Principles of California
Real Estate
Lesson 8:
Real Estate
Agency Law
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 agent
 typical transaction also involves real
estate salespersons working for brokers
Agency Law
 Agency relationship has important legal
consequences for both parties:
Agency Law
 Agency relationship has important legal
consequences for both parties:
1.Dealing with agent may be legal
equivalent of dealing with principal
directly.
Agency Law
 Agency relationship has important legal
consequences for both parties:
1.Dealing with agent may be legal
equivalent of dealing with principal
directly.
2.Agent owes certain legal duties to his
principal.
General Agency Law
 Governs agency relationships and
establishes agent’s powers and duties.
 Applies to agency relationships between:
 lawyer and client
 trustee and beneficiary
 real estate agent and seller or buyer
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 agreement
 ratification
 estoppel
 implication
Creating an Agency
Express agreement
 Principal appoints someone to act as his
agent, and agent accepts appointment.
 Most agencies created by express
agreement.
Creating an Agency
Express agreement
 Principal appoints someone to act as his
agent, and agent accepts appointment.
 Most agencies created by express
agreement.
 Examples:
 listing agreement
 buyer agency agreement
 power of attorney
Creating an Agency
Express agreement
 Express agency agreement must meet some—but
not all—requirements for valid contract:
 mutual consent
 competent parties
 lawful purpose
Creating an Agency
Express agreement
 Express agency agreement must meet some—but
not all—requirements for valid contract:
 mutual consent
 competent parties
 lawful purpose
Consideration NOT required.
Agency relationship can exist even if principal isn’t
compensating agent.
Creating an Agency
Express agreement
 Valid agency can be created with oral
agreement (but written agreement always
best).
 Agency relationship begins as soon as
parties agree to it.
Creating an Agency
Express agreement
 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
Creating an Agency
Estoppel
 Agency is created by estoppel when:
 apparent agent acts on behalf of principal
without authorization
 principal allows third party to believe actions
were authorized
Creating an Agency
Estoppel
 Agency is created by estoppel when:
 apparent agent acts on behalf of principal
without authorization
 principal 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 Agency
Implication
 One person’s behavior implies that he’s
acting as another person’s agent.
Creating an Agency
Implication
 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.
Creating an Agency
Implication
 Agency by implication is similar to agency
by estoppel, except:
 in agency by estoppel, principal must
acknowledge agency for protection of
third party
Creating an Agency
Implication
 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
Summary
Creating 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 principal
 principal may be held liable for agent’s
mistakes/misconduct
 principal 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:
 actual
 apparent
Actual vs. Apparent Authority
Actual authority
Actual authority: Written or oral authority
granted to agent by principal.
Actual vs. Apparent Authority
Actual authority
Actual authority: Written or oral authority
granted to agent by principal.
 Express actual authority: when
principal specifically directs agent to do
something.
Actual vs. Apparent Authority
Actual authority
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.
Actual vs. Apparent Authority
Actual authority
 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.
Actual vs. Apparent Authority
Apparent authority
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.
Actual vs. Apparent Authority
Apparent authority
 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.
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.
If agent commits tort, principal may be held
liable under theory of vicarious liability.
Legal Effects of Agency
Vicarious liability
 Vicarious liability: principal liable for
agent’s torts as if he had committed them
himself.
Legal Effects of Agency
Vicarious liability
 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.
Legal Effects of Agency
Vicarious liability
 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.
Legal Effects of Agency
Vicarious liability
 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.
Legal Effects of Agency
Vicarious liability
 If innocent principal is vicariously liable for
agent’s actions, he can sue agent.
Legal Effects of Agency
Vicarious liability
 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.
Legal Effects of Agency
Vicarious liability
 A principal can be vicariously liable both
for acts of his broker and for acts of
salesperson working for his broker.
Legal Effects of Agency
Vicarious liability
 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.
Legal Effects of Agency
Imputed knowledge rule
