Lesson 8: Real Estate Agency Law Principles of California Real Estate

Lesson 8: Lesson 8:

Real Estate Real Estate

Agency LawAgency Law

Principles of California Real Estate

Definitions

Agency relationship: Established when one person authorizes another to represent her in dealings with other people (third parties).

Definitions

Agency relationship: Established when one person authorizes another to represent her in dealings with other people (third parties).Person authorizing another to represent

her: principal.Person authorized to act as principal’s

representative: agent.

Agency Relationship

Seller or buyer hires a broker to act as representative (agent) in a real estate transaction.

Agency Relationship

Seller or buyer hires a broker to act as representative (agent) in a real estate transaction.

Many real estate transactions involve more than one agency relationship:each party may have own agenttypical transaction also involves real

estate salespersons working for brokers

Agency Law

Agency relationship has important legal consequences for both parties:

Agency Law


1.Dealing with agent may be legal equivalent of dealing with principal directly.

Agency Law


1.Dealing with agent may be legal equivalent of dealing with principal directly.

2.Agent owes certain legal duties to his principal.

Governs agency relationships and establishes agent’s powers and duties.

Applies to agency relationships between: lawyer and client trustee and beneficiaryreal estate agent and seller or buyer

General Agency Law

Creating an Agency

Duties and liabilities of agency relationship arise automatically when relationship is created.

Creating an Agency

Duties and liabilities of agency relationship arise automatically when relationship is created.

Under general agency law, agency relationships created by:express agreementratificationestoppel implication

Creating an Agency Express agreement

Principal appoints someone to act as his agent, and agent accepts appointment. Most agencies created by express

agreement.


Principal appoints someone to act as his agent, and agent accepts appointment. Most agencies created by express

agreement.

Examples: listing agreementbuyer agency agreementpower of attorney

Express agency agreement must meet some—but not all—requirements for valid contract:mutual consent competent partieslawful purpose


Express agency agreement must meet some—but not all—requirements for valid contract:mutual consent competent partieslawful purpose

Consideration NOT required.

Agency relationship can exist even if principal isn’t compensating agent.


Valid agency can be created with oral agreement (but written agreement always best).Agency relationship begins as soon as

parties agree to it.


Valid agency can be created with oral agreement (but written agreement always best).Agency relationship begins as soon as

parties agree to it.

Without written agreement, broker can’t sue client for compensation.


Creating an Agency Ratification

Principal gives approval—after the fact—to acts not authorized at time they were performed.

Creating an Agency Ratification

Principal gives approval—after the fact—to acts not authorized at time they were performed.

Principal may ratify agency by:expressly approving unauthorized acts

or accepting benefits of unauthorized acts

Agency is created by estoppel when: apparent agent acts on behalf of principal

without authorizationprincipal allows third party to believe

actions were authorized

Creating an AgencyEstoppel

Agency is created by estoppel when: apparent agent acts on behalf of principal

without authorizationprincipal allows third party to believe

actions were authorized

The principal is estopped (prohibited) from denying agency in order to protect innocent third party.

Creating an AgencyEstoppel

Creating an Agency Implication

One person’s behavior implies that he’s acting as another person’s agent.


One person’s behavior implies that he’s acting as another person’s agent.

If a person believes that someone is acting as her agent, and that someone fails to correct that impression, he may be held to owe agency duties to the first person.

Agency by implication is similar to agency by estoppel, except:in agency by estoppel, principal must

acknowledge agency for protection of third party


Agency by implication is similar to agency by estoppel, except:in agency by estoppel, principal must

acknowledge agency for protection of third party

in agency by implication, agent must acknowledge agency for protection of principal


SummaryCreating an Agency Relationship

Agency Express agreement Power of attorney Ratification Estoppel Implication

Legal Effects of Agency

Dealing with agent can be the legal equivalent of dealing with principal:agent’s actions may be binding on

principalprincipal may be held liable for agent’s

mistakes/misconductprincipal may be held to know information

known by agent

Legal Effects of Agency Agent’s actions bind principal

General rule: authorized acts performed by agent are legally binding on principal, as if principal had performed acts himself.

