Principles of California Real Estate
Lesson 8: Real Estate
Agency Law
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Definitions
Agency relationship: Established when
one person (principal) authorizes another
(agent) to represent her in dealings with
third parties.
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Definitions
A principal who engages agent’s services
is also known as a client, while a third
party is known as a customer.
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Agency Relationship
Seller or buyer hires broker to act as agent
in real estate transaction.
Many real estate transactions involve more
than one agency relationship.
 Each party may have her own agent.
 Typical transaction also involves real
estate salespersons working for
brokers.
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Agency Law
Agency relationship has important legal
consequences for both parties.
 Third parties dealing with agent may be
legal equivalent of dealing with principal.
 Agent owes certain legal duties to
principal and to third parties.
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Creating Agency Relationship
Duties and liabilities of agency relationship
arise automatically.
Under agency law, relationship created by:
 express agreement
 ratification
 estoppel
 implication
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Creating Agency Relationship
Express agreement
Express agreement: Principal selects person to
act as agent, and agent agrees to agency.
 Most agencies created this way.
 No writing necessary (although
customary).
 No consideration necessary.
 Examples: listing agreement, buyer agency
agreement.
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Creating Agency Relationship
Ratification
Ratification: Principal gives approval—
after the fact—to acts not authorized at
time they were performed.
Principal may ratify by:
 expressly approving unauthorized
acts or
 accepting benefits of unauthorized
acts
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Creating Agency Relationship
Estoppel
Estoppel: Agency is created by estoppel when:
 principal allowed third party to believe
there was agency authority for action, and
 it would be unfair to third party to deny
agent’s authority.
Principal is estopped (prohibited) from denying
agency, to protect innocent third party.
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Creating Agency Relationship
Implication
Implication: Person’s behavior implies that
he’s acting as another person’s agent.
If person believes that someone is acting as
her agent, and that person fails to correct
the impression, he may actually be held to
owe agency duties.
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Summary
Creating Agency Relationship
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Agency
Express agreement
Ratification
Estoppel
Implication
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Legal Effects of Agency
Once agency relationship established,
principal is bound by agent’s acts that are
within scope of agent’s authority.
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Legal Effects of Agency
Scope of authority
Extent to which principal is bound by
agent’s acts depends on kind of agency
that was created.
There are two basic types of agents:
 general
 special
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Scope of Authority
General agent
General agent: Agent authorized to handle
all of principal’s affairs in one or more
areas.
 Often handles all matters for particular
business/property owned by principal
(example: property managers).
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Scope of Authority
Special agent
Special agent: Agent has limited authority to
do specific thing or conduct specific
transaction.
 Broker typically authorized to represent
seller/buyer in single transaction only,
and powers are limited (can’t sign
contracts, change price, etc.).
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Scope of Authority
Actual vs. apparent authority
Two types of agency authority:
 actual
 apparent
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Actual vs. Apparent Authority
Actual authority: Express or implied authority
granted to agent by principal.
 Express actual authority: Principal
specifically directs agent to do something.
 Implied actual authority: Agents have
implied authority to do what’s necessary to
carry out acts expressly authorized by
principal.
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Actual vs. Apparent Authority
Apparent authority: Agent appears to have
authority, although principal didn’t actually
grant it.
 Agent has apparent authority when
principal negligently or deliberately
allows it to appear that unauthorized
actions were authorized.
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Actual vs. Apparent Authority
Good faith deposit
If listing agent doesn’t have authority (in
listing agreement) to receive good faith
deposits, then she acts as buyer’s agent if
she accepts deposit.
 If agent absconds with deposit, it’s
buyer’s loss. (If seller had given authority
it would be seller’s loss.)
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Legal Effects of Agency
Vicarious liability
Under theory of vicarious liability, principal may
be held liable for her agent’s wrongful acts.
 Buyer or seller may be liable for acts of
broker, and for salesperson working for
that broker.
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Vicarious Liability
Damages
In cases involving vicarious liability, injured
party may sue both principal and agent, and
collect damages from both.
However, if principal did nothing wrong, she
may then sue agent for damages she paid to
injured party.
