Washington Real Estate Fundamentals
Lesson 7:
Real Estate Agency Law
© 2011 Rockwell Publishing
Introduction to Agency
Agency relationships
Agency relationship: When one person
authorizes another to represent her in
dealings with third parties.
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Agency Relationships
Parties
Principal: Person who authorizes another to
represent her.
Agent: Person authorized to represent
principal.
Third party: Person outside agency
relationship who deals with principal through
agent.
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Agency Relationships
In real estate transactions
Real estate licensee acts as representative
(agent) of seller or buyer (principal/client).

In many transactions, each party has
own agent:
 licensee who lists property is seller’s
agent
 licensee who shows buyer properties
is typically buyer’s agent
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Agency Relationships
In real estate transactions
In Washington, real estate licensee can’t
represent seller or buyer directly.
 Must be affiliated with real estate firm.
 Affiliated licensee acts as firm’s agent.
Technically:
 firm is principal’s agent
 licensee is subagent
Subagent: An agent of an agent.
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Introduction to Agency
Agency law
Agency relationship has important legal
implications for both parties.

Dealing with agent is usually legal
equivalent of dealing with principal.
 Example: agent’s authorized signature
on contract is legally binding on
principal

Agent owes special duties to principal.
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Agency Law
General agency law
General agency law: Body of law that governs
agency relationships in most contexts.


Examples: attorney and client,
trustee and beneficiary
Traditionally also governed relationship
between real estate licensee and client.
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Agency Law
Washington statute
In Washington, real estate agency is now
governed by Real Estate Brokerage
Relationships Act (1997).

Statute is based on general agency law.

But it made changes to address
problems with agency in real estate
transactions.
© 2011 Rockwell Publishing
Agency Law
Real estate exam
Both general agency law and Washington
statute are tested on state license exam.

National portion includes questions about
general agency law.

State portion includes questions about:
 Real Estate Brokerage Relationships Act
 agency disclosure rules
© 2011 Rockwell Publishing
Summary
Introduction to Agency
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Principal
Agent
Third party
Subagent
General agency law
Real Estate Brokerage
Relationships Act
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Creating an Agency Relationship
Agency duties and liabilities arise
automatically when relationship created.
Under general agency law, agency
relationship may be created by:
 express agreement
 ratification
 estoppel
 implication
© 2011 Rockwell Publishing
Creating an Agency Relationship
Express agreement
Agency by express agreement: Principal
appoints agent, agent accepts appointment.

Most agency relationships created by
express agreement.

Examples:
 listing agreement
 buyer representation agreement
 power of attorney
© 2011 Rockwell Publishing
Agency by Express Agreement
Requirements
Requirements for creating agency by express
agreement:
 legally competent parties
 mutual consent
 purpose of agency must be lawful
Not required:
 consideration
 written agreement
© 2011 Rockwell Publishing
Agency by Express Agreement
Oral agreement
Agency relationship can be created by oral
agreement.

But real estate licensee can’t sue for
compensation without written agreement.

However, agency duties and liabilities
arise even when no right to sue for
compensation.
© 2011 Rockwell Publishing
Creating an Agency Relationship
Ratification
Agency by ratification: Principal gives
approval, after the fact, to acts performed by:
 person with no authority to represent
principal
 agent whose actions exceeded granted
authority
Principal may ratify actions expressly, or by
accepting benefits of actions.
© 2011 Rockwell Publishing
Creating an Agency Relationship
Estoppel
Agency by estoppel: Created when it would
be unfair to third party to deny there was an
agency.

Apparent agent acts on behalf of another
without authorization.

Other person (principal) allows third party
to believe actions were authorized.

Principal estopped from denying agency.
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Creating an Agency Relationship
Implication
Agency by implication: When one person’s
behavior misleads another into believing
there is an agency relationship between
them.
 Mistaken party believes other is acting as
her agent.
 Other fails to correct misunderstanding.
 May be intentional or unintentional
(inadvertent).
© 2011 Rockwell Publishing
Creating an Agency Relationship
Estoppel vs. implication
Agency by implication similar to agency by
estoppel, except:

In agency by estoppel, principal required
to acknowledge agency to protect a third
party.