Legal Effects of Agency Agent’s actions bind principal

General rule: authorized acts performed by agent are legally binding on principal, as if principal had performed acts himself.

Principal typically bound only by agent’s acts that are within the scope of authority granted by principal.

Agent’s Authority General agent

General agent: Agent who is authorized to act in one or more specified areas of principal’s affairs.Within those areas, general agent has

broad authority.Often handles all matters for particular

business/property owned by principal (example: property managers).

Agent’s Authority Special agent

Special agent: Agent is authorized to do only a specific thing or conduct a specific transaction. Broker typically authorized to represent

seller/buyer only in single transaction.Broker’s authority usually quite limited

in that single transaction.

Agent’s Authority Actual vs. apparent authority

Two types of agency authority: actualapparent

Actual vs. Apparent Authority Actual authority

Actual authority: Written or oral authority granted to agent by principal.


Actual authority: Written or oral authority granted to agent by principal.Express actual authority: when

principal specifically directs agent to do something.


Actual authority: Written or oral authority granted to agent by principal.Express actual authority: when

principal specifically directs agent to do something.

Implied actual authority: agent’s additional authority to do whatever necessary to carry out acts expressly authorized by principal.

Principal is bound by agent’s actions if within scope of agent’s actual authority.

Principal may also be bound by actions within scope of agent’s apparent authority.


Actual vs. Apparent Authority Apparent authority

Apparent authority: Authority agent appears to have, although principal didn’t actually grant it.


Apparent authority: Authority agent appears to have, although principal didn’t actually grant it.Principal not bound by unauthorized

actions unless she’s aware of them and her conduct indicates approval.

If principal fails to deny that apparent agent’s actions are authorized, and third party relies on agent’s apparent authority, principal may be bound by agent’s actions.

Third party should always try to verify agent’s authority and determine scope.


Summary Agent’s Actions Bind Principal

Authorized actions are binding Scope of authority Actual authority Apparent authority Ostensible agent

Legal Effects of Agency Vicarious liability

Tort: mistake, accident, or misconduct resulting in injury/financial harm to another.Party committing tort may be held liable

and required to compensate injured party.


Tort: mistake, accident, or misconduct resulting in injury/financial harm to another.Party committing tort may be held liable

and required to compensate injured party.

If agent commits tort, principal may be held liable under theory of vicarious liability.

Vicarious liability: principal liable for agent’s torts as if he had committed them himself.


Vicarious liability: principal liable for agent’s torts as if he had committed them himself.Person injured by agent may sue

principal as well as agent.


Vicarious liability: principal liable for agent’s torts as if he had committed them himself.Person injured by agent may sue

principal as well as agent. Principal and agent jointly responsible

for paying any judgment awarded to plaintiff.


Injured party’s chances of collecting judgment increase when two defendants are responsible for paying judgment.Even if one defendant doesn’t pay, the

other may.


If innocent principal is vicariously liable for agent’s actions, he can sue agent.


If innocent principal is vicariously liable for agent’s actions, he can sue agent.Agent must reimburse principal for any

money paid to third party. Principal must be able to enforce

judgment against agent.


A principal can be vicariously liable both for acts of his broker and for acts of salesperson working for his broker.


A principal can be vicariously liable both for acts of his broker and for acts of salesperson working for his broker.

A broker can be vicariously liable for negligent or wrongful acts of her salesperson.


Legal Effects of Agency Imputed knowledge rule

Under general agency law, principal is held to have notice of information in agent’s possession.Agent’s knowledge is imputed to

principal.True even if agent never actually tells

principal.

If agent knows something that third party should be told, principal held to know that information as well.


If agent knows something that third party should be told, principal held to know that information as well.

Principal may be held responsible for failing to disclose that information to third party, even if agent never actually told principal.


Summary Vicarious Liability and

Imputed Knowledge

Tort Vicarious liability Imputed knowledge

Agency Duties

Agency law imposes legal duties (standards of conduct) on agent.

Two broad categories:duties agent owes to principalduties agent owes to third parties

Duties to the Principal

Agency is fiduciary relationship: agent is fiduciary in relation to principal.


Agency is fiduciary relationship: agent is fiduciary in relation to principal.

Fiduciary: someone who acts for benefit of another in relationship founded on trust and confidence.