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Summary
Legal Effects of Agency
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Scope of authority
General agent
Special agent
Actual authority
Apparent authority
Vicarious liability
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Duties in Agency Relationship
Agent owes duties to principal, and both
agent and principal have duties to third
parties.
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Agent’s Duties to Principal
Agency is fiduciary relationship—agent owes
fiduciary duties to principal.
Fiduciary: Person who stands in special
position of trust and confidence to someone
else.
 Law holds fiduciaries to high standard of
conduct.
 Fiduciary must serve best interests of
principal.
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Duties to Principal
Agent owes principal fiduciary duties of:
 utmost care
 integrity and honesty
 loyalty
 disclosure of material facts
Duties are owed to principal from time agency
relationship begins through to end (and beyond).
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Duties to Principal
Utmost care
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 compared to competent real estate
agents, not average citizen.
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Duties to Principal
Integrity and honesty
Agent must account for any funds or valuables
agent receives on principal’s behalf (trust funds).
 In California, broker must deposit all trust
funds in special trust or escrow account to
help prevent commingling or improper use of
funds.
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Duties to Principal
Loyalty
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 (such
as making secret profit on deal).
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Duties to Principal
Loyalty
Duty of loyalty prohibits agent from revealing
principal’s confidential information to other
parties, or taking advantage of it himself.
 Duty not to disclose confidential information
continues even after termination of agency
relationship.
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Duties to Principal
Disclosure of material facts
Agent must inform principal of any facts that
could influence principal’s judgment in
transaction.
Information that must be disclosed:
 all offers to purchase
 property’s true value
 any relationship between agent and buyer
 dual agency
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Duties to Principal
Disclosure of material facts
Seller’s agent must present all offers to
purchase:
 even if offer seems unacceptable
 even if not accompanied by good faith
deposit
Duty ends if seller instructs agent not to
present any more offers.
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Duties to Principal
Disclosure of material facts
Failure to disclose property’s true value is
breach of seller’s agent’s fiduciary duty.
Seller’s agent must disclose:
 if he is actual buyer
 any relationship with prospective buyer
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Duties to Principal
Disclosure of material facts
Seller’s agent must disclose dual agency.
 Broker may act as dual agent only if both
parties consent to arrangement.
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Summary
Duties to Principal
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Utmost care
Integrity and honesty
Loyalty
Disclosure of material facts
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Duties to Third Parties
An agent also owes duties to third parties:
 reasonable care and skill
 good faith and fair dealing
 duty to inspect property
 disclosures
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Duties to Third Parties
Reasonable care and skill
Agent owes duty of reasonable care and skill
to third parties (as well as to principal).
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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.
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Duties to Third Parties
Good faith and fair dealing
Duty of good faith and fair dealing requires
agent to avoid making inaccurate or
misleading statements.
Both intentional and unintentional
misrepresentations may amount to fraud,
giving third party right to rescind purchase
agreement or sue for damages.
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Duties to Third Parties
Good faith and fair dealing
Party generally can’t sue agent based on
agent’s opinions, predictions, or puffing.
 Puffing: Nonfactual or exaggerated
statements, which party should
recognize as unreliable.
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Duties to Third Parties
Good faith and fair dealing
Duty of good faith and fair dealing requires
agent to disclose material facts about property
to prospective buyers, including known latent
defects.
Latent defect: Problem that wouldn’t be
discovered in typical inspection (example: roof
leaks in heavy rains).
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Duties to Third Parties
Good faith and fair dealing
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 broker to conceal latent defect,
broker should refuse to take listing.
 Agency duties don’t require broker to
violate law.
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Duties to Third Parties
Good faith and fair dealing
Under CA law, agent/seller not required to
disclose:
 house was occupied by person with
AIDS or HIV (in fact, illegal to
disclose this)
 death on premises more than three
years earlier (regardless of cause)
But can’t give false answers if asked.
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Duties to Third Parties
Property inspection
In residential transactions (1-4 units)
agent must inspect property and disclose
any problems discovered.
 Agent can’t simply rely on seller’s
information about property.
Agent only exempt from inspection
requirement with new subdivision home
being sold for first time.
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Duties to Third Parties
Property inspection
Agent is not required to inspect areas that
are not reasonably accessible to visual
inspection.