In agency by implication, agent required
to acknowledge agency to protect
principal.
© 2011 Rockwell Publishing
Creating an Agency Relationship
State statute
Agency relationship between seller and
licensee created by written listing agreement.
Under state law, agency relationship between
buyer and licensee created when:
 licensee performs real estate brokerage
services for buyer
 unless there is written agreement to the
contrary (such as listing agreement with
another party)
© 2011 Rockwell Publishing
Summary
Creating an Agency Relationship
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Agency by express agreement
Agency by ratification
Agency by estoppel
Agency by implication
State rules
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Legal Effects of Agency
General agency law includes rules regarding:

Agent’s authority


Vicarious liability


when agent’s actions are binding on principal
when principal is liable for agent’s mistakes or
misconduct
Imputed knowledge

when principal is held to have information
known by agent
© 2011 Rockwell Publishing
Legal Effects of Agency
Agent’s authority
Extent to which principal can be bound by
agent’s actions depends on scope of authority
granted to agent.

Principal is bound by acts within scope of
agent’s authority.

Principal not bound by acts that fall
outside scope of agent’s authority.
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Agent’s Authority
Types of agents
Depending on scope of authority granted,
agent may be classified as:
 universal agent
 general agent
 special agent
Real estate agent is ordinarily special agent.
 Limited authority for single transaction.
 Not authorized to sign contract, deed.
© 2011 Rockwell Publishing
Agent’s Authority
Actual vs. apparent authority
Principal bound:

not just by actions within scope of
agent’s actual authority

but also by actions within scope of
agent’s apparent authority
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Agent’s Authority
Actual authority
Actual authority: Authority granted to agent by
principal, either expressly or by implication.

Express actual authority: Authorization
communicated to agent orally or in
writing.

Implied actual authority: Authorization to
do what is necessary to carry out
expressly authorized acts.
© 2011 Rockwell Publishing
Agent’s Authority
Apparent authority
Apparent authority: Agent’s actions are
unauthorized, but principal allows third parties
to think they are authorized.

Apparent agent (also called ostensible
agent):
 may have no authority to act
 may be exceeding actual authority
© 2011 Rockwell Publishing
Agent’s Authority
Apparent authority
Apparent authority corresponds to agency
created by estoppel, discussed earlier.

To be bound, principal must have:
 known about agent’s actions
 failed to deny they were authorized
Third party should make reasonable effort to
determine scope of agent’s authority.
© 2011 Rockwell Publishing
Legal Effects of Agency
Tort liability
Tort: Negligent or intentional wrongful act that
results in injury or financial harm to another.

Breach of a duty imposed by law, rather
voluntarily taken on by contract.

Person who commits a tort may be sued
by injured party.

If held liable (legally responsible),
required to compensate injured party.
© 2011 Rockwell Publishing
Tort Liability
Vicarious liability
Vicarious liability: Under general agency law,
principal liable for agent’s torts as if he had
committed them himself.

Injured party sues principal and agent.

Principal and agent jointly responsible for
paying judgment awarded to plaintiff.

Innocent principal can in turn sue agent.
© 2011 Rockwell Publishing
Tort Liability
In real estate context
Washington’s real estate agency law
eliminates vicarious liability in most situations.

Generally, seller or buyer not liable for
her agent’s torts.

Injured party may sue only agent, not
principal, for agent’s torts.
© 2011 Rockwell Publishing
Tort Liability
In real estate context
Under real estate agency law, vicarious
liability still applies in two situations:

Principal participated in or authorized
agent’s actions.

Principal benefited from agent’s conduct
and injured party probably couldn’t collect
judgment from agent.
© 2011 Rockwell Publishing
Legal Effects of Agency
Notice of information
Imputed knowledge rule: Under general
agency law, principal is held to have notice of
information in agent’s possession.

Agent’s knowledge is automatically
imputed to principal.

Even if agent never actually tells principal.
© 2011 Rockwell Publishing
Notice of Information
Imputed knowledge rule
Because of imputed knowledge rule:

Principal has notice of information a third
party told agent, even if agent never told
principal.

Principal may be liable for failing to
disclose problem to a third party, even if
agent never informed principal about the
problem.
© 2011 Rockwell Publishing
Notice of Information
In real estate context
Under Washington’s real estate agency law,
imputed knowledge rule no longer applies to
real estate transactions.

