proposed transaction for a residential lease is not for more than one year and no sale is being considered; or

(2) the licensee meets with a party who is represented by another licensee

32

Agency Disclosures - If the Licensee Represents a Party

A licensee who represents a party in a proposed transaction must disclose that representation at the time of the licensee’s first contact with:

(1) another party to the transaction; or (2) another licensee who represents another party to the transaction.

The disclosure may be orally or in writing.

Whose side are you on?

33

Management Responsibilities

Different problems arise if a broker is acting as a manager of real estate. The problem of management liability may also occur when the property management company, or broker, does not want to become obligated for the payment of the expenses of a project.

1. Where an agent (the broker) acts on behalf of a principal who is known to the service company performing the work, and the agent is acting within the scope of his authority, the principal is liable, and the agent will not ordinarily be personally liable to the third party.

2. If the broker discloses the fact that he is an agent but does not disclose the identity of the principal, the broker will generally be considered personally liable on the agreement.

3. It follows, then, that if the principal is undisclosed, and the agency is also undisclosed, the agent is liable to third parties for all acts that he performs, as if they were the principal’s.

34

Termination of Agency

Agency may be terminated by acts of the parties which includes:• mutual consent• completion of the agency objective• expiration of agreement• client unilaterally revokes• agent renounces the contract

Agency may be terminated by operation of law which includes:• death of either the principal or the agent• insanity of either party• change of law

35

Power of Attorney

• There is an often misunderstood type of agency relationship created when a principal employs an attorney-in-fact.

• This creates a general agency, and the attorney-in-fact is given the authority to act on behalf of his principal by a power of attorney.

• The power of attorney may be global (to do any and all acts as if the attorney-in-fact were the principal) or specific (to sell one’s house).

• A power of attorney merely creates an agency by express agreement. It gives no special or extraordinary power to the attorney-in-fact.

• An attorney-in-fact does not have to be an attorney-at-law.

• POAs have always been difficult for title companies to deal with.

• It is easy to terminate them (death, insanity, or revocation).

36

A durable power of attorney is defined as a written instrument that: (1) designates another person as attorney-in-fact or agent. (2) is signed by an adult principal. (3) contains the words “This Power of Attorney is not effected by the subsequent disability or incapacity of the principal,”. (4) is acknowledged by a principal before an officer authorized to take acknowledgments.

It does not lapse because of the passage of time unless the instrument creating the power of attorney specifically states a time limitation.

Except for express revocation or termination by its own terms, there are only three ways a durable power of attorney can be terminated: (1)the death of the principal. (2) the appointment of a guardian for the principal. (3) the divorce or annulment of the principal and agent if the agent has been appointed by the principal and the innocent third party had been put on notice of the change of status.

Durable Power of Attorney

37

CASE STUDIES FOR DISCUSSION

1. A listing agent for a broker prepared a brochure regarding a house for sale. The brochure contained numerous misrepresentations about various features of the house. The purchaser was given a free opportunity to inspect the house during his various visits, and no efforts were made to hide anything from him. The purchaser, the morning of the closing, visited the house for the purposes of checking all mechanical operations. After closing, the purchaser then sued the broker to recover the difference between the actual value of the house and the value of the house as represented in the brochure prepared by the broker. The purchaser alleged misrepresentation and deceptive trade practices. The broker argued that the purchaser had sufficient time to inspect and the broker should not be liable. What legal ramifications do you foresee?

38

CASE STUDIES FOR DISCUSSION

2. A broker negotiated a sale for some property that was consummated at the title company. The title company issued a title insurance policy for the site. Upon closing, the seller refused to pay the commission to the broker since he did not advise the purchaser in writing that he had to obtain an abstract of title insurance or procure a policy of title insurance. The broker contends that since the insurance was obtained, there was no need to give the purchaser the advice in writing. The seller argues that the Texas Real Estate License Act is very clear and that he must advise the purchaser according to the statute in order to maintain an action for his commission. What arguments do you see for both sides?

39

CASE STUDIES FOR DISCUSSION

3. Mr. Houston obtained an exclusive right to sell a listing from Mr. Water. Mr. Houston diligently endeavored to find purchasers for the property, but the sale of the property was negotiated without the aid of Mr. Houston and directly to a purchaser during the time the listing agreement was in effect. The seller contends that the broker did not endeavor to find a purchaser, that he found the purchaser himself, and that the broker, although available, was never asked to perform any services in the sale and therefore did not earn any commissions. The broker contends that under his exclusive right to sell listing agreements, he deserves the full 6% commission contracted for plus attorney’s fees. What legal ramifications do you foresee?

40

CASE STUDIES FOR DISCUSSION

4. In July, Gilmore received an earnest money deposit from the Browns in connection with the contract for their purchase of property from the Hearns. The deal fell through, and there was a dispute between the parties as to who was entitled to the earnest money. In August, the Real Estate Commission informed Gilmore that he should remit the money to one of the parties. Gilmore’s attorney notified the Hearns and the Browns in September that the money was in Gilmore’s escrow account and Gilmore ultimately interpleaded the money into a registry of the court while the parties were contesting who was to receive the money. In November, the Real Estate Commission instituted proceedings to remove Gilmore’s license because of his violation of Section 15(6)(Z) of the Texas Real Estate License Act. There was evidence that Gilmore knew about the dispute between the parties in April and waited until September to do anything about the earnest money. Gilmore alleges that he was trying to hold the earnest money until the parties settled their differences. The Real Estate Commission alleges that Gilmore waited too long to allow for the escrow money to be properly distributed. What is the result?

41

Questions for Discussion

1. Below is a list of duties, some owed to the client by an agent, some owed to a customer by an agent, and yet others are duties owed by a client to the agent. Identify the person to whom the duty is owed (client, customer, or agent). Keep in mind that some duties may be owed to more than one party.

2. Below is a list of disclosure issues, some of which must be disclosed, others cannot be disclosed, and yet others may, but are not required to be, disclosed. Identify into which category each of the following issues fall.

3. Discuss an agent’s duty to disclose who he or she represents including when and how the disclosure may take place.

4. Discuss an agent’s duty to provide a consumer with the statutorily mandated written statement concerning agency including when it must be provided and any exemptions to its use.

5. How may agency relationships be created and terminated?