 If agent knows something that third party
should be told, principal held to know that
information as well.
Legal Effects of Agency
Imputed knowledge rule
 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 principal
 duties agent owes to third parties
Duties to the Principal
 Agency is fiduciary relationship: agent is
fiduciary in relation to principal.
Duties to the 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.
Duties to the Principal
 Agent owes fiduciary duties to principal :
 reasonable care and skill
 obedience and utmost good faith
 accounting
 loyalty
 disclosure of material facts
Duties to the Principal
 Agent owes fiduciary duties to principal :
 reasonable care and skill
 obedience and utmost good faith
 accounting
 loyalty
 disclosure 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.
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.
 Agent liable to principal for any harm
caused by carelessness or incompetence.
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.
 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.
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.
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.
 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 Principal
Loyalty
 Agent must put principal’s interests above
those of third party, and above agent’s own
interests.
Duties to the 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.
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
Loyalty
Confidentiality
 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.
Loyalty
Confidentiality
 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.
Duties to the Principal
Disclosure of material facts
 Agent must disclose any facts that could
influence principal’s judgment in transaction.
 All these must be disclosed:
 offers to purchase
 property’s true value
 any relationship between agent and buyer
 dual agency
Duties to the Principal
Disclosure of material facts
 Seller’s agent must present all offers to
purchase:
 even if offer seems unacceptable
Duties to the 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
Duties to the 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
 unless clearly frivolous, or when seller
instructs agent not to present certain types
of offers
Duties to the Principal
Disclosure of material facts
 Failure to disclose property’s true value is
breach of seller’s agent’s fiduciary duty.
Duties to the Principal
Disclosure of material facts
 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.
Duties to the Principal
Disclosure of material facts
 Seller’s agent must disclose any
relationship with prospective buyer.
 Potential for conflict of interest.
Duties to the Principal
Disclosure of material facts
 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.
Duties to the Principal
Disclosure of material facts
 Seller’s agent must disclose dual agency.
 Broker may act as dual agent only if both
principals consent to arrangement.
Duties to the Principal
Disclosure of material facts
 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 skill
 good faith and fair dealing
 disclosure 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.
Avoiding Misrepresentation
Opinions, predictions, and puffing
 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.
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.
Disclosure of Material Facts
Latent defects
 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.
Disclosure of Material Facts
Latent defects
 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.
Disclosure of Material Facts
Latent defects
 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)
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)
 death on premises more than three years
earlier (regardless of cause)
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)
 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.
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.
 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).
Disclosure of Material Facts
Property inspection
 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 Facts
Transfer disclosure statement
 Buyer in transaction involving 1- to 4-unit
residential property must be given a Real Estate
Transfer Disclosure Statement.
Disclosure of Material Facts
Transfer 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.
Disclosure of Material Facts
Transfer 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.
 Agent should fill out only his own section of the
form—not the seller’s sections.
Disclosure of Material Facts
Transfer disclosure statement
 Selling agent is responsible for giving
completed disclosure statement to buyer.
Disclosure of Material Facts
Transfer disclosure statement
 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.
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.
 Applies to transactions involving housing
built before 1978.
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.
 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.
Disclosure of Material Facts
Lead-based paint