Agent owes fiduciary duties to principal :reasonable care and skillobedience and utmost good faithaccountingloyaltydisclosure of material facts


Agent owes fiduciary duties to principal :reasonable care and skillobedience and utmost good faithaccountingloyaltydisclosure of material facts

Duties are owed to principal from time agency relationship begins through closing.

Duties to the Principal Reasonable care and skill

When representing principal, agent must use same degree of care and skill ordinarily used by others competently engaged in same business.


When representing principal, agent must use same degree of care and skill ordinarily used by others competently engaged in same business. Agent liable to principal for any harm

caused by carelessness or incompetence.


When representing principal, agent must use same degree of care and skill ordinarily used by others competently engaged in same business. Agent liable to principal for any harm

caused by carelessness or incompetence.Agent is compared to competent real

estate agents, not average citizen.

Duties to the Principal Obedience and good faith

Agent must obey principal’s instructions in good faith. If principal suffers loss because agent

didn’t follow instructions, agent can be held liable.

Duties to the Principal Accounting

Agent must avoid commingling, or mixing any trust funds with his or her own funds.



Agent must regularly report to principal on status of trust funds.



Agent must regularly report to principal on status of trust funds.In California, a real estate broker must

deposit all trust funds in special trust account to prevent commingling or improper use of the funds.

Duties to the PrincipalLoyalty

Agent must put principal’s interests above those of third party, and above agent’s own interests.

Duties to the PrincipalLoyalty

Agent must put principal’s interests above those of third party, and above agent’s own interests.

Agent may not take any action detrimental to principal’s interests in transaction.

Loyalty Confidentiality

If principal tells agent something in confidence, agent must not disclose it to third parties or use it for his own benefit.Part of duty of loyalty

Agent doesn’t owe any duty of confidentiality to third parties:If buyer tells seller’s agent something

useful to seller, agent must tell seller.


Agent doesn’t owe any duty of confidentiality to third parties:If buyer tells seller’s agent something

useful to seller, agent must tell seller.If seller tells buyer’s agent something

useful to buyer, agent must tell buyer.


Loyalty Secret profits

Agent can’t have an interest in the transaction without principal’s consent.Agent can’t collect any secret profit: a

financial benefit agent receives without principal’s consent.

Loyalty Secret profits

Agent can’t have an interest in the transaction without principal’s consent.Agent can’t collect any secret profit: a

financial benefit agent receives without principal’s consent.

Buyer acting on own behalf need not disclose intent to make profit off deal.

Duties to the Principal Disclosure of material facts

Agent must disclose any facts that could influence principal’s judgment in transaction.


Agent must disclose any facts that could influence principal’s judgment in transaction.

All these must be disclosed:offers to purchaseproperty’s true valueany relationship between agent and buyerdual agency

Seller’s agent must present all offers to purchase: even if offer seems unacceptable


Seller’s agent must present all offers to purchase: even if offer seems unacceptableeven if not accompanied by good faith

deposit


Seller’s agent must present all offers to purchase: even if offer seems unacceptableeven if not accompanied by good faith

depositunless clearly frivolous, or when seller

instructs agent not to present certain types of offers


Failure to disclose property’s true value is breach of seller’s agent’s fiduciary duty.


Failure to disclose property’s true value is breach of seller’s agent’s fiduciary duty.Seller often relies on agent’s advice in

setting listing price. By misleading seller, unscrupulous agent

could arrange bargain for friend, or collect secret profit.


Seller’s agent must disclose any relationship with prospective buyer.Potential for conflict of interest.


Seller’s agent must disclose any relationship with prospective buyer.Potential for conflict of interest.

Seller’s agent must also disclose if he’s buying interest in the property himself.


Seller’s agent must disclose dual agency.Broker may act as dual agent only if both

principals consent to arrangement.


Seller’s agent must disclose dual agency.Broker may act as dual agent only if both

principals consent to arrangement.Broker must always exercise caution

when acting as a dual agent, because it’s difficult to represent two parties who have conflicting interests.