Seller or buyer not automatically
considered to have knowledge of facts
known by his real estate agent.
© 2011 Rockwell Publishing
Summary
Legal Effects of Agency
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Actual authority
Apparent authority
Ostensible agent
Tort
Vicarious liability
Imputed knowledge
© 2011 Rockwell Publishing
Duties in an Agency Relationship
Agency is a fiduciary relationship.

Fiduciary: One who acts for benefit of
another in relationship founded on trust
and confidence.

Law holds fiduciaries to high standards of
conduct.

Agent is fiduciary in relation to principal.
 Owes principal fiduciary duties.
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Duties in an Agency Relationship
Traditionally, real estate agent’s fiduciary
duties to principal were expansive.
In contrast, duties to third parties were
limited.
 Only a duty of honesty and fair dealing.
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Duties in an Agency Relationship
Under Washington real estate agency law:
 agent still has greater responsibility to
her principal
 but protection for third parties expanded
Duties under this law fall into two categories:
 duties licensee owes to all parties
 additional duties licensee owes only to
principal
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Duties to All Parties
Reasonable skill and care
 Honesty and good faith
 Presenting all written communications
 Disclosing material facts
 Accounting
 Providing agency law pamphlet
 Making agency disclosure

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Duties to All Parties
Reasonable skill and care
Real estate licensee held to standard of skill
and care a competent licensee would use.

If licensee’s carelessness or
incompetence harms a party, licensee
may be liable.
© 2011 Rockwell Publishing
Duties to All Parties
Honesty and good faith
Licensee must avoid making inaccurate or
misleading statements.
 Even unintentional misrepresentations
may constitute fraud.
 Injured party may rescind purchase
agreement or sue for damages.
However, generally can’t be sued based on
opinions, predictions, or “puffing.”
© 2011 Rockwell Publishing
Duties to All Parties
Present written communications
Licensee must transmit written communications
from one party to the other in timely manner.
All written offers must be submitted, even if:
 property or buyer already subject to a
contract
 offer seems unacceptable
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Duties to All Parties
Disclosure of material facts
Fact is “material” if it:
 has substantial adverse effect on
property’s value
 affects a party’s ability to perform
contractual obligations
 defeats purpose of transaction
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Disclosure of Material Facts
Latent defects
Latent defect: Problem with property that buyer
wouldn’t discover through ordinary inspection.

Known latent defects must be disclosed:
 by
licensee to all parties
 by
seller to buyers

Even if buyers don’t ask.

Even if property for sale “as is.”
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Disclosure of Material Facts
Limits on agent’s duty
Agent not required to investigate:
 condition of property
 financial condition of parties
 statements made by parties
(Unless agent agrees to the contrary.)
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Disclosure of Material Facts
Seller disclosure statement
Washington law requires residential seller to
give buyer property disclosure statement.

Discloses seller’s knowledge regarding:
 title and encumbrances
 utilities
 condition of buildings
 other aspects of property
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Disclosure of Material Facts
Stigmatized properties
Information that could stigmatize property
generally need not be disclosed:
 violent crime
 suicide or other death
 drug or gang activity
 political or religious activity
 presence of sex offender in area
Exception: affects property’s condition or title.
© 2011 Rockwell Publishing
Duties to All Parties
Accounting
Licensee must:
 keep trust funds in firm’s trust account,
separate from other funds
 provide periodic reports on status of trust
funds to owner of funds
© 2011 Rockwell Publishing
Duties to All Parties
Real estate agency law pamphlet
Licensee must give pamphlet to each party
she renders services to before that party:
 signs agency agreement with licensee
 signs offer
 consents to dual agency
 waives rights granted by real estate
agency law
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Duties to All Parties
Agency disclosure
Before buyer or seller signs offer, licensee
must disclose in writing whether he represents:
 buyer
 seller
 both
 neither
(Requirement covered in more detail later.)
© 2011 Rockwell Publishing
Summary
Duties to All Parties
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Reasonable skill and care
Honesty and good faith
Presenting all written communications
Disclosure of material facts
Accounting
Agency law pamphlet
Agency disclosure
© 2011 Rockwell Publishing
Duties in an Agency Relationship
Duties to principal
Licensee owes principal the duties owed to all
parties, plus these additional duties:
 loyalty
 disclosure of conflicts of interest
 confidentiality
 recommending expert advice
 good faith and continuous effort
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Duties to Principal
Loyalty
Agent must place principal’s interests:
 above those of third party
 above his own interests
May not take any action adverse to principal’s
interests.
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Duties to Principal
Loyalty
Agent may not collect secret profits.
Secret profit: Financial benefit agent receives
from agency without principal’s consent.
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Duties to Principal
Disclose conflicts of interest
Conflict of interest: Agent has personal
interest in transaction that might conflict with
principal’s best interests.