Seller/landlord must:
1. disclose location of any lead-based
paint
Disclosure of Material Facts
Lead-based paint

Seller/landlord must:
1. disclose location of any lead-based
paint
2. provide copy of any existing lead-based
paint inspection report
Disclosure of Material Facts
Lead-based paint

Seller/landlord must:
1. disclose location of any lead-based
paint
2. provide copy of any existing lead-based
paint inspection report
3. give buyers/tenants EPA pamphlet on
lead-based paint
Disclosure of Material Facts
Lead-based paint
 Buyers (not tenants) get a 10-day period to
have home tested for lead-based paint.
Disclosure of Material Facts
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.
Disclosure of Material Facts
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.
 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 liability
 Disciplinary 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.
Breach of Duty
Tort liability
 Remedies for injured party:
 compensatory damages
 rescission
 refund of agent’s commission or any
secret profits made
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 principal
 renunciation by the agent
Termination by the Parties
Mutual agreement
 Principal and agent can terminate agency
by mutual agreement at any time.
Termination by the Parties
Mutual agreement
 Principal and agent can terminate agency
by mutual agreement at any time.
 Get termination in writing, especially if
agency based on written contract.
Termination by the Parties
Mutual agreement
 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.
Termination by the Parties
Principal revokes
 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
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 expires
 agency’s purpose is fulfilled
 either party dies/becomes incompetent
 property 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 broker
 listing salesperson
 selling broker
 selling salesperson
 other cooperating agents who showed
home to other prospective buyers
Real Estate Agency Relationships
Terminology
 Real estate agent
 Broker
 Salesperson
 Client
 Customer
 Selling agent
 Cooperating agent
 In-house sale
 Cooperative sale
 Listing agent
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.
Real Estate Agency Relationships
Historical background
 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.
Real Estate Agency Relationships
Historical background
 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.
Real Estate Agency Relationships
Historical background
 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.
Real Estate Agency Relationships
Historical background
 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 agency
 buyer agency
 dual 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
Establishing seller agency
 Seller agency can be established by oral
agreement—even actions of seller and
agent may be enough to create agency
relationship.
Seller Agency
Establishing seller agency
 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
Types of Agency Relationships
Buyer agency
Advantages of buyer agency:
 buyer gets the agent’s loyalty and
confidentiality
 buyer gets the agent’s objective
evaluation of the property, and advice on
how much to offer
Types of Agency Relationships
Buyer agency
Advantages of buyer agency:
 buyer gets the agent’s loyalty and
confidentiality
 buyer gets the agent’s objective
evaluation of the property, and advice on
how much to offer
 buyer gets help with negotiating the
transaction
Types of Agency Relationships
Buyer agency
Advantages of buyer agency:
 buyer gets the agent’s loyalty and
confidentiality
 buyer 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 access to more properties
Buyer Agency
Establishing buyer agency
 Written buyer agency agreements typically contain
these provisions:
 term of the agency
 characteristics of the property the buyer’s
looking for
 price range of the property
 conditions under which the fee will be earned
 who will pay the fee
 the agent’s contractual duties
Buyer Agency
Compensation
 Three typical methods of compensating a
buyer’s agent:
 retainer
 seller-paid fee
 buyer-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 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 may be: hourly rate,
commission, or flat 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 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.
Dual Agency
Conflict of interest
 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
Confidential information
 Dual agent must not reveal confidential
information from one party to other, or
manipulate either party based on
confidential information.
Dual Agency
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 Agency
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.
 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.
Dual Agency
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.
Dual Agency
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.
 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 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.
 Applies to any transaction for property
with 1-4 dwelling units.
Agency Disclosure Requirements

Compliance involves two main steps:
1. giving parties agency disclosure form
Agency Disclosure Requirements

Compliance involves two main steps:
1. giving parties agency disclosure form
2. making specific disclosures and giving
parties agency confirmation statement
Agency Disclosure Requirements
 Agency disclosure form: explains duties of
seller’s agent, buyer’s agent, and dual
agent.
Agency Disclosure Requirements
 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.
Agency Disclosure Requirements
 Listing agent must give seller agency
disclosure form before seller signs listing
agreement.
Agency Disclosure Requirements
 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.
Agency Disclosure Requirements
 Selling agent also must give form to seller
(or to listing agent) as soon as practicable
before offer is presented.
Agency Disclosure Requirements
 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
Broker/Salesperson Relationship
Employee vs. independent contractor
 Salesperson classified either as employee or
independent contractor.
 Certain employment and tax laws apply only
to employees
 Independent contractor: hired for particular job,
allowed to use own judgment in carrying out
work.
Broker/Salesperson Relationship
Employee vs. independent contractor
 Salesperson classified either as employee or
independent contractor.
 Certain employment and tax laws apply only
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 employerset schedule, for hourly wage or salary.
Employee vs.
Independent Contractor
 Is person employee or independent
contractor?
Factors include scheduling and manner of
compensation:
 Employees generally work on employerset schedule, for hourly wage or salary.
 Independent contractors generally set
own schedule and are paid per job or
commission.
Employee vs.
Independent Contractor
 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.
Employee vs.
Independent Contractor
 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.
Employee vs.
Independent Contractor
 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.
Employee vs.
Independent Contractor
 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.
Employee vs. Independent
Contractor
 Salesperson typically independent
contractor:
 broker concerned with results (listings,
sales, and closings)
 salesperson compensated by
commission
 broker not required to withhold taxes from
salesperson’s compensation
Employee vs. Independent
Contractor

IRS requirements for salesperson to be
considered independent contractor:
1. substantially all salesperson’s
compensation from commissions
Employee vs. Independent
Contractor

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
Employee vs. Independent
Contractor
 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