Summary Duties to the Principal

Reasonable skill and care Obedience and good faith Accounting Loyalty Disclosure of material facts

Duties to Third Parties

Agent also owes duties to third parties:reasonable care and skillgood faith and fair dealingdisclosure of material facts

Duties to Third Parties Reasonable care and skill

Agent owes duty of reasonable care and skill to third parties as well as to principal.

Duties to Third Parties Good faith and fair dealing

Both principal and agent owe third parties duty of good faith and fair dealing.Seller and seller’s agent must treat

prospective buyers fairly.

Duties to Third Parties Avoiding misrepresentation

Duty of good faith and fair dealing requires agent to avoid making inaccurate or misleading statements.

Duties to Third Parties Avoiding misrepresentation

Duty of good faith and fair dealing requires agent to avoid making inaccurate or misleading statements.

Unintentional as well as intentional misrepresentations may amount to fraud, giving third party the right to rescind purchase agreement or sue for damages.

Avoiding Misrepresentation Opinions, predictions, and puffing

But a party generally can’t sue agent based on agent’s opinions, predictions, or puffing. Puffing: nonfactual or exaggerated

statements, which a party should recognize as unreliable.

Recently, CA courts more willing to treat puffing as representations of material facts, because unsophisticated buyers might rely on statements and buy property.Be aware that sales talk might be

interpreted as statement of fact—leading to charge of misrepresentation.

Avoiding Misrepresentation Opinions, predictions, and puffing

Good Faith and Fair Dealing Disclosure of material facts

The duty of good faith and fair dealing requires agent to disclose material facts about the property to prospective buyers.

Disclosure of Material Facts Latent defects

Material facts include latent defects.Latent defect: problem with property not

discoverable through casual inspection.


Material facts include latent defects.Latent defect: Problem with property not

discoverable through casual inspection.

If agent (or seller) knows of any latent defects, she must disclose them to prospective buyers, even if buyer doesn’t ask.

If seller asks agent to conceal a latent defect, agent must refuse.Agency duties don’t require or allow

agent to violate law on principal’s behalf.


Property may be advertised “as is” (the seller is not claiming the property is in good condition).This doesn’t relieve seller or seller’s

agent of duty to disclose latent defects.


Disclosure of Material Facts Exceptions to duty to disclose

Under CA law, agent/seller are not required to disclose:house was once occupied by person with

AIDS (in fact, this must NOT be disclosed)



AIDS (in fact, this must NOT be disclosed)death on premises more than three years

earlier (regardless of cause)



AIDS (in fact, this must NOT be disclosed)death on premises more than three years

earlier (regardless of cause) If specifically asked about deaths on

property, agent must answer truthfully.

Disclosure of Material Facts Property inspection

In residential transactions, agent must inspect property and disclose any problems discovered—she cannot simply rely on seller’s information about property.


In residential transactions, agent must inspect property and disclose any problems discovered—she cannot simply rely on seller’s information about property.

Duty to inspect applies to any agent listing a one- to four-unit residential property (except new home in subdivision offered for sale for first time).

Agent is not required to inspect areas that are not reasonably accessible to visual inspection.If property is condominium unit, agent

needs to inspect only the unit for sale.


Disclosure of Material FactsTransfer disclosure statement

Buyer in transaction involving 1- to 4-unit residential property must be given a Real Estate Transfer Disclosure Statement.



Transfer disclosure statement has separate sections to be filled out by seller, listing agent, and selling agent.



Transfer disclosure statement has separate sections to be filled out by seller, listing agent, and selling agent.

Agent should fill out only his own section of the form—not the seller’s sections.

Selling agent is responsible for giving completed disclosure statement to buyer.


Selling agent is responsible for giving completed disclosure statement to buyer.

Transactions exempt from transfer disclosure statement requirement are those resulting from foreclosure, probate, divorce, or other court orders


Disclosure of Material Facts Lead-based paint

Lead-based paint disclosure law: federal law requires sellers and landlords to disclose any lead-based paint hazards to prospective buyers or tenants.


Lead-based paint disclosure law: federal law requires sellers and landlords to disclose any lead-based paint hazards to prospective buyers or tenants.Applies to transactions involving housing

built before 1978.


Lead-based paint disclosure law: federal law requires sellers and landlords to disclose any lead-based paint hazards to prospective buyers or tenants.Applies to transactions involving housing

built before 1978. Intended to reduce incidence of lead

poisoning, which causes severe brain and organ damage in young children.

