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Volume II – Working With Clients
What is this topic about?
Working with clients is about the relationships that exist between real estate licensees and their customers and clients and the legal duties those relationships create. In Oregon, these relationships are subject to a complicated system of statutory and regulatory control as well common law. Whether listing property, showing property or just working with a customer, real estate licensees must keep this complicated and, at times, confusing area of the law in mind.
This topic begins with an overview of real estate license laws that control agency relationships. In the Understanding Real Estate License Laws section of this topic you will find copies of all of the Statutes and Administrative Rules that apply to agency relationships in Oregon, along with a brief explanation of each statute and rule. The Law of Agencysection contains a detailed overview of the subject of agency, including Creating and Terminating agency relationships.
You will also find in this topic a discussion of the Scope of Agency Relationships. Key to understanding agency is Understanding Agency Duties, including Common Law Duties and Statutory Duties. No examination of agency relationships and laws in Oregon would be complete without Understanding Agency Disclosure including Initial Agency Disclosure, Final Agency Acknowledgement and Disclosed Limited Agency.
Working with clients in today’s real estate market means Dealing with FSBOs and MLS Only or Limited Service Listings, including the Potential Problems that arise and their Solutions. Finally, no discussion of working with clients would be complete without Understanding Commissions. That means Understanding Procuring Cause. Understanding procuring cause includes not only the Legal Definition of Procuring Causes, but Applying Procuring Cause to Real Estate. You can also find a discussion of Commission Sharing and Commissions and Antitrust in this section of the Toolkit.
- Understanding Real Estate License Laws
- Administrative Rules Affecting Agency
- The Law of Agency
- Establishing and Terminating Agency Relationships
- Understanding Agency Duties
- Statutory Agency Duties
- Dealing with FSBOs and MLS Only or Limited Service Listings
- Sharing Commissions
UNDERSTANDING REAL ESTATE LICENSE LAWS
State law controls how agency relationships are formed, the duties and responsibilities imposed, how long the agency relationship lasts and how it is terminated. In Oregon, the agency duties imposed on real estate licensees are found in statute. These statutes are set out and explained in the Statutory Provisions Involvedsection of this subject. State statutes are fleshed out and implemented by administrative rules. These rules, promulgated by the Oregon Real Estate Agency, are explained in the Administrative Rules Affecting Agencysection.
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Statutory Provisions Involved
Oregon Revised Statute 696.800 Agent’s Obligations – Definitions. If you want to know what the critical words of a statute mean, this is the place to look. In Oregon 696.800 you will find, among others, the definition of “agent,” “confidential information,” “disclosed limited agency,” and “real property transaction.”
ORS 696.800 defines more than a dozen terms used in the statutory regulation of agency relationships. You should keep ORS 696.800 in mind when reading the substantive provisions of the agency statutes. The definitions found in ORS 696.800 explain and qualify the words used in the substantive statutes. For instance, “real property” is defined in ORS 696.800(10) to not include leasehold. This definition can change a licensee’s obligation if the transaction involves a lease instead of a sale.
Among the most important definitions found in ORS 696.800 is one for “confidential information.” ORS 696.800(3) defines “confidential information” broadly to cover any information communicated to an agent by their client. This includes, but is not limited to price, terms, financial qualifications or motivation to buy or sell. There are two exceptions to this broad definition. Information a client instructs an agent to disclose is not confidential. Neither is information that must be disclosed to avoid a fraudulent misrepresentation.
The statutory definition of “confidential information” applies only to transactions involving “one to four residential units.” This provision was inserted into the statutory definition at the request of commercial real estate brokers. They believed that “confidentiality” in commercial transactions is different from confidentiality in residential transactions. However, confidentiality is a common law agency duty that attaches without regard to the object of the agency relationship.
What is and isn’t confidential information under the common law is a matter of circumstance but, generally, the definition is the same as the statutory one. That is, you start with the idea that everything communicated between client and agent is confidential. Under the common law, the only things that aren’t confidential are those the client wants disclosed or that the law otherwise requires disclosed.
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Oregon Revised Statute 696.805 Real Estate Licensee as Seller’s Agent; obligations. ORS 696.805 controls the establishment of listing side agency relationships and the duties imposed on an agent who represents only the seller.
ORS 696.805 establishes the statutory obligations of a seller’s agent. According to the statute, “[a] real estate licensee who acts under a listing agreement with a seller acts as the seller’s agent only.” This manner of defining “seller’s agent” links agency to a particular type of service contract called a “listing agreement.” Although signing a listing agreement is by far the most common way of establishing an agency relationship between a broker and a seller, it is certainly not the only way. A broker could, for instance, agree to advise a seller on listing price or offer to negotiate or provide other services without ever “listing” the property itself for sale. In such a case, the broker would certainly be the seller’s agent even though the relationship would be outside the definition of “seller’s agent.”
Whatever the wisdom of defining agency relationships on the listing side in terms of a listing, the main purpose of ORS 696.805 is to set out the duties of the agent when representing the seller. In all, the statute imposes ten (10) separate “obligations” or duties on the seller’s agent. These obligations, as well as the common law fiduciary duties, are discussed in depth in the Understanding Agency Duties section of this topic.
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Oregon Revised Statute 696.815 Representation of Both Buyer and Seller; obligations. ORS 696.815 controls the establishment of dual agency relationships and the duties imposed on an agent who represents both buyer and seller. It is in ORS 696.815 that disclosed limited and designated agency relationships are authorized and controlled.
ORS 696.815 establishes the statutory obligations of a licensee who represents both the buyer and the seller in a single transaction. According to the statute, a licensee can represent both the buyer and seller in a real estate transaction “under a disclosed limited agency agreement, with full disclosure of the relationship under the agreement.” The statue explains that dual representation requires a specific agreement (the disclosed limited agency agreement) and that the agreement must contain a full disclosure of dual agency relationships. Such agreements are discussed in detail in the Disclosed Limited Agencysection of this topic.
The duties of a disclosed limited agent are found in ORS 696.815(2)-(5). According to the statute, a disclosed limited agent owes the seller all the duties of a single agent under ORS 696.805 and owes the buyer all the duties of single agent under ORS 696.810. These duties are discussed in detail in the Understanding Agency Duties section of this topic.
In addition to the duties owed each client, a disclosed limited agent also has duties to both buyer and seller under ORS 696.815(2)(c). Additional duties are imposed on the agent and their principal broker under ORS 696.815(5). These special duties are discussed in detail in the Disclosed Limited Agency section of this topic.
In addition to defining disclosed limited agency and setting out the obligations of licensees in such relationships, ORS 696.815 also creates what is called “designated agency.” Designated agency is just the industry name for an agency relationship allowed by law. Nowhere in statute or rule will you find anything called “designated agency.” Under ORS 696.815(4) different agents supervised by the same principal broker can “continue to represent only the party with whom the broker has an agency relationship.”
In designated agency situations, the principal broker is the designated agent. The individual agents representing the buyer and seller continue to represent only the buyer and seller. They are not, however, single agents. That is the case because ORS 696.815(5) imposes additional duties on the designated agents. Under that provision, the agents representing the buyer and seller must disclose any conflict of interest to all parties, take no action adverse or detrimental to either party’s interests and obey the lawful instructions of both parties. These additional designated agency duties are discussed in detail in the Understanding Agency Duties section of this topic.
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ADMINISTRATIVE RULES AFFECTING AGENCY
Oregon Administrative Rule 863-015-0200 Agency Relationships.
OAR 863-015-0200 defines and fleshes out by administrative rule the types of agency relationships allowed by statute. The rule makes it clear that an agency relationship can be created by agreement or conduct. Disclosed limited agency and designated agency relationships are defined in the rule more closely than in ORS 696.815, but no new obligations are imposed. The rule is strictly definitional as far as agency relationships are concerned. The rule also contains the full text of the Final Agency Disclosure form required by statute. Agency disclosure requirements are discussed in detail in the Agency Disclosure section of this topic.