Agent faced with conflict of interest:
 isn’t required to withdraw from agency
 but must disclose conflict to principal
© 2011 Rockwell Publishing
Duties to Principal
Disclose conflicts of interest
Examples of conflicts that must be disclosed:
 agent has personal relationship with third
party
 agent is also representing other party
(dual agency)
 agent has or will acquire interest in
property
© 2011 Rockwell Publishing
Duties to Principal
Disclose conflicts of interest
Self-dealing: Agent lists property for less than
true value, buys it through intermediary, and
immediately resells it at a profit.
Not unethical for agent to buy client’s property,
but must disclose:
 property’s true value
 intention of making a profit
© 2011 Rockwell Publishing
Duties to Principal
Confidentiality
Agent may not disclose principal’s confidential
information.
 Exception: when legally required to do so.
Confidential information must be protected
even after agency relationship ends.
© 2011 Rockwell Publishing
Duties to Principal
Confidentiality
Information confidential if:
1. acquired by licensee during agency
2. principal reasonably expects confidentiality
3. principal has not disclosed it to third
parties or authorized disclosure
4. disclosure would harm principal, and
5. principal not obligated to disclose it
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Duties to Principal
Confidentiality
Agent does not owe duty of confidentiality to
third parties.
 If buyer gives information to seller’s
agent, agent must disclose it to seller.
 If
seller gives information to buyer’s
agent, agent must disclose it to buyer.
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Duties to Principal
Expert advice
Agent must advise principal to seek expert
advice on matters beyond agent’s expertise.
 Questions with legal implications should
be referred to a lawyer.
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Duties to Principal
Good faith and continuous effort
Agent owes principal duty of diligent
representation.
 Must make good faith and continuous
effort to find buyer, or to find suitable
property.
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Breach of Duty
Tort liability
If agent breaches a duty, one possible
consequence is tort liability.
 Tort is a negligent or intentional act that
breaches a duty imposed by law.

Injured party can sue agent.
 If
injured party wins lawsuit, agent
ordered to pay compensatory
damages.
© 2011 Rockwell Publishing
Breach of Duty
Disciplinary action
Licensee’s breach of duty is often also a
violation of license law.

Dept. of Licensing may take disciplinary
action even if injured party does not sue.