Seller/landlord must:

1. disclose location of any lead-based paint




2. provide copy of any existing lead-based paint inspection report




2. provide copy of any existing lead-based paint inspection report

3. give buyers/tenants EPA pamphlet on lead-based paint


Buyers (not tenants) get a 10-day period to have home tested for lead-based paint.



Specific warnings must be attached to purchase agreement/lease.



Specific warnings must be attached to purchase agreement/lease.

Parties must sign statements acknowledging law’s requirements have been fulfilled.


Breach of Duty

If agent breaches duties to principal and/or third parties, what are the consequences?Tort liabilityDisciplinary action

Breach of Duty Tort liability

Breach of duty may result in tort lawsuit against agent (injured party can sue agent). Injured party might be either agent’s

principal or third party.

Remedies for injured party:compensatory damagesrescissionrefund of agent’s commission or any

secret profits made

Breach of Duty Tort liability

Tort Liability Vicarious liability

If salesperson commits tort against buyer, buyer can sue salesperson—and also salesperson’s broker and broker’s principal (seller).

Tort Liability Vicarious liability

If salesperson commits tort against buyer, buyer can sue salesperson—and also salesperson’s broker and broker’s principal (seller).

Defendants may all be held liable for any damages awarded.

If seller did nothing wrong but had to pay damages, seller can sue broker for amount paid.

Breach of Duty License suspension or revocation

Agent’s breach of duty usually is also a violation of the Real Estate Law, resulting in license suspension, revocation, or other disciplinary measures.

Summary Duties to Third Parties

Good faith and fair dealing Latent defects Property inspection Transfer disclosure statement Breach of duty

Terminating an Agency

Termination of agency: agent no longer authorized to represent principal.

Most agency duties and liabilities end.

Terminating an Agency

Termination of agency: agent no longer authorized to represent principal.

Most agency duties and liabilities end.

Agency terminated in two ways:

1. by actions of parties

2. by operation of law

Terminating an Agency Action of the parties

Agency based on mutual consent, so relationship can be terminated by:mutual agreement revocation by the principalrenunciation by the agent

Termination by the Parties Mutual agreement

Principal and agent can terminate agency by mutual agreement at any time.


Principal and agent can terminate agency by mutual agreement at any time.Get termination in writing, especially if

agency based on written contract.


Principal and agent can terminate agency by mutual agreement at any time.Get termination in writing, especially if

agency based on written contract.Notify any third parties agent’s been

dealing with.

Termination by the Parties Principal revokes

Principal can fire agent for any reason—or no reason at all.However, revocation before agreed

termination date might breach the contract—in that case, agent could sue principal for damages.

Exception to revocation rule: agency coupled with interest can’t be revoked.

Agency coupled with interest: agent has financial stake or other interest in agency subject matter.

Termination by the Parties Principal revokes

Termination by the Parties Agent renounces

Agent may terminate agency at any time without principal’s consent.However, renunciation before agreed

termination date might breach the contract—in that case, principal could sue agent for damages.

Termination by the Parties Termination by operation of law

Agency will terminate automatically if:agency term expiresagency’s purpose is fulfilled either party dies/becomes incompetentproperty that was subject matter of

agency is extinguished

Termination by Operation of Law

Agent’s authority ends automatically on termination date of agency agreement.

Termination by Operation of Law

Agent’s authority ends automatically on termination date of agency agreement.If no termination date specified in

contract, agency will expire after reasonable time.

“Reasonable time” may have to be determined by a court.

Termination by Operation of Law Purpose fulfilled

Agency terminates when its purpose has been fulfilled.

Termination by Operation of Law Purpose fulfilled

Agency terminates when its purpose has been fulfilled.

Example: Seller hires broker to find buyer for his property. When buyer is found and transaction closes, purpose of agency has been met and agency ends.

Termination by Operation of Law Death or incompetence

Agency terminated automatically if either party dies or becomes legally incompetent.

Even before agent is informed of terminating event, agent’s actions are no longer authorized.

Termination by Operation of Law Subject matter extinguished

Agency ends if property that is subject matter of agency is “extinguished” (destroyed or title is transferred).