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Oregon Administrative Rule 863-015-0205 Disclosed Limited Agency.
OAR 863-015-0205 is the administrative rule that controls disclosed limited agency relationships. Under the rule, such relationships can be established only by written agreement. Disclosed limited agency agreements must meet all of the requirements of OAR 863-015-210.
OAR 863-015-0205 allows for designated agency and even, under subsection (5), for true single agency relationships within the same company. The key to designated agency and in-company single agency is the control of confidential information. OAR 863-015-205(4) demands that principal brokers have “established procedures to assure that a licensee who represents one client will not have access to and will not obtain confidential information concerning another client involved in the same transaction.” For in-company single agency to work, the principal broker must also have divided supervision and control agreements in place so there is no overlapping supervision of both the listing and selling licensees.
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Oregon Administrative Rule 863-015-0210 Disclosed Limited Agency Agreement.
OAR 863-015-0210 contains the administrative rule requirements for disclosed limited agency agreements. The required contents of such agreements are contained in the first two subsections of the rule. Subsection (3) of the rule sets out a statutorily sufficient form for disclosed limited agency agreements. The form is not “required” by the rule, but the rule does make it clear that use of the statutory form is evidence of having complied with the requirements of the rule. Not surprisingly, the statutory form is universally used in Oregon real estate. Click Herefor a detailed discussion of Disclosed Limited Agency.
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Oregon Administrative Rule 863-015-0215 Initial Agency Disclosure Pamphlet.
OAR 863-015-0215 is the administrative rule that sets out the requirements for the statutorily required Initial Agency Disclosure Pamphlet. Agency disclosure is peculiar to real estate and its form and substance is controlled by the Real Estate Agency. Agency disclosure is discussed in detail in the Agency Disclosure section of this topic. Click Here for a copy of the Initial Agency Disclosure Pamphlet.
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The Law of Agency
Agency relationships are the backbone of the real estate business. Real estate license law in most states assumes such relationships. Those same license laws define the duties involved in agency relationships. Indeed, agency relationships are so central to the practice of real estate that real estate licensees call themselves real estate “agents.”
Notwithstanding the critical role of agency relationships in the practice of real estate, the law of agency is inadequately understood by most real estate licensees. As a result, the industry is rife with myths about agency and agency relationships. The whole thing can seem quite scary and complex. Yet, the law of agency is simple law.
“Agency,” according to legal dictionaries, is “the fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Typical of legalese, the definition doesn’t seem too helpful. If, however, you read the definition carefully, you’ll see it contains some very important concepts.
First, agency relationships require “consent,” not an “agreement.” The relationship “results” from the “manifestation” of this consent. What is consented to is for one person “to act” on behalf of another. That is, one person consents to another acting on his behalf and the other acts according to that consent. All that is needed is for one person to consent and the other act on it. This seemingly asymmetrical feature of the law of agency can cause real estate agents serious grief.
If you think in terms of “manifesting consent” and “acting,” you can see how easy it is to create an agency relationship. An agency relationship can be formed without the principal and the agent even discussing the matter. All that is necessary is for the principal to manifest consent for the agent to act on the principal’s behalf and for the agent to do something on the principal’s behalf. It is so easy to create an agency relationship during a real estate transaction that real estate education often discusses “accidental” agency.
There is, of course, no such thing as an “accidental” agency. People don’t consent to accidents. It is more accurate to talk about an “unintended” agency relationship. The lack of intention is typically on the agent’s side. Because all that is needed to raise an agency relationship question is evidence that one person (the agent) took some action consistent with acting on behalf of another (the principal) and the principal took advantage of that action, such relationships can exist without the agent intending the relationship. The problem, of course, is that an agent who thinks they have only a customer is unlikely to meet the duties owed to a client.
Think about an agent who represents only the seller showing property to buyers, writing offers for them and then helping them perform the contract. On whose behalf is the agent acting? Is the agent acting for the seller, for the buyer or for both? The answer, if there is nothing in writing, depends upon conduct. Without something in writing, deciding whether there is or isn’t an agency relationship can become a “liars contest.” It is this simple truth that caused the real estate industry to lobby agency disclosure laws into existence in all fifty states. A complete discussion of agency disclosure can be found in the Agency Disclosure section of this topic.
Notwithstanding agency disclosure statutes, the ease with which agency relationships can be created continues to cause confusion and worry in the industry. One place this confusion and worry manifests itself is on the selling side of transactions. Because selling side agency relationships are typically established without benefit of a service agreement or other writing, there is a great deal of confusion around when a selling side agency relationship begins. The lack of written understanding also leaves open to debate exactly what services the agent has undertaken to provide to the buyer and how long the agency relationship lasts.
Agency relationships, until very recently, have not been as big a problem on the listing side. All that has changed with the advent of what are called “limited service listings.” Limited service listings are listings in which the listing broker limits the services they will provide to the seller. Often, the services offered the seller is nothing more than filing the listing with the MLS. This manner of doing business leaves the seller more or less unrepresented. Buyer’s agents dealing with unrepresented sellers then have to worry about forming unintended agency relationships with the seller. Click here for information on dealing with unrepresented sellers.
If you think about it, you will see that much of the confusion surrounding agency relationships is generated because of the ambiguity surrounding the establishment and scope of agency relationships. Establishing and terminating agency relationships and controlling their scope have not been a priority in the industry, historically. The rise of buyer agency, and now limited service listings, is putting pressure on real estate professionals to better understand agency relationships. That understanding begins with establishing and terminating agency relationships.
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Establishing and Terminating Agency Relationships
Creating Listing Side Relationships
Because the listing side agency relationship is created in a written contract, it is easy to determine when the agency relationship begins. It begins on the effective date of the listing contract. When marketing or MLS filing is to be delayed under the listing agreement, it is wise to add a clause that makes clear that all other terms of the listing are to be in force on the effective date of the listing. In this way, arguments can be avoided if a buyer emerges prior to the marketing or MLS filing date.
Notwithstanding the certainty created by using a written agreement on the listing side, there is one situation that can cause confusion of agency duties when listing property. That situation arises when the seller discloses confidential information to the agent during the listing presentation but, for whatever reason, does not then list the property. Although it would seem the agent has no duty to protect the confidences if the seller does not enter into a listing agreement, courts do not look at the situation that way. Instead, courts conclude that a limited agency relationship created by conduct existed for the purpose of the listing presentation. It follows that information exchanged during the presentation is confidential even if the seller does not continue the relationship by entering into a listing agreement.
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Terminating Listing Side Relationships
An agency relationship lasts for a stated term, for a reasonable time in the circumstances if no term is stated, until the object of the agency is accomplished or otherwise ceases to exist, or until terminated by the parties. On the listing side, the term of the agency is stated – it’s the term of the listing. If the property sells before the listing “expires” (or the house burns down), the agency will end because the object of the agency is accomplished (or rendered impossible). That leaves only “terminated by the parties” to cause trouble on the listing side.
Agency relationships are just that: relationships. Although agency relationships can be established by contract, the relationship itself is not a contract. This is where the difference between agreement and consent comes in. One person cannot force another to consent. It follows that either party to an agency relationship can terminate the agency relationship unilaterally at any time by simply withdrawing the consent to act.
The ability to terminate an agency relationship unilaterally does not mean there may not be legal consequences, contractual or otherwise, for ending the relationship. In real estate, such consequences often become an issue when the seller wants to terminate the listing before it expires. The seller’s right to terminate the listing agreement as a contract is not the same as their right to terminate the agency relationship by withdrawing consent. The agency relationship itself will end the moment the seller withdraws their consent to act on their behalf, but doing so, depending on the circumstances, may also breach the listing agreement.
Real estate agents often confuse termination of the agency relationship with performance or breach of the listing contract. There are usually provisions in the listing agreement about damages if the seller breaches the agreement by withdrawing consent to act as the seller’s agent. Breach of contract issues, however, have nothing to do with whether or not the broker can continue to act on the seller’s behalf to market the property. An agent cannot continue to represent a seller without the seller’s consent even if withdrawing that consent breaches the listing agreement and entitles the broker to damages.