With condominiums, agent only needs to
inspect unit for sale, not common areas.
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Duties to Third Parties
Property Inspection
Agent still has duty to inspect property (and
disclose any problems) even if property
listed “as is.”
If buyer wants to sue for agent’s failure to
inspect, he must file suit within two years of
taking possession.
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Duties to Third Parties
Transfer disclosure statement
A prospective buyer in transaction involving
1- to 4-unit residential property must be
given transfer disclosure statement.
 Statement has separate sections for
seller, listing agent, and selling agent.
 Agent should only fill out his own
section of form—not seller’s section.
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Duties to Third Parties
Transfer disclosure statement
Transfer disclosure statement is used to list
seller’s disclosures concerning:
 what’s included in sale
 known defects in property
 any other problems (environmental
hazards, improvements without
permits, nuisances, and so on)
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Duties to Third Parties
Transfer disclosure statement
Selling agent is responsible for giving
completed disclosure statement to buyer.
 Exempt transactions include property
transfers tied to foreclosure, probate,
divorce, or other court actions.
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Duties to Third Parties
Transfer disclosure statement
If buyer receives original or amended
transfer disclosure statement, she may
rescind purchase agreement if dissatisfied
with disclosures.
 Rescission must occur within 3 days of
delivery in person, or 5 days if
delivered by mail.
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Duties to Third Parties
Other disclosures
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 housing built before 1978.
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Duties to Third Parties
Lead-based paint disclosures
Seller/landlord must:
 disclose location of any lead-based paint
 provide copy of any existing lead-based
paint inspection reports
 give buyers/tenants EPA pamphlet on
lead-based paint
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Duties to Third Parties
Natural Hazards Disclosure Statement
Natural Hazards Disclosure Statement:
Seller must disclose any risks from natural
hazards, such as flooding or earthquakes.
Seller’s disclosure must be based on maps
prepared by state or federal authorities
designating hazard areas, not personal
knowledge.
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Duties to Third Parties
Earthquake guide
Buyer of property built before 1960 must
receive Homeowner’s Guide to Earthquake
Safety.
 If earthquake safety improvements have
not been made to house, that must be
disclosed to buyer.
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Duties to Third Parties
Mello-Roos lien disclosure
Seller of a 1- to 4-unit residential property
must disclose whether property is subject
to Mello-Roos lien, which pays for local
improvements.
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Duties to Third Parties
Breach of duty
If agent breaches duties to principal and/or
third parties, what are consequences?
 Tort liability
 Disciplinary action
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Duties to Third Parties
Breach of duty
Tort: Breach of a duty imposed by law
causing physical or financial injury.
Breach of duty may result in tort lawsuit
against agent (injured party can sue agent).
 Injured party could be third party or
agent’s principal.
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Duties to Third Parties
Breach of duty
If salesperson commits tort (breach of duty),
buyer can sue salesperson, salesperson’s
broker, and broker’s principal (seller).
 All defendants may be held liable.
 If defendant did nothing wrong, but is
still held liable, can sue responsible
defendants for compensation.
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Duties to Third Parties
Breach of duty
Remedies for injured party:
 compensatory damages (most
common remedy)
 rescission of transaction
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Summary
Duties to Third Parties
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Good faith and fair dealing
Latent defects
Property inspection
Transfer disclosure statement
Other disclosures
Breach of duty
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Terminating an Agency
Termination of agency: Agent no longer
authorized to represent principal.
 Most agency duties and liabilities end.
Agency relationship terminated by:
 actions of parties
 operation of law
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Terminating an Agency
Action of the parties
Parties can terminate agency through:
 mutual agreement
 revocation by principal
 renunciation by agent
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Termination by the Parties
Mutual agreement
Principal and agent can terminate agency
by mutual agreement at any time.
 If original agreement was in writing,
termination agreement should be in
writing.
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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
contract rights; if so, agent could sue
principal for damages.
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Termination by the Parties
Principal revokes
Exception to general 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 (a co-owner).
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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 contract
rights; if so, principal could sue agent
for damages.