Termination by Operation of Law Subject matter extinguished

Agency ends if property that is subject matter of agency is “extinguished” (destroyed or title is transferred).

Example: Rob manages office building. When owner sells the building, the subject of Rob’s agency is extinguished. The agency is terminated by operation of law.

Summary Terminating an Agency

Termination by the parties Agency coupled with an interest Termination by operation of law

Real Estate Agency Relationships Typical residential transaction

Sale of home usually involves more than one real estate agent: listing brokerlisting salespersonselling broker selling salespersonother cooperating agents who showed

home to other prospective buyers

Real Estate Agency Relationships Terminology

Selling agent Cooperating agent In-house sale Cooperative saleListing agent

Real estate agentBrokerSalesperson

ClientCustomer

Real Estate Agency Relationships Historical background

Previously, there was considerable confusion as to who the agent represented in the transaction.

A “Unilateral offer of subagency” provision in listing agreements provided that any cooperating MLS agent who found the buyer represented the seller.

However, many buyers thought the agent they were working with was representing them, not the seller.

Some agents were also confused about which party they represented.



Agent might act as if she represented buyer, even though legally she represented seller, which created an inadvertent dual agency.

Inadvertent (or accidental) dual agency: agent accidentally ended up representing both buyer and seller, without parties’ knowledge or consent.

In the 1990s, the unilateral offer of subagency was replaced with a “cooperation and compensation” provision: other MLS members act as cooperating agents, not seller’s subagents.


In the 1990s, the unilateral offer of subagency was replaced with a “cooperation and compensation” provision: other MLS members act as cooperating agents, not seller’s subagents.

Cooperating agents can choose to represent either seller or buyer.


Historical Background Why agency representation matters

Buyer or seller needs to know who agent represents in order to evaluate what agent says or doesn’t say.Buyer can’t depend on seller’s agent for

advice, and seller can’t depend on buyer’s agent.

Summary Real Estate Agency Relationships

Listing agent Selling agent Cooperating agent Unilateral offer of subagency Inadvertent dual agency

Types of Agency Relationships

Three types of agency relationships in real estate transactions are: seller agencybuyer agencydual agency

Types of Agency Relationships Seller Agency

Traditionally, real estate agents almost always represented sellers.

Buyer agency now common, but seller agency still most common agency relationship.

Seller Agency Establishing seller agency

Typically created with written listing agreement (employment contract):

1. seller hires broker to find buyer for property

2. in exchange for broker’s efforts, seller agrees to pay broker a commission under certain conditions

Seller agency can be established by oral agreement—even actions of seller and agent may be enough to create agency relationship.


Seller agency can be established by oral agreement—even actions of seller and agent may be enough to create agency relationship.But without written agreement, broker is

not entitled to sue seller for commission.


Seller Agency Role of seller’s agent

Promoting seller’s interests: marketing property to best advantage, finding buyer, and negotiating sale on most favorable terms possible. Must be done according to seller’s

instructions and rules of agency law.

Seller Agency Working with buyers

May perform some services for buyers: filling out offer, helping buyer apply for financing.Helps sell property: no violation of agent’s

duty of loyalty to seller.

Seller Agency Working with buyers

May perform some services for buyers: filling out offer, helping buyer apply for financing.Helps sell property: no violation of agent’s

duty of loyalty to seller.Must be sure buyer knows agent

represents seller only—never give buyer advice.

Summary Seller Agency

Establishing seller agency Role of a seller’s agent Working with buyers

Types of Agency Relationships Buyer agency

Advantages of buyer agency:buyer gets the agent’s loyalty and

confidentiality



confidentialitybuyer gets the agent’s objective

evaluation of the property, and advice on how much to offer





buyer gets help with negotiating the transaction





buyer gets help with negotiating the transaction

buyer gets access to more properties

Buyer Agency Establishing buyer agency

Written buyer agency agreements typically contain these provisions:term of the agencycharacteristics of the property the buyer’s

looking forprice range of the propertyconditions under which the fee will be earnedwho will pay the feethe agent’s contractual duties

Buyer Agency Compensation

Three typical methods of compensating a buyer’s agent:retainerseller-paid feebuyer-paid fee

Buyer Agent’s Compensation Retainer

Retainer: a fee paid up front, before agent starts working for buyer.