The breach of contract issues created when a seller terminates a listing before the expiration date can be very complex legally. Click here for a legal analysis of these issues in Oregon. What is not complex is the effect of the seller’s withdrawal of consent to act on their behalf. Without that consent, the agent can no longer market the property or hold themselves out as the seller’s agent. Attempts to force the seller to continue the agency once the seller gives notice of termination of the agency relationship are common in the industry, but very dangerous legally.
Brokers will sometimes try to force the seller to allow them to continue with the agency relationship by threatening the seller with the liquidated damages clause in listing agreements. Such clauses often purport to entitle the listing broker to a full commission if the seller terminates the listing. Whatever the enforceability of such clauses, the use of them to threaten clients raises serious agency duty issues. The problem with threatening your own client is that if you are successful, they remain your client. If they remain your client, you have an obligation not to threaten them, especially if the threat involves the agent making statements about the client’s legal rights.
Because of the problems associated with trying to force a seller to continue a listing against their will, some brokers attempt to avoid dealing with “termination” of the listing altogether. Rather than terminate the listing, they merely “withdraw” it from the MLS by having the seller sign a listing withdrawal form. If the distinction between termination and withdrawal is not carefully explained, most sellers will assume the listing is being terminated when they sign the withdrawal form. If the seller does not understand fully what is actually going on, this manner of doing business places the broker’s interest in direct conflict with their client’s, can involve misrepresenting the seller’s options and harms the seller by continuing the listing (and agency relationship) while seriously diminishing exposure to the market.
Bluffing a seller (even innocently) into continuing a listing is asking for trouble. That trouble often starts when the seller approaches another broker and tries to list the property. Simply put, trying to hold onto a listing in the face of a seller’s desire to terminate is a poor business practice. When a client seller wants out of a listing agreement, the real issue is damage to the broker. And it is by focusing on damages that the broker can determine their best course of action.
Damages in listing termination cases depend mostly on how long the listing has been active, the broker’s expenses in marketing the property and the likelihood of a sale during the remaining listing period. A seller who terminates a listing near its end, trying to avoid a commission on a likely sale, is not the same as a seller who terminates because there have been no offers for months is not the same as a seller who terminates within a week of creating the listing because they want to stay in the house and care for their sick spouse. Each of these situations is different. Unfortunately, the liquidated damage clause found in most listing contracts treat each of these situations exactly the same by demanding the full commission as damages.
When faced with a listing termination issue, the broker should first look at the situation, not the termination clause of the listing contract. Is the issue seller greed? Is it changed seller circumstances? Is it dissatisfaction with service? If the issue is greed, a hard line and a demand for a full commission might be the best course of action. If changed circumstances, a no cost release might preserve the business relationship so that when circumstances change again, the listing might come back. If the issue is services, an honest assessment of the seller’s perspective is in order. It is only after that honest assessment that the broker can begin to consider negotiating a settlement with the seller. It is in these negotiations over the cost to the broker that the liquidated damage clause in the contract becomes important.
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Creating Selling Side Relationships
Although buyer agency by written agreement is becoming more prevalent in the industry, the majority of agency relationships with buyers still do not involve written agreements. Instead, the buyer and the agent simply start interacting and at some point during that interaction an agency relationship is created. This manner of doing business makes it very difficult to determine exactly when a selling side agency relationship is established.
Unless there is a writing, figuring out when a business relationship becomes an agency relationship involves determining when consent was given and acted upon. That is, at what point the principal (here the buyer) manifested consent for the agent to act on their behalf and the agent consented by acting on that manifestation. Establishing an agency relationship by conduct instead of contract means depending on who says and does what, and when. It is for this reason that the establishment of buyer agency relationships remains a matter of confusion in the industry.
Fortunately, when exactly an agency relationship is established on the selling side rarely matters. First, without it in writing, the relationship is not exclusive – hence the old industry saying: “nobody owns a buyer.” By the time a buyer identifies a particular property and attempts to purchase it, there is (unless there is something in writing to the contrary) no doubt the agent “working with” the buyer has established an agency relationship. Until the buyer identifies property and decides to purchase, nothing likely has happened to cause the buyer, or the agent, serious damage. Thus, the lack of certainty as to when an agency relationship begins on the selling side causes few, if any, real problems.
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Terminating Selling Side Relationships
Equally confusing on the selling side is termination of agency relationships. Like any agency relationship, a selling side agency relationship lasts for a stated term, for a reasonable time in the circumstances if no term is stated, until the object of the agency is accomplished or otherwise ceases to exist, or until terminated by the parties. In the typical selling side situation where there is no agreement between the agent and the buyer, there is no stated term and it is very hard to say how long a buyer who hasn’t found anything is still “in the market.”
The lack of formality on the selling side makes it difficult, absent completion of the object or termination by the parties, to say how long a selling side agency relationship exists. This uncertainty is, however, tempered by the fact that buyer agency relationships created only by conduct are non-exclusive. This non-exclusivity, coupled with ORS 696.810(4), means it is not a breach of the duty of loyalty to show property to competing buyers.
Non-exclusivity and ORS 696.810(4) are no help, however, when it comes time to write offers for competing buyers. Two buyers competing for the same property means disclosed limited agency rules kick in. Disclosed limited agency disclosure and consent rules make representing two buyers for one property difficult and unusual. A complete discussion of disclosed limited agency can be found in the Agency Disclosure section of this topic
One place where termination of a buyer agency relationship can become an issue is when the agent wants to purchase property that might be of interest to their buyer client. Before purchasing a property of potential interest to a buyer client, an agent must offer the property to the client. This is a function of the duty of loyalty. An agent who represents buyers must, therefore, consider their current list of clients before purchasing property for themselves.
Any uncertainty over who is still a client should be resolved in the client’s favor. That means that prior to purchasing property themselves, buyer agents should determine the property does not meet existing clients’ needs, offer the property to the clients first or terminate the conflicting agency relationships. Of these choices, offering the property to existing clients is the safest if there is doubt about the client’s real estate needs.
Determining what might meet a buyer client’s needs means having a good idea of those needs. If the buyer is looking for an executive home with three baths and five bedrooms and is willing to pay a half a million dollars for it, you don’t have to offer them the little fixer upper you found for yourself over on the other side of town. If you have clients actively looking for inexpensive property on that side of town, it would be foolish to buy the property without making them aware of it. In between these extremes lie all the rest of your clients. When self-interest is involved, it is wise to err on the side of clients.
Terminating an agency relationship on the selling side does not usually raise the same breach of contract issues as on the listing side. A non-exclusive agency relationship that exists without a contract is pretty much the same as “at will” employment as far as termination is concerned: either party can terminate at any time for any reason or for no reason at all. All that is required is notice to the other party. Although the notice need not be in writing and can even be implied from the circumstances, written notice is always preferable – especially in cases where agent self-interest may be an issue.
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Scope of Agency Relationships
The ease with which agency relationships can be created raises more problems than just unintended relationships. Because the agency relationship can be implied from conduct alone, the “scope” of the relationship is often left undefined. The scope of an agency relationship is its range of operation or purpose. The scope of an agency relationship is determined by what the parties intend the agent to accomplish. It is the scope of the relationship that establishes the agent’s authority and obligations to the principal.
Because of its sales origin, the real estate industry has, until recently, paid little attention to the scope of agency relationships. For almost a century, the industry operated by “listing” the seller’s property and then “working with” unrepresented buyers to get the seller’s property sold. The only agency relationship intended was that between broker and seller.
The scope of a sales relationship with a seller is pretty simple: market the property to find a buyer ready, willing and able to purchase. Not only was the scope of the sales relationship pretty simple, but it was spelled out in a written listing agreement. Thus, historically, there was little need to worry about the scope of agency relationships. All this is changing.