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Termination by Operation of Law
Events that cause automatic termination of
agency:
 expiration of agency term
 fulfillment of agency’s purpose (example:
property sold)
 death/incompetence of either party
 extinction of agency subject matter
(example: house burns down)
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Summary
Terminating an Agency
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Actions by the parties
Mutual agreement
Revocation
Renunciation
By operation of law
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Real Estate Agency Relationships
Typical real estate transaction is likely to
have more than one real estate agent.
In California, real estate agents can have
these types of client relationships:
 seller agency
 buyer agency
 dual agency
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Real Estate Agency Relationships
Seller agency
Seller agency: Listing broker and his
salesperson represent and owe fiduciary
duties only to seller.
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Real Estate Agency Relationships
Buyer agency
Buyer agency: Selling broker and her
salesperson represent and owe fiduciary
duties only to buyer.
 Buyer’s agent should negotiate with
seller through seller’s agent, rather than
directly with seller.
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Buyer Agency
Compensation
Buyer’s agent is often compensated through
commission split with seller’s agent.
● Provision in most MLS listings states that
any cooperating broker who procures
buyer is entitled to selling broker’s
commission. No writing is necessary.
● Buyer’s agent may also be compensated
by buyer, instead of commission split.
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Real Estate Agency Relationships
Dual agency
Dual agency: Broker represents both seller
and buyer in same transaction.
 Legal in CA, but both parties must get full
disclosure and give written consent.
 Dual agent owes duties to both clients—
can’t favor one client over other.
 Violations of requirements could result in
contract rescission and/or no
commission.
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Dual Agency
In-house transaction
Most common dual agency situation is inhouse transaction: The salespersons
representing buyer and seller both work for
same broker.
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Dual Agency
Inadvertent dual agency
Many dual agency lawsuits involve
inadvertent dual agency, in which listing
agent’s conduct with buyer created an
agency by implication between agent and
buyer.
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Dual Agency
Cooperation and compensation
MLS listing agreement forms contain
“cooperation and compensation” provision.
 Provides that any MLS member who
finds buyer may decide who she
represents (usually buyer)—she isn’t
automatically subagent of seller.
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Agency Disclosure Requirements
California law requires agents in residential
transactions to disclose to both buyer and
seller which party (or parties) agent is
representing.
 Applies to properties with 1-4 units.
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Agency Disclosure Requirements
Timing
Listing agent must give seller agency
disclosure form describing types of agency
before seller signs listing agreement.
Selling agent must give copy to each party
as soon as practicable; buyer must receive
form before signing offer, and seller must
receive it before offer is presented.
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Agency Disclosure Requirements
Agency confirmation statement
Each agent in a transaction must also
provide parties with a statement explaining
exactly who the agent represents.
Statement usually contained in purchase
agreement.
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Summary
Agency Relationships and Disclosure
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Seller agency
Buyer agency
Dual agency
Agency disclosure
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Broker/Salesperson Relationship
Salesperson is agent of broker; broker is
salesperson’s principal.
 Salesperson not licensed to represent
members of public directly; must work
through broker.
 Broker responsible for supervising
salesperson’s real estate activities.
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Broker/Salesperson Relationship
Employee vs. independent contractor
Independent contractor: Hired for particular
job and/or outcomes, and allowed to use own
judgment in carrying out the work.
 Compensated for work performed, not
fixed wage.
Employee: Supervised/controlled much more
closely; fixed salary, set hours.
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Broker/Salesperson Relationship
Employee vs. independent contractor
Brokers are almost always independent
contractors.
 Most associate brokers and salespersons
are independent contractors, too.
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Broker/Salesperson Relationship
Tax withholding
If someone classified as employee, certain
employment and tax laws apply.
 If agent is employee, broker must
withhold funds for income taxes and
Social Security.
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Broker/Salesperson Relationship
Broker responsibility
Even if salesperson is independent contractor
(and not subject to tax withholding), broker is
still responsible for supervising salesperson’s
actions and may be held liable for her conduct.
Brokers are also responsible for workers’
compensation for independent contractors (as
well as for employees).
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Broker/Salesperson Relationship
Contracts
California requires that brokers have a written
employment agreement with each licensee
who works for them.
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Summary
Broker/Salesperson Relationship
• Employee
• Independent contractor
• Broker responsibility
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