Punishment may include:
 license suspension or revocation
 fine
© 2011 Rockwell Publishing
Summary
Duties to Principal
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Loyalty
Confidentiality
Conflict of interest
Expert advice
Good faith effort
Breach of duty
© 2011 Rockwell Publishing
Terminating an Agency
Under general agency law, agency
relationships may be terminated by acts of
the parties:
 mutual agreement
 revocation by the principal
 renunciation by the agent
The operation of law may also terminate an
agency.
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Termination by Acts of Parties
Mutual agreement
Principal and agent may mutually terminate
agency relationship at any time.
 Termination should be put in writing,
especially if agency was created by
written agreement.
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Termination by Acts of Parties
Principal revokes
Principal may revoke agency at any time.
 But if agency contract in effect,
revocation of agency may breach the
contract.
 Principal may be liable for damages.
 In real estate context, usually must pay
agent’s commission.
© 2011 Rockwell Publishing
Principal Revokes
Agency coupled with an interest
Exception: Principal can’t revoke agency
coupled with an interest.
Agency coupled with an interest: When an
agent has a financial stake or other interest in
the property (the subject matter of the
agency).
© 2011 Rockwell Publishing
Termination by Action of Parties
Agent renounces
Agent may renounce the agency at any time.
 But if agency contract in effect,
renunciation may breach the contract.
 Agent may be liable to principal for
damages.
© 2011 Rockwell Publishing
Terminating an Agency
Termination by operation of law
Agency may terminate by operation of law
through:
 expiration of term
 fulfillment of agency’s purpose
 death, incompetence, or bankruptcy of
either party
 extinction of subject matter
© 2011 Rockwell Publishing
Termination by Operation of Law
Expiration of term
Agency ends automatically when termination
date in agency agreement is reached.
 If no termination date, agency expires
after a reasonable time, as determined
by a court.
© 2011 Rockwell Publishing
Termination by Operation of Law
Purpose fulfilled
Agency terminates when its purpose has
been fulfilled.
 In real estate context, this most
commonly happens when transaction
closes.
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Termination by Operation of Law
Death, incompetence, bankruptcy
Agency terminates if either principal or agent:
 dies
 becomes mentally incompetent
 enters bankruptcy
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Termination by Operation of Law
Subject matter extinguished
If the property that is the subject of the
agency is extinguished, the agency ends.
This can occur if the property is destroyed, for
example.
© 2011 Rockwell Publishing
Terminating an Agency
Under state real estate statute
Under Washington’s statute, real estate
agency continues until one of four things
occurs:
 licensee completes performance
 agency term expires
 parties terminate by mutual consent
 either party notifies the other that the
agency is terminated
© 2011 Rockwell Publishing
Termination under State Law
Duties after agency ends
Under the state statute, agent owes principal
two duties after relationship ends:
 agent must account for money and
property received during relationship
 agent must not disclose principal’s
confidential information
© 2011 Rockwell Publishing
Summary
Terminating an Agency
• Mutual agreement
• Revocation
• Agency coupled with an interest
• Renunciation
• Expiration
• Fulfillment of purpose
• Death, incapacity, or bankruptcy
• Extinction of subject matter
• Real estate statute
© 2011 Rockwell Publishing
Real Estate Agency Relationships
Basic terminology in a real estate transaction:
 real estate agent
 client
 customer
 listing agent
 selling agent
 cooperating agent
© 2011 Rockwell Publishing
Real Estate Agency Relationships
Historical background
Until mid-1990s, listing agreements had
unilateral offer of subagency provision.

Made any cooperating agent from MLS a
subagent of listing firm’s principal.
 So all agents represented seller.