The advent of buyer agency in the late 1980s placed new emphasis on the scope of agency relationships. For the most part, buyer agency relationships arise by conduct and, therefore, are not defined by written agreement. At the same time, a buyer’s needs are both greater than and less defined than a seller’s. A seller has only one piece of property to sell. The object of the relationship is, therefore, very narrow. Not so with buyers.
Buyers are fundamentally shoppers. They are going to exchange something of known value (money) for something of unknown value (a new/used house). Not only is the condition of the house unknown at the time of offer but so are offsite conditions that can affect value. This greatly increases the buyer’s risk in the transaction which, depending on the scope of the agency relationship, greatly increases their agent’s risk.
A good way to think about the scope of buyer representation is to ask yourself exactly what a buyer agent is supposed to do for the buyer. Does a buyer’s agent just have to find the buyer property to look at? Or does the agent have to make sure the property found is really suitable to the buyer’s needs, free of defects and worth the price paid? Your answer is probably somewhere between these extremes, but where?
When nothing is said between buyer and agent about the scope of the relationship, it is very likely the buyer will believe the agent is “guaranteeing” satisfaction. At the same time, the agent is likely to believe they are merely showing property. This mismatch of expectations, coupled with the ambiguity created by not defining the scope of the relationship, is what drives liability risk on the selling side of transactions.
There are two simple solutions to the scope of agency problem inherent in buyer agency. One is the growing use in the industry of buyer service agreements. Written service agreements between buyers and agents are helpful in a number of regards, but none so much as in defining the scope of the relationship. A buyer’s agent can use the written service agreement to both explain and limit the services they will provide. In this way, they can control the scope of the relationship and with it their risk. Click here for a copy of a sample buyer service agreement.
The second way in which a buyer’s agent can control the scope of their agency relationship with the buyer is to use what is called a “client engagement letter.” Because agency relationships do not require agreement, it is not necessary to have a service agreement or contract to define the scope of the relationship. All that is necessary is for one party to define the services offered and the other party to consent to those services.
Defining the scope of agency relationship is simply a matter of the agent telling the client what services will and won’t be provided and the client continuing the relationship. It is here that the “act and consent” basis of agency relationships can work to the agent’s advantage. See the Establishing and Terminating Agency Relationships section of the topic for a complete discussion of the “act and consent” issue. To capitalize on that advantage, it is only necessary to develop a letter that defines the services offered and send it to each client as soon as an agency relationship has been established.
Client engagement letters are routinely used by other service professionals like lawyers, accountants and tax professionals. Such professionals use engagement letters to confirm the agency relationship by welcoming the principal as a client and informing the client about the nature of the professional’s services. The nature of the service includes spelling out the professional’s authority to act on behalf of the client, the services the professional will and will not provide, and any specific responsibilities the client will have during the relationship.
Engagement letters do not create agency relationships. The relationship is created by the acts of the agent and the consent of the principal. What an engagement letter does is acknowledge the relationship and, in doing so, defines it. An engagement letter works to protect buyer agents by preventing the client from later claiming the agent was responsible for seeing to that no harm whatever came to the buyer as the result of the transaction. Click here for a copy of a sample client engagement letter.
Something similar to an engagement letter can also be used to deal with limited service listings. A limited service listing is any listing in which the listing broker limits the services they will provide to the seller. At the extreme, this can mean limiting the service the listing broker will provide the seller to nothing more than putting the property in the MLS. Such listings are often called “MLS-only” listings.
MLS-only and other limited service listings work because under the common law the agent and the principal are free to define the scope of their relationship. If the agent and principal agree that the agent’s only obligation will be to place the property in the MLS, the scope of their agency relationship is limited to that act. Although all the fiduciary duties of an agent attach to the agent, they apply only to those acts the agent and principal have agreed will be the agent’s responsibility.
The ability to limit the scope of agency relationships on the listing side is causing considerable consternation in the real estate industry. Some buyer agents do not like working with a seller who is not represented by an agent because they believe it increases their own work and liability risk. Click HERE for a detailed explanation of the issue and potential solutions, including sample clauses and letters. Some brokers see limited service brokerage as a threat to their “full service” brokerage business models. Click here for a detailed white paper on the subject.
Notwithstanding the unrest the ability to control the scope of agency relationships has recently created on the listing side, scope is a critical component of the law of agency. As a general rule, the greater the scope of the agent’s obligations to the principal the greater the agent’s potential liability. That makes controlling the scope of the relationship an important risk management issue. So important, in fact, that in addition to using written agency agreements or client engagement letters, the industry has developed industry-wide standards of practice.
Industry standards, whether self-adopted or imposed by government, are used in many professions. Most real estate licensees are familiar with USPAP, the Uniform Standards of Professional Appraisal Practice. Engineers and architects have industry-wide standards imposed by their professional associations. Home inspectors in Oregon have adopted professional standards and gotten the Construction Contractors Board to adopt them as administrative rules.
Whether imposed as industry standards by a professional organization or by governmental action, standards of practice define the minimum scope of relationships in the industry. Industry standards can increase or limit scope of agency relationships in the same way a contract between agent and principal can. Standards of practice, like the scope of an agency relationship, are not the same as agency duties.
Agency duties, like all legal duties, attach to relationships. That means whether the duty arises or not depends on the legal relationship of the parties involved. Here, that relationship is agent/principal. But that does not mean individuals cannot structure the scope of their relationships to limits the universe of things to which the duties will apply.
Think of defining the scope of an agency relationship, or industry standards of practice, like a housekeeper telling a homeowner they do not do windows. That agreement regarding windows limits the scope of the housekeeper’s work. If the housekeeper limits the scope of their work, dirty windows in the home will not be the fault of the housekeeper even if a housekeeper had the legal duty to keep things clean and shiny. The “clean and shiny” legal duty simply would not attach to windows.
Understanding Agency Duties
Common Law Fiduciary Duties
Because the agent in an agency relationship is acting on behalf of another person, the law has long imposed legal duties on agents. These duties result from the fact that in an agency relationship the principal must trust and rely on the agent to accomplish the object of the relationship. Relationships involving trust and reliance are considered “fiduciary” relationships.
The common law imposes six legal duties on fiduciaries. They are the duties of loyalty, obedience, disclosure, confidentiality, diligence, and accounting. With the exception of the duties of confidentiality and diligence, fiduciary duties are fairly easy to understand.
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Loyalty means the agent must put the client’s interests before anyone else’s, including their own. It would be disloyal, for instance, for a buyer’s agent to purchase property of interest to the client for themselves without first finding out if the client wanted the property. Loyalty can also become an issue if an agent is receiving a bonus or fee sufficiently different from that the client would expect or is typical in the situation.
In such cases, doubt can be raised about whether the agent’s conduct in the transaction was driven by their duty to the client or their own interest in the bonus or fee. It is not that the agent is receiving a fee or commission. There is nothing disloyal or wrong about an agent receiving a fee or commission. Rather, it is that the fee or commission is unusual enough to cast doubt on whether it, instead of client needs, motivated the agent’s actions. As with any conflict of interest calling into question the agent’s loyalty, disclosure of the conflict is the appropriate course of action for the agent.
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Obedience means doing what the principal asks. The duty of obedience does not, however, require doing things that are illegal, unethical or in conflict with other legal duties. The client’s instruction to the agent must be lawful instructions. That is, they must be instructions to do what the law allows done. In dual agency situations, obedience can cause problems. That is why disclosed limited and designated agency statutes have provisions that forbid agents involved in such relationships from taking actions that are harmful or detrimental to either party.
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The duty of disclosure means telling the principal everything of importance the agent knows or learns about the object of the relationship. Normally, the object of the relationship is buying or selling property. The agent must tell their principal everything they know that may be of importance or even of interest to the client in making the decision to buy or sell.
The agency duty of disclosure to one’s own client is much broader than the duty to disclose latent material facts. This can cause confusion for agents. For instance, Oregon law declares certain things, like a death on the property, not to be material in a real estate transaction. An agent with such information could not hide the information from their own client and would still have to disclosure it if it were apparent the information was important to their client.
