HISTORY OF AGENCY

Agency relationships in real estate transactions are governed by three kinds of law, which have been mentioned earlier, including

• common law, the rules established by tradition and court decisions;
• statutory law, the laws enacted by the legislature; and
• administrative law, the rules and regulations created by real estate commissions and departments, as authorized by the legislature.

The fundamentals of agency law have remained largely unchanged for hundreds of years, but the nature of real estate brokerage services, particularly those provided in residential sales transactions, has changed significantly in the last half-century.

In the 1950s, the common law doctrine of caveat emptor (“let the buyer beware”) was the norm; buyers were pretty much on their own. It should have been clear that the real estate broker represented the seller’s interests, but buyers often failed to realize that fact.

In the 1960s, the way that buyers and sellers were brought together in real estate transactions began to change. Brokers started to share information about properties they listed, which often resulted in two brokers cooperating to sell a property. The brokers formalized this exchange of information by creating the multiple listing service (MLS). The MLS expedited sales by increasing a single property’s exposure to more brokers, and thus more potential buyers. Because it generated more sales, the MLS quickly became a widely used industry service. But one thing remained the same: both brokers still represented the seller’s interest. The listing broker had a direct agency relationship with the seller, and the selling broker worked with the listing broker as a subagent of the seller. Because two different brokers would take part in a transaction, it was even less apparent to the buyer that the obligation of both was to work on behalf of the seller.

By the early 1990s, buyers began to demand that they be represented, too. They came to expect not only accurate, factual information but also objective advice, particularly in the face of increasingly complex real estate transactions. As a result, state laws and regulations (and subsequently, MLS rules) were changed to allow a broker to represent a buyer and share in the commission paid to the seller’s broker. Buyers have learned to view the real estate professional as the expert on whom they can rely for guidance, and a large percentage of sales contracts are now written by buyer agents.

A real estate broker must comply with the laws and regulations regarding all aspects of a transaction, but an increasing number of brokers are choosing to represent buyers exclusively, just as some brokers prefer to represent sellers. In any case, brokers also must decide how they will cooperate with other brokers, in compliance with the rules of the MLS.

The relationship of a real estate broker and consumer may not be an agency relationship, and other forms of representation that are recognized by state laws will be discussed here. Even as the elements of real estate practice change, however, the underlying assumptions that govern an agency relationship remain intact. Those assumptions are discussed next.

Definitions

An agent is a person authorized to act on behalf of the principal in dealings with a third person.

The law of agency, whether expressed in the common law or statutes, typically includes the following definitions:

• Agent—the individual who is authorized and consents to represent the interests of another person in dealings with a third person. Many different agency relationships are possible in a real estate transaction. The sales associates of a real estate broker act as agents (representatives) of the broker. In a real estate transaction, a firm’s broker will be the agent of a client and may share this responsibility with the sales associates who work for the firm. As agents of the broker, the sales associates historically have had the same relationship to a client of the firm that the broker does. Because of the number of transactions that are “in-house” (the same firm dealing with both seller and buyer), it is now possible for a sales associate to represent a buyer as the buyer’s designated agent, even when the sales associate’s firm also represents the seller in the transaction.
• Principal—the individual who hires the agent and delegates to that agent the responsibility of representing the principal’s interests. In a real estate transaction in which an agency relationship is established, the principal is the buyer or the seller or the landlord or the tenant. The broker is the principal in dealings with sales associates.
• Agency—the fiduciary relationship between the principal and the agent by which the agent is authorized to represent the principal in one or more transactions.
• Fiduciary—the relationship in which the agent is held in a position of special trust and confidence by the principal.
• Client—the principal in a real estate transaction for whom a real estate broker acts as agent. The term client is also used when a broker represents someone in a relationship other than an agency.
• Customer—the third party or nonrepresented consumer who is not a principal but for whom some level of service may be provided and who is entitled to fairness and honesty. The customer may be represented by a separate agent.
• Nonagent—(also referred to as a facilitator, intermediary, transactional broker, transaction coordinator, or contract broker) someone who works with a buyer and a seller (or a landlord and a tenant), assisting one or both parties with the transaction without representing either party’s interests. Nonagents are often subject to specific statutory responsibilities. A broker may be considered a nonagent when dealing with a customer (someone other than the person the broker represents).

 IN PRACTICE

The general discussion here involves the concepts and principles that govern traditional common law agency relationships. Many states have passed agency legislation that supersedes the common law of agency.

Many agency statutes make the common law duties a matter of statutory law rather than (or in addition to) creating totally new legal relationships. While we are providing an overview of current agency laws, a real estate professional should be familiar with the specific terms of any agency statute adopted by the legislature of the state in which the real estate professional does business. The websites listed in the appendix provide access to statutory law, as well as the rules and regulations of each state’s real estate licensing agency.

The client is the principal to whom the agent gives advice and counsel. The agent is entrusted with certain confidential information and has fiduciary responsibilities (discussed in greater detail later) to the principal. The client can expect full disclosure of all relevant information learned by the agent. In contrast, the customer is entitled to factual information and fair and honest dealings as a consumer but does not receive advice and counsel or have an expectation that information disclosed to the agent will remain confidential. The agent works for the principal and with the customer. This means that the agent supports and defends the principal’s interests, not the customer’s.

The relationship between the principal and agent must be consensual—that is, the principal delegates authority, and the agent consents to act. The parties must agree to form the relationship.

Just as the agent owes certain duties to the principal, the principal has responsibilities toward the agent. The principal’s primary duties are to comply with the agency agreement and cooperate with the reasonable expectations of the agent—that is, the principal must not hinder the agent and must deal with the agent in good faith. The principal also must compensate the agent according to the terms of the agency agreement.