Buyer Agent’s Compensation Retainer

Retainer: a fee paid up front, before agent starts working for buyer.

Typically nonrefundable, but if buyer’s agent becomes entitled to other compensation (such as seller-paid fee), retainer will be credited against that amount.

Buyer Agent’s Compensation Seller-paid fee

Seller-paid fee: when buyer’s broker receives share of listing broker’s commission (also called a commission split).

Buyer Agent’s Compensation Seller-paid fee

Seller-paid fee: when buyer’s broker receives share of listing broker’s commission (also called a commission split).

Most common compensation arrangement.

Agreement may be written or oral.Agency representation not determined by

which party is paying agent’s fee.

Buyer Agent’s Compensation Buyer-paid fee

Buyer-paid fee protects agent if buyer purchases FSBO (seller not represented by agent and not paying any commission).


Buyer-paid fee protects agent if buyer purchases FSBO (seller not represented by agent and not paying any commission).Buyer-paid fee may be: hourly rate,

commission, or flat fee.


Buyer-paid fee protects agent if buyer purchases FSBO (seller not represented by agent and not paying any commission).Buyer-paid fee may be: hourly rate,

commission, or flat fee.Agent and buyer must enter buyer agency

agreement specifying terms and conditions of fee payment.

Summary Buyer Agency

Establishing buyer agency Advantages of buyer agency Compensation

Types of Agency Relationships Dual agency

Dual agency: when real estate agent represents both seller and buyer in same transaction.

Types of Agency Relationships Dual agency

Dual agency: when real estate agent represents both seller and buyer in same transaction.

Requires written consent of both parties. Dual agent owes fiduciary duties to both

clients.

Dual Agency Conflict of interest

Inherent conflict of interest: seller wants highest possible sales price, while buyer wants lowest price.Difficult for dual agent to promote

interests of both parties at same time.However, in some situations, parties

willing to accept dual agency.

If dual agent works within certain limitations, she can avoid violating agency duties owed to either party.

Each party should be warned that he or she will not receive full representation.

Dual Agency Conflict of interest

Dual Agency Confidential information

Dual agent must not reveal confidential information from one party to other, or manipulate either party based on confidential information.


Dual agent must not reveal confidential information from one party to other, or manipulate either party based on confidential information.Must explain to each party at outset

that he must withhold certain information.


Dual agent must not reveal confidential information from one party to other, or manipulate either party based on confidential information.Must explain to each party at outset

that he must withhold certain information.

Each party should understand agent will keep other party’s negotiating position confidential.

Dual Agency Impartiality

Dual agent must do his best to be impartial and treat both clients equally.

Dual Agency Impartiality

Dual agent must do his best to be impartial and treat both clients equally.

Dual agency generally inappropriate when agent has ongoing personal or business relationship with one party.

Dual Agency Disclosure

Dual agent must obtain written consent from both parties.

Dual Agency Disclosure

Dual agent must obtain written consent from both parties.

Failure to disclose violates Real Estate Law.Agent will face disciplinary action.Neither party may have to pay agent’s

commission. Either party could rescind transaction.

Dual Agency Inadvertent dual agency

Seller’s agent working closely with buyer may unintentionally develop agency relationship with buyer, creating an inadvertent dual agency.


Seller’s agent working closely with buyer may unintentionally develop agency relationship with buyer, creating an inadvertent dual agency.Agent should comply with disclosure

requirements and act in accordance.


Seller’s agent working closely with buyer may unintentionally develop agency relationship with buyer, creating an inadvertent dual agency.Agent should comply with disclosure

requirements and act in accordance. Agent should avoid conduct giving other

party wrong impression.

Agency Disclosure Requirements

Agency Relationships in Residential Real Property Transactions Act: requires all agents in transaction to disclose to buyer and seller which party (or parties) they’re representing.


Agency Relationships in Residential Real Property Transactions Act: requires all agents in transaction to disclose to buyer and seller which party (or parties) they’re representing. Applies to any transaction for property

with 1-4 dwelling units.