Disclosure to the client is the only way an agent can deal with conflict of interest situations. Not only must an agent disclose such situations to the client but also the disclosure must be a full and fair disclosure in language the client can understand. The duty to fully and fairly disclose can create very difficult situations for agents. Of these difficult situations, none is more potentially difficult than buying your own listing.
Purchasing your own listing creates a conflict of interest because, as the buyer, the agent’s interests are directly opposed to the seller’s. The safest and simplest way to resolve this conflict is to dissolve the agency relationship and advise the seller to seek representation elsewhere. Although safe and simple, this is almost never done in real life. It is not done because agents believe they must continue to represent the seller in order to get a commission and they want the commission to help fund the purchase.
Unfortunately for agents, the duty of full and fair disclosure can make it very difficult for a listing agent who wants to purchase their client’s property to continue to represent the seller. Because the agent will be on both sides of the deal, an agent purchasing their client’s property can continue to represent the seller only if the seller agrees to the dual representation after full disclosure. The disclosure, to be considered full and fair, would have to include the fact that no commission would be due the agent if the seller refused to allow the dual agency. It is for that reason that negotiating the price directly, based on the anticipated commission savings from dissolving the agency relationship, is a much better approach than trying to continue the relationship and taking the commission.
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The duty of confidentiality can be a little confusing. Confidentiality means not telling other people things your principal doesn’t want disclosed or that would be harmful to the principal if disclosed. Obviously, the duty of confidentiality can conflict with the duty of honesty and disclosure. Fortunately, the duty of confidentiality does not require the agent to be dishonest or unethical in order to protect their client.
In Oregon, “confidential information” is defined by statute ORS 696.800(3). Confidentiality is a specific statutory duty in Oregon and is discussed at length in the Statutory Agency Duties section of this topic. The common law idea of confidentiality is basically the same as in the statute in that it simply requires the agent to hold in confidence any information entrusted to the agent by the principal, unless the law requires it disclosed or client wants it disclosed.
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Like the duty of confidentiality, the duty of diligence can be confusing. Diligence means the attention and care legally expected or required of a person. What is legally expected of a real estate licensee is that they have the attention and skill of the average real estate licensee. This self-referential standard feels mushy, and in many ways it is, but that is no accident. Measuring diligence by reference to peers creates a dynamic standard of care in an industry.
As circumstances in the industry change, so does the standard of care. Until well into the 1980’s no one thought anything of a buried heating oil tank. Today, an agent, whether representing a seller or a buyer, would hardly be considered diligent if they ignored the existence of such a tank. The same is true of man-made siding, mold and any number of other issues.
The duty of diligence is arguably the most important of the common law duties. A lack of due diligence is another way of saying “negligent.” Negligence is important because an agent can be negligent both in what they do and what they don’t do. Failing to understand a transaction document can be negligent. Failing to read that same document can be negligent and, depending on the circumstances, it may even be negligent not to know there ought to be such a document. It is this last, or negligence by omission, aspect of the duty of diligence that makes it so dangerous.
Negligence by omission is easily confused with misrepresentation by omission. Indeed, the two legal theories overlap because each is based on the idea of not knowing what one should know. This overlap has caused the industry to focus on disclosure as a means to control risk. Unfortunately, disclosures do not help when the claim is a lack of diligence rather than misrepresentation.
Diligence requires the application of training and intelligence to specific circumstances. It is for this reason that general disclosures of potential problems are ineffective when the claim is lack of diligence. Take, for example, the problem of mold. Disclosing that mold can be a serious problem in housing does not excuse the agent who misses or ignores “red flags” like odors or stains that indicate there may be mold in a particular property. In fact, quite the opposite is true.
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The duty of accounting requires the agent to account to the principal for any and all money or property of the principal’s coming into the agent’s hands. Accounting is rarely an issue unless money has been misappropriated. Misappropriation of a client’s money is a very serious breach of agency duty that can result in loss of license and even criminal sanctions.
Typically, the only client funds entrusted to real estate agents is the earnest money. Earnest money accounting and handling is separately regulated by statute and administrative rule in Oregon. Other than earnest money, the duty of accounting causes few problems in real estate as long as the agent is very careful to document any monies of the client that flow through their hands.
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Statutory Agency Duties
In Oregon, as is now the case in many other states, the duties a real estate licensee owes buyers or sellers are set out in statute. For the most part these “plain language” statutory duties parallel the common law fiduciary duties. Like most, but certainly not all states, Oregon real estate law assumes the relationship between real estate licensees and their clients will be an agency relationship. Thus, statutory law now controls both whether there is an agency relationship and the duties owed in that relationship.
ORS 696.800 through ORS 696.880 are the Oregon license laws provision that deal with agency. ORS 696.805 deals with seller agency and ORS 696.810 concerns itself with buyer agency. ORS 696.815 covers representation of both the buyer and the seller.
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Duties to all Parties
Although there are three types of agency relationships set out in Oregon statute, there is really only one basic set of agency duties. Whether representing a seller or a buyer or both, real estate licensees in Oregon owe everyone involved in the transaction (the seller, other principals and the principals’ agents) three legal duties. They are: (1) To deal honestly and in good faith; (2) To present all written offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase; and (3) To disclose material facts known by the seller’s agent and not apparent or readily ascertainable to a party.
These three general duties apply without regard to the agency relationships. Although the duties are “affirmative” in the sense that they mandatory, they are not “fiduciary” duties like those that apply between agent and principal under the common law. Because they apply to all parties regardless of representation, it is critical to understand these general license law duties.
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Duty to Deal Honestly and in Good Faith
The duty to “deal” honestly and in good faith establishes a duty of personal integrity during transactions. “Honesty” is pretty simple: you can’t lie to clients and customers during real estate transactions. “Good faith” is more complicated. Good faith, according to Black’s Law Dictionary, “encompasses an honest belief, the absence of malice and the absence of a design to defraud or to seek an unconscionable advantage.”
In Oregon, “good faith” is required in the performance of all contracts. A court faced with interpreting the statutory duty of a real estate licensee to deal honestly and in good faith would, no doubt, turn to contract case law imposing the common law duty of good faith in the performance of contracts. That means understanding good faith in the performance of contracts.
Contractual “good faith” isn’t just about honesty. Certainly, honest people are more likely to act in good faith and lying is certainly one way to act in bad faith. But contractual good faith is really about acting in a way that gives effect to the reasonable expectations of the parties to the transaction. To act with good faith you must understand the reasonable contractual expectations of the other party and give those expectations effect.
Good faith is a difficult concept generally, not just real estate licensees. Let me give you an example. A struggling flower grower quits paying its hothouse gas bill. Six months later, the gas company starts trying to collect its $50,000 bill. The grower tells the gas company they’ll have to wait because the flower growing business is cyclical and flower growers make most of their money right before Valentine’s Day. They are trying, says the grower, to get a second mortgage on their land so they can pay their debts and make it to Valentine’s Day.
Notwithstanding, or maybe because of, the grower’s explanation, the gas company files a lien on the grower’s property for the $50,000. They then send the grower a letter saying they will remove the lien and continue the supply contract only if the grower pays them $100,000. The grower doesn’t have the $100,000 and can’t get a loan because of the lien, so they go out of business. The grower then sues the gas company for breach of the duty of good faith in performance of the supply contract – and wins.
What the court determined in the flower grower case was that the gas company’s letter demanding twice the money due was an “excessive demand” intended to force the grower out of business by making his performance of the supply contract impossible. This result startles people, especially real estate licensees.
There is a sort of “all is fair in love, war and real estate contracts” belief that is alive and well in the industry. Think about all the stories you hear about ways to get a client out of a contract. Most of these stories involve clients telling agents I want out for reason X and the agent telling the client OK but let’s tell them Y. That is transactional bad faith.
Agents who get into this sort of thing often feel stuck between their duty to protect the client and their duty to deal honestly and in good faith with the other party. How can this sort of thing be resolved? An agent can’t just tell the other side the client’s real motive. Nor can they lie to the other side about motive. So how do you handle the duty of good faith and honesty?