But many buyers thought selling agent
represented them.
 This created inadvertent dual agency.
© 2011 Rockwell Publishing
Real Estate Agency Relationships
Historical background
Real Estate Brokerage Relationships Act:
Washington statute passed in 1997 to
address this confusion.
 Licensee who works with buyer is
presumed to represent buyer unless
there is written agreement to the contrary
(such as listing agreement).
© 2011 Rockwell Publishing
Real Estate Agency Relationships
Types of agency relationships
Under Washington statute, four types of
agency relationships in real estate
transactions:
 seller agency
 buyer agency
 dual agency
 non-agency
© 2011 Rockwell Publishing
Types of Agency Relationships
Seller agency
Seller agency ordinarily created through
written listing agreement.
 Listing broker, designated broker, and
firm become seller’s agent.
 Broker is technically agent of firm and
designated broker, and subagent of
seller.
© 2011 Rockwell Publishing
Seller Agency
Role of seller’s agent
Seller’s agent’s role is to:
 market property to best advantage
 find a buyer
 help negotiate sale
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Seller Agency
Assisting buyers
Seller’s agent may perform certain services
for buyers who don’t have their own agent,
such as:
 filling out a purchase offer form
 helping buyer apply for financing
Helps advance seller’s goal of selling the
property, and therefore does not violate duty
of loyalty.
© 2011 Rockwell Publishing
Seller Agency
Avoiding inadvertent dual agency
Licensee who shows buyer one of her own
listings must make sure buyer understands
licensee is acting as seller’s agent.
© 2011 Rockwell Publishing
Types of Agency Relationships
Buyer agency
Under the Washington statute, buyer agency
created automatically when licensee begins
providing brokerage services to a buyer.
(Though again, this rule doesn’t apply if agent
is already representing another party by
written agreement.)
© 2011 Rockwell Publishing
Buyer Agency
Advantages for buyer
Primary advantage: agent owes buyer
fiduciary duties (confidentiality, loyalty, etc.).
Other advantages:
 objective advice on properties
 help with negotiating
 access to more homes (such as FSBOs
and foreclosures)
© 2011 Rockwell Publishing
Buyer Agency
Buyer agency agreement
Buyer and agent usually enter into written
buyer representation agreement that states:
 term of agency
 characteristics of property buyer wants
 price range
 conditions necessary to earn fee
 who will pay the fee
 agent’s contractual duties
© 2011 Rockwell Publishing
Buyer Agency
Compensation
Buyer’s agent’s compensation may be:
 retainer
 seller-paid fee (commission split)
 buyer-paid fee (hourly rate, percentage
of price, or flat fee)
By law, agency representation not determined
by which party pays agent’s fee.
© 2011 Rockwell Publishing
Types of Agency Relationships
Dual agency
Dual agency: When agent represents and
owes agency duties to both buyer and seller
in same transaction.
 Legal if there is disclosure and:
 both parties consent in writing
 buyer signs buyer agency agreement
and seller signs seller agency
agreement
© 2011 Rockwell Publishing
Dual Agency
Impartiality
Conflict of interest inherent in dual agency.
 Duty of loyalty does not fully apply.
 Dual agent must refrain from acting in
any way that will harm either party.
 Must not reveal one party’s confidential
information to the other.
 Must not reveal negotiating positions.
 Must be impartial.
© 2011 Rockwell Publishing
Dual Agency
In-house transactions
Dual agency now most common in in-house
transactions.
In-house transaction: Seller’s agent and
buyer’s agent both work for same firm.
 Each affiliated licensee represents only
his party.
 Firm and designated broker are dual
agents.
© 2011 Rockwell Publishing
Types of Agency Relationships
Non-agency
Real estate licensee may choose to act as a
non-agent in a transaction.
 Non-agent acts only as a facilitator.
 Does not owe fiduciary duties (the ones
owed to a principal) to either party.
Non-agent still owes both parties same duties
agents owe to all parties.
© 2011 Rockwell Publishing
Agency Disclosure Requirements
In Washington, agent must give anyone she
renders services to:
1. Agency disclosure pamphlet.
2. Disclosure of which party or parties she’s
representing in this transaction.
 Made to each party before he or she
signs offer to purchase.
 In writing and initialed or signed by
parties.
© 2011 Rockwell Publishing
Summary
Real Estate Agency Relationships
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Unilateral offer of subagency
Inadvertent dual agency
Seller agency
Buyer agency
Dual agency
In-house transaction
Non-agency
Agency disclosure requirements
© 2011 Rockwell Publishing
Designated Broker and Broker
Employee or independent contractor
For certain purposes, real estate licensee may
be classified either as:
 firm’s employee, or
 independent contractor
Some employment and tax laws apply only to
employees, not to independent contractors.
© 2011 Rockwell Publishing
Employee or Contractor
General criteria
Employee usually:
 works on schedule set by employer
 is paid hourly wage or salary
 is closely supervised
Independent contractor usually:
 sets own schedule
 is paid by job or on commission basis
 uses own judgment in performing tasks
© 2011 Rockwell Publishing
Employee or Contractor
Licensees are usually contractors
Real estate firm/designated broker is
independent contractor in relation to seller or
buyer.
Affiliated licensees working for real estate firm
are usually independent contractors in
relation to firm.
© 2011 Rockwell Publishing
Employee or Contractor
Effect of classification
Because affiliated licensee is independent
contractor:
 Money not withheld from compensation
for federal income tax, social security.
 These are licensee’s responsibility.

No unemployment compensation.
But firm must have workers’ compensation
coverage, even for independent contractors.
© 2011 Rockwell Publishing
Employee or Contractor
IRS rules
Internal Revenue Service has two
requirements for classifying real estate
licensee as independent contractor:
 Substantially all compensation must be
based on commission, not hours worked.
 Licensee works under a written contract
stating she will not be treated as
employee for federal tax purposes.
© 2011 Rockwell Publishing
Designated Broker and Broker
Supervision
Even when affiliated licensee is independent
contractor, license law makes firm’s
designated broker responsible for supervising
licensee’s actions.
© 2011 Rockwell Publishing
Summary
Designated Broker and Broker
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Employee
Independent contractor
IRS requirements
Tax withholding
Unemployment compensation
Workers’ compensation
Supervision
© 2011 Rockwell Publishing