Compliance involves two main steps:

1. giving parties agency disclosure form


Compliance involves two main steps:

1. giving parties agency disclosure form

2. making specific disclosures and giving parties agency confirmation statement


Agency disclosure form: explains duties of seller’s agent, buyer’s agent, and dual agent.


Agency disclosure form: explains duties of seller’s agent, buyer’s agent, and dual agent.Doesn’t indicate which parties the agents

in that specific transaction represent.Just provides general information about

different types of agents, their duties to their clients, and their duties to third parties.


Listing agent must give seller agency disclosure form before seller signs listing agreement.


Listing agent must give seller agency disclosure form before seller signs listing agreement.

Selling agent must give buyer form as soon as practicable before buyer signs offer to purchase.


Selling agent also must give form to seller (or to listing agent) as soon as practicable before offer is presented.


Selling agent also must give form to seller (or to listing agent) as soon as practicable before offer is presented.

Each time agent gives form to one party, buyer or seller must sign form to acknowledge that he or she received copy.


Agency Disclosure Requirements Agency confirmation

Each agent also must inform parties, as soon as practicable, who he represents in transaction.

Agency Disclosure Requirements Agency confirmation

Each agent also must inform parties, as soon as practicable, who he represents in transaction.

Disclosures must be confirmed in writing in agency confirmation statement (included in deposit receipt or separate document).

Summary Dual Agency and Agency Disclosure

Dual agency Agency disclosure form Agency confirmation

Broker/Salesperson Relationship

Legal relationship between salesperson and her broker: salesperson is agent of broker.Salesperson not licensed to represent

members of public directly, without broker.

Broker/Salesperson Relationship

Legal relationship between salesperson and her broker: salesperson is agent of broker.Salesperson not licensed to represent

members of public directly, without broker.

Broker primarily responsible for supervising salesperson’s real estate activities.

Broker/Salesperson Relationship Employee vs. independent contractor Salesperson classified either as employee or

independent contractor.Certain employment and tax laws apply only

to employees



to employees

Independent contractor: hired for particular job, allowed to use own judgment in carrying out work.



to employees

Independent contractor: hired for particular job, allowed to use own judgment in carrying out work.

Employee: supervised/controlled much more closely.

Employee vs. Independent Contractor

Is person employee or independent contractor?

Factors include scheduling and manner of compensation:Employees generally work on employer-

set schedule, for hourly wage or salary.


Is person employee or independent contractor?

Factors include scheduling and manner of compensation:Employees generally work on employer-

set schedule, for hourly wage or salary.Independent contractors generally set

own schedule and are paid per job or commission.

Broker is independent contractor in relation to seller (or buyer): seller hires broker to find buyer for property—seller is primarily concerned with ultimate result, not how broker achieves result.


Broker is independent contractor in relation to seller (or buyer): seller hires broker to find buyer for property—seller is primarily concerned with ultimate result, not how broker achieves result.

Salesperson may be broker’s employee or independent contractor: depends on broker supervision and method of compensation.


If broker requires salesperson to work certain hours, gives detailed instructions on marketing properties, and pays salesperson hourly wage, salesperson would be broker’s employee.


If broker requires salesperson to work certain hours, gives detailed instructions on marketing properties, and pays salesperson hourly wage, salesperson would be broker’s employee.Broker then must withhold money from

salesperson’s salary for income tax, social security, unemployment insurance, and workers’ compensation.



Salesperson typically independent contractor: broker concerned with results (listings,

sales, and closings)salesperson compensated by

commissionbroker not required to withhold taxes

from salesperson’s compensation

IRS requirements for salesperson to be considered independent contractor:

1. substantially all salesperson’s compensation from commissions


IRS requirements for salesperson to be considered independent contractor:

1. substantially all salesperson’s compensation from commissions

2. salesperson works under written contract providing she won’t be treated as employee for federal tax purposes


Even if salesperson is considered independent contractor for tax purposes, Real Estate Law makes broker responsible for supervising salesperson. Broker may be held liable for salesperson’s misconduct.


Summary Employee vs. independent contractor

Employee Independent contractor IRS requirements Broker as independent contractor

Documents

Lesson 8: Real Estate Agency Law Principles of California Real Estate