Good faith and honesty are a lot easier for a real estate agent to deal with when they will realize they have a business problem, not a legal problem. Tell the client that terminating contracts is a serious legal matter beyond your expertise. Tell them they may want to consult an attorney before deciding. But if they decide that is what the want to do, you can send the other side a document stating their decision in their own words. You need to explain and document to your client that your duty of honesty to all parties will prevent you from lying on their behalf. Then do a follow up letter to the client that says this is what you instructed me to do.
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Duty to Present all Written Offers
The general duty to present all offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase is an artifact of the sales industry. The presentation duty is really just an application of the duty of honesty that says an agent cannot hide documents or communications from the parties to a transaction even if the agent would rather the parties didn’t know about the document or communication.
The presentation of offers duty is largely an artifact of the sales business origin of the industry. In those days, listing agents tried to get their unrepresented buyer’s offer in front of the seller before a subagent of the seller in another company could get their unrepresented buyer’s offer in front of the seller. The advent of buyer agency has greatly reduced, but not eliminated, the need for this specific duty. About the only place presentation becomes an issue any more is in multiple offer situations.
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Duty to Disclose Material Facts
All real estate licensees have a general duty to disclose material facts known by the agent and not apparent or readily ascertainable to a party. This duty applies to both the listing agent and the selling agent. The duty is not the same as the affirmative duty of disclosure because it applies to all parties, not just to the client. Because it applies to all parties, the duty is limited in scope of the disclosure of known material facts not apparent or readily ascertainable by others.
The duty to disclose material facts comes into play on the listing side mostly in disclosure of material defects in the property. The duty to disclose material defects in property has long been an issue in the industry. Although it unfortunately happens, it is very rare that an agent will deliberately try to hide a material defect they know about. Most lawsuits against agents for failure to disclose material defects are based not on the claim that the agent failed to disclose known defects but that the agent was negligent in not knowing of the defect.
The classic failure to discover defects case is Easton v. Strassburger, a 1984 California case. In Easton, a California court found the listing agent had a duty to disclose facts materially affecting the value or desirability of the property, which through reasonable diligence should have been known. According to the court, there was substantial evidence to support the finding that the listing agent was negligent because a number of red flags indicated problems with the property. The court held the problems, which involved earth movement, were within the knowledge a typical real estate licensee familiar with property in the area.
The Easton duty to discover material defects does not require listing agents to inspect the property they list. Rather, the standard is really one of diligence. The listing agent must use the care of an ordinary real estate licensee when looking at or showing the property they list. The agent cannot ignore red flags that would be obvious to the average real estate licensee. Click here for a copy of the Easton case.
On the selling side, disclosure of material defects rarely comes up because buyers are rarely as defective as houses. In fact, about the only way a buyer can be defective is to not have the financial wherewithal to perform as agreed. This comes up in two important places in a real estate transaction: redemption of earnest money and credit worthiness. A buyer’s agent must disclose to the other side any knowledge that their client does not intend to, or cannot, redeem earnest money due under the contract. A buyer’s agent also cannot hide from the seller the buyer’s financial inability to perform the contract.
The statutory duties a real estate licensee owes to their own client mirrors common law fiduciary duties. The common law duties of loyalty, obedience, disclosure, confidentiality, diligence, and accounting are included among the statutory duties owed a client. There is no practical difference as far as a licensee’s obligations are concerned between those duties and their common law counterparts. Click here for a detailed explanation of common law fiduciary duties. These affirmative statutory duties to clients may not be waived by the agent or the client. There are, however, several statutory duties which have no common law counterpart.
Under Oregon statutory law, agents have a duty to advise their client to seek expert advice on matters related to the transaction that are beyond the agent’s expertise. This affirmative duty is the flip side of a provision of Oregon agency law that says agents have no duty to investigate matters that are outside the scope of the real estate licensee’s expertise unless the licensee or the licensee’s agent agrees in writing to investigate a matter. Taken together, these two duties mean that, while an agent need not themselves investigate matters that are beyond the expertise of a real estate licensee, they may have a duty to advise the client to have another professional look into the matter. So, for instance, an agent would not have to investigate an encroachment onto a property but might, depending on the circumstances, have a duty to tell their client they need to consult with an attorney about the encroachment.
Another place where statutory duties do not exactly mirror common law agency duties is in marketing property under contract or finding additional properties for a buyer under contract. Unless agreed otherwise in writing, an agent must make a continuous, good faith effort to find a buyer for their seller or property for their buyer. Agents are not required, however, to seek additional offers to purchase or find additional properties once their client has entered into a contract for sale. The agent and principal may agree to seek additional offers or property but they are not required to do so as a matter of agency duty.
Oregon statutory agency duties clarify the common law by expressly allowing the seller’s agent to show properties owned by another seller to a prospective buyer. Similarly, a listing agent can list competing properties for sale without breaching any affirmative duty to the seller. The same rules apply to buyer agents who can show properties one buyer client is interested in to another buyer client.
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Understanding Agency Disclosure
In Oregon, agency disclosure was first adopted in 1993. The law demanded that real estate agents personally provide the buyer and seller in a real estate transaction with a statutory initial agency disclosure form. Agents were required to get the buyer and seller to acknowledge receipt of the disclosure. The statutory form, which was to be given at “first substantive contact” with the buyer or seller set out the duties of “buyers’ agents” and “seller’s agents” as well as agents “acting for both the buyer and the seller.” A “final agency acknowledgement” stating the agency relationships at the time of offer was also required under the law.
Under the 1993 law, buyers and sellers were asked to sign a statement saying they had received the disclosure and understood agency relationships in real estate, including the then common practice that all agents represent the seller. The form, however, went on to ask the person signing it to declare their relationship with the agent presenting the form. The form also contained what was called a “limited authorization regarding in-company sales.” It was these latter two provisions that proved to be the downfall of the agency disclosure form.
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Initial Agency Disclosure
Problems with dual agency and consumer confusion has resulted in a complete overhaul of agency disclosure laws over the years. The agency disclosure law distinguishes between disclosure of agency relationships and their formation. Under the law, real estate licensees must give consumers who may be seeking representation from a real estate licensee (any real estate licensee, not just the particular agent involved) a pamphlet that explains agency relationships and the duties of an agent at first contact, which is defined in rule. While this new disclosure requirement is so simple, it has caused some confusion.
After years of forcing consumers to sign something as soon as they talk to a real estate licensee, it has proved difficult for agents to simply hand out something. There is no requirement that agents document giving consumers the Initial Agency Disclosure Pamphlet. Nevertheless, companies have developed a variety of policies regarding consumer acknowledgment of delivery of the pamphlet as a best practice tool due to the requirement it be delivered. Agents should, of course, follow their company policies.
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Final Agency Acknowledgment
The law also requires clients to acknowledge actual agency relationships at the time an offer is written. This final agency acknowledgement form is typically incorporated into the sale agreement form. In cases where the final agency acknowledgement form is not incorporated into the sale form, it can be attached to the contract for sale as an addendum. Whatever the means of delivery, the content of the final agency acknowledgement is established by law in ORS 696.845.
The final agency acknowledgement form used in Oregon assumes that not later than the time of offer, real estate licensees will have formed one of the three types of agency relationships authorized in Oregon licensing statutes. That is, the form assumes the agents will represent either the seller or the buyer or both and asks the agent to mark the check box appropriate to the agency relationship they have established. This checkbox manner of agency acknowledgement can be confusing to clients and agents alike.
The final agency acknowledgment form adopts industry jargon by asking for the “Seller’s Agent” ”Seller’s Firm” and the “Buyer’s Agent.” ”Buyer’s Firm.” The “Buyer’s Agent” must then declare whether they represent the buyer exclusively, the seller exclusively or both buyer and seller as a “disclosed limited agent.” The “Seller’s Agent” is given only the choice of representing the seller exclusively or both the buyer and seller as a disclosed limited agent.
That selling licensees have more representation options than listing licensees makes little sense unless you know something of the history of agency relationships in real estate. When agency disclosure was introduced in 1993, it was common practice in the industry for all agents to work for the seller. Agents in offices other than the listing agent’s were considered “subagents” of the listing firm. It was, therefore, possible for both the “selling firm” and the “listing firm” to represent the seller exclusively. The practice of sub-agency has now all but disappeared but not its vestiges.
The final agency acknowledgement form is most easily used when there are two different agents from two different firms, with one agent representing the seller as the “listing licensee” and the other representing the buyer as the “selling licensee.” In such a transaction, it will be clear the buyer has their own agent, the seller theirs and that each agent represents their party exclusively. Dual agency situations in which one or more agents from the same firm represents both buyer and seller are less straight forward thanks to the advent of “disclosed limited agency.”
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Disclosed Limited Agency
“Disclosed limited agency” is just another name for dual agency. It is defined in Oregon law as: “a real property transaction in which the representation of a buyer and seller or two or more buyers occurs within the same real estate business.” Clearly, dual agency in Oregon continues to be company-based. Disclosed limited agency agreements and administrative rules, however, have significantly changed the old “in-company” sales model still practiced in most states.
The “in-company” sales model in use in Oregon until 2002, handles the potential conflicts of dual agency by making all the company’s licensees agents of all the company’s clients. In that way, it is thought, all agents could have access to listing files and still represent buyers because their ability to use information gleaned from listing files to the advantage of their buyer clients would be limited by their also being agents of the seller. All that was required to make this system work was a set of rules about what information a dual agent could and couldn’t disclose and some way for the client to “agree” to an “in-company” sale.
Because the in-company sale model depended on creating dual agency relationships for all agents as soon as any agent took a listing or started working with a buyer, it was necessary to get client approval before actually entering into an agency relationship. This was accomplished by making an “in-company” disclosure part of the initial agency disclosure. However, because the initial agency disclosure was to be given before there was an actual agency relationship, the wording of the in-company disclosure was somewhat awkward. The form asked the prospective client to give “limited authorization” for an agent they “may” hire to act as a dual agent if a situation involving dual agency were to “arise” in the future.
It wasn’t long before lawyers working for disappointed buyers were able to exploit the awkwardness of the in-company form. Arguing the form did not contain clear consent to a dual agency relationship after full disclosure to the client of the consequences of giving such consent; lawyers were able to successfully attack the legal sufficiency of in-company forms. This lead to a general rethinking of dual agency in real estate and the rise of disclosed limited agency relationships.
Disclosed limited agency is dual agency. The law of agency allows dual agency only with the written consent of the principal given after receiving full disclosure by the agent. What courts want to see is that the principal understood the consequences of what they were agreeing to before they gave their consent. So, what are the consequences of dual agency to the principal?
If you look at agency duties, you will quickly see that dual agency creates a very serious loyalty and confidentiality problem. Other duties, like diligence, can be more difficult with clients on both sides of a transaction, but there is simply no way to be loyal to parties with conflicting interests and there is no way to hide information from yourself. The consequences of dual agency are attenuated loyalty and lack of confidentiality. With this in mind, it is much easier to understand disclosed limited agency.
Disclosed limited agency, because it involves dual agency, can be done only by written agreement. In that agreement, the agent must disclose the consequences of dual agency to the principal and obtain the principal’s agreement to the relationship. In Oregon, this is accomplished by having both clients sign a statutory Disclosed Limited Agency Agreement form. Although identical in structure, there are separate statutory forms for sellers and buyers.
Like any agreement, the first thing a Disclosed Limited Agency Agreement does is identify the parties to the agreement. When it comes to disclosed limited agency, those parties are the agent, the principal and the agent’s principal broker. You can think of disclosed limited agency as involving a triangle. Real estate agents conduct their activities on behalf of their principal broker. The listing or selling agent acts as the principal broker’s subagent to provide services to the company’s client. It is this triangular relationship that makes disclosed limited agency possible.
When two different licensees working for the same principal broker get involved in a transaction with one representing the seller and one the buyer, the principal broker is a dual agent. That is the case because the services provided each client is being provided on the principal broker’s behalf. The individual listing and selling agents, however, have personally only established an agency relationship with one of the parties to the transaction. Disclosed limited agency allows those individual agents who have worked only with one party to continue to represent just that party. It is the principal broker alone who is the dual agent.
The full disclosure part of disclosed limited agency is accomplished in Oregon by incorporating the statutory Initial Agency Disclosure into the Disclosed Limited Agency Agreement. The Initial Agency Disclosure explains representation of more than one party to a transaction, including the role of the principal broker and the loyalty and confidentiality limitation involved in dual agency. Once the disclosure is made, the parties give their permission for the individual agents to continue to represent only the party with whom they already have a relationship while the principal broker represents both parties as a dual agent.
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DEALING WITH FSBOS AND MLS ONLY OR LIMITED SERVICE LISTINGS
Modern real estate practice can bring agents working for buyers into direct contact with sellers who are not represented or are not represented for the purpose of negotiating and closing a transaction. Typically, such cases arise when an agent is working with a buyer who is interested in a property that is being offered for sale by the owner (FSBO). To represent their buyer client, the agent must deal directly with the unrepresented owner.
A similar situation can arise in cases where the property of interest to the buyer is listed in the MLS but the listing broker and the seller have agreed to limit the services the listing broker will provide. Some listings may involve what are called “MLS Only” listings where the only service provided by the listing broker is placing the property in the MLS. In other situations, called “Limited Service Listings,” the listing broker may provide marketing, forms and other preliminary services to the seller.
When the services being provided to the seller by the listing broker do not include arranging for showing, negotiating the contract or assisting the seller in contract performance, the buyer’s agent can be in basically the same position as when dealing with a FSBO. That is, in order to represent their buyer client, the buyer’s agent must deal directly with the unrepresented owner. MLS Only and Limited Service Listings, therefore, raise many of the same problems as for-sale-by-owner transactions.
Over the years, there has been significant discussion in the industry about the impact of MLS Only and Limited Service Listings. Many buyer agents feel they are being asked to do the “work” of the listing broker. That is not true any more than it was true that the listing agent’s subagents in other companies were doing the buyer’s agent’s work in the old single agency days of real estate. A buyer’s agent dealing with an unrepresented seller on their buyer’s behalf is no different than a listing agent dealing with an unrepresented buyer on the seller’s behalf.
Problems that arise in FSBO and Limited Service Listings situations have nothing to do with who is doing the most work. The issues raised have nothing to do with what duties a listing broker “should” provide. Attempts in other states to take that road by having the state demand that brokers provide certain minimum services have met with lawsuits, confusion and uncertainty. How to deal with unrepresented sellers is a business issue, not a regulation issue. How to handle the business issues involved is the next topic in this subject.
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There are two potential problems to be aware of when dealing with a FSBO and MLS Only or Limited Service Listings. The first potential problem is handling the commission. The second, and potentially more difficult, problem is handling the increased risk of an unintended agency relationship created by dealing directly with an unrepresented party.
An MLS Only or Limited Service Listing, like any MLS listing, may or may not include a unilateral offer of compensation from the listing broker. If an offer of compensation from the listing broker is made in the MLS, the cooperating buyer broker can treat the commission issue pretty much as they would any other MLS listing. If, however, no offer of compensation is made by the listing broker, and cooperating brokers are instructed to negotiate a commission with the seller, the buyer’s agent must treat the situation as they would a FSBO.
The commission issue when dealing with a FSBO, or listings that do not include compensation, is a common source of considerable confusion. Historically, agents have handled the commission issue when dealing with an unrepresented seller by having the seller sign a one-party listing. This approach creates a dual agency situation in which the agent represents both the buyer they brought to the sale and the seller. As in any dual agency situation, the risk associated with the transaction is increased.
Most states, and Oregon is no exception, allow a real estate licensee to act as the buyer’s agent only when the commission is paid by the seller. (See e.g., ORS 696.810(1)) As a result, it is possible for a buyer’s agent, when dealing with a FSBO or in a situation where a listing broker is not paying compensation and authorizes negotiations with the seller, to have a commission agreement with the seller that does not include representation. In this way, a single agency situation can be maintained and the risks associated with the transaction reduced.
The legal ability to represent only the buyer while receiving a commission from the seller does not reduce the risk of an unintended agency claim. Such claims, commonly made by buyers against subagents in the days when all licensees represented the seller, are implied agency claims. Under the common law, an agency relationship can be implied from the conduct of the parties. In an unintended agency situation, a principal in the transaction claims an agent’s actions lead the principal to reasonably believe the agent was acting as their agent. If the belief was indeed reasonable, the court may find an agency relationship actually existed.
Licensees must be aware of the potential for an unintended agency relationship when dealing directly with unrepresented parties. When dealing with unrepresented sellers, the buyer’s agent often performs services, such as providing forms, suggesting solutions to problems, finding information and so on, that could be construed as evidence of an agency relationship. Therefore it is critical that the seller (and the agent) understand that any actions undertaken by the agent are done for the sole benefit of the buyer even if the seller might also benefit as a result. How to avoid unintended agency claims and collect commissions from someone you don’t represent is the next topic in this subject.
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Compensation problems are resolved by contract. Although not widely understood, to be entitled to a commission it is not enough to have a real estate license, be an agent of one of the parties, or even to be the procuring cause of the sale. Commissions are due only if there is an enforceable agreement to pay a commission. Listing agreements serve that purpose on the listing side. Ordinarily, the listing broker’s unilateral offer of compensation in the MLS serves the same purpose on the selling side.
In FSBO, and some MLS Only or Limited Service situations (those where no compensation is offered and the listing broker has instructed cooperating brokers to negotiate the commission with the seller), there is no pre-existing agreement to pay a commission. The problem can only be solved by getting the seller to agree to pay a commission before proceeding with the transaction. One-party listings were developed as a way to get the seller to agree to pay a commission.
Because license law allows the seller to pay a commission to an agent representing only the buyer, there is no reason to get a “listing” just to create a commission contract. A simple compensation contract can accomplish the same thing without creating a dual agency situation. Care must be taken, however, when forming such a compensation contract to avoid any chance of an unintended agency claim.
The best way to avoid an unintended agency claim when asking a seller for a compensation contract is to include a ”no agency relationship” clause right in the contract. Such a clause spells out plainly the lack of an agency relationship between the agent and the seller. It will also warn the seller that actions taken by the agent that may appear to benefit the seller are being done exclusively for the benefit of the buyer. It is also a good idea to warn the seller that anything they say to the agent will be disclosed to the buyer. However, regardless of the existence of a “no agency relationship” clause in the contract, the agent is still advised to be clear with seller throughout the transaction that their sole client is the buyer and to ensure their conduct says the same.
Many companies have developed their own compensation contracts. In many states, the state association publishes such forms. Here in Oregon, there is no published compensation contract. The Oregon Association of REALTORS® has, however, developed a sample compensation contract with a no agency clause. Click here for a copy of the sample contract.
It can be tempting for agents to try to solve the compensation issue in their buyer’s offer. This is an exceedingly bad idea asagents are not a party to the sale agreement. This causes agents to state their desired commission in terms of a contingency to their client’s offer to purchase. That, in turn, creates a conflict of interest because the seller may reject the buyer’s offer based on the commission issue and not the merits of the offer itself. Unless this potential outcome is fully disclosed to the buyer, and they agree to take the risk, making your own commission a contingency of an offer can violate agency duties and real estate license law. It is for this reason that negotiating a compensation agreement, with a clause to deal with unintended agency, is the best way to deal with unrepresented sellers.
Even if the listing broker is willing to pay a coop commission, the problem of unintended agency still exists if the agent must deal directly with a party they do not represent. For instance, in a Limited Service Listing where the listing broker offers a coop commission there is still a chance the seller will come to regard the buyer’s agent as their own agent. The only difference is there is no compensation contract with the seller in which to insert a single agency relationship clause.
If there is no compensation agreement between agent and seller, the best way to get single agency relationship language in front of the seller is through an addendum to the buyer’s offer. In this case there is no risk of harming the buyer’s interest because nothing is being asked of the seller. The seller is simply being advised about the actual agency relationships that exist in the transaction. That is, that the agent will represent only one party in the transaction. Think of a single party addendum as a beefed-up final agency acknowledgment.
As with compensation agreements, many companies have developed their own “no agency relationship” addendums. The Oregon Association of REALTORS® has, however, developed a sample single party addendum clause. Click here for a sample of the addendum.
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Commissions based on a percentage of the purchase price of the property sold have always been the most common form of compensation in the real estate industry. Although fee-for-service and even wage programs exist, commissions continue to dominate. This topic is about how commissions are earned, shared, disputed, used and misused in real estate.
Central to any discussion of commissions has to be a discussion of “procuring cause.” Accordingly, Understanding Procuring Cause is the first subject in this topic. The subject includes sections explaining the Legal Definition of Procuring Cause as well as Applying Procuring Cause to Real Estate. If procuring cause has to be the first subject in any discussion of commission, Sharing Commissions has to be second. Finally, no discussion of commissions would be complete without some mention of Commissions and Antitrust.
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Understanding Procuring Cause
Procuring cause is a legal standard. It is really just the judicial gloss that has accumulated over the years around the clause in a listing agreement that says the seller will pay the listing broker a commission if the listing broker procures a buyer ready, willing and able to purchase the property. If you look at the listing agreement you use, you will see a “compensation” clause of some kind that contains a “ready and willing buyer” provision entitling the broker to the commission. Understanding “procuring cause” means understanding what the simple clause means legally.
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Legal Definition of Procuring Cause
The legal definition of “procuring cause” is a little on the arcane side. An abstract definition commonly used by courts defines the standard as: “[t]he proximate cause; the cause originating a series of events, which, without break in their continuity, result in the accomplishment of the prime object.” Courts apply this abstract procuring cause definition to real estate commissions by saying that procuring cause is “a cause originating a series of events which without break in their continuity result in the accomplishment of prime objective of the employment of the broker who is procuring a purchaser ready, willing and able to buy real estate on the owner’s terms.”
Legal definitions have not, of course, prevented disputes over procuring cause. The “cause originating a series of events which without break results in the accomplishment of prime objective” part of the definition is far from self-explanatory. There are endless court cases in which the actions of the broker are tested to see whether they were sufficient to “cause” the buyer to purchase. Invariably these fights involve some variation of the one broker shows and another broker writes theme. These kinds of procuring cause fights are about whom among competing brokers actually “caused” the buyer to enter the contract. This subject is covered in depth in the Applying Procuring Cause to Real Estate section of this topic.
The other part of the procuring cause definition most tested in court cases is the buyer’s actual readiness, willingness and ability to purchase. In such cases, what is being fought over is not just who caused the buyer to enter the contract, but when that buyer is actually “procured.” When, exactly, is the buyer “procured?” Is it when they enter a binding contract? It is when the seller actually gets the money? Is it somewhere in-between?
We are fortunate here in Oregon to have had both the “caused” and “procured” parts of “procuring cause” worked out by the Oregon Supreme Court. Here, in the Court’s own words, is the legal standard in Oregon:
“When a broker is engaged by an owner of property to find a purchaser for it, the broker earns his commission when (a) he produces a purchaser ready, willing and able to buy on the terms fixed by the owner, (b) the purchaser enters into a binding contract with the owner to do so, and (c) the purchaser completes the transaction by closing the title in accordance with the provisions of the contract. If the contract is not consummated because of lack of financial ability of the buyer to perform or because of any other default of his, * * * there is no right to commission against the seller. On the other hand, if the failure of completion of the contract results from the wrongful act or interference of the seller, the broker’s claim is valid and must be paid. In short, in the absence of default by the seller, the broker’s right to commission against the seller comes into existence only when his buyer performs in accordance with the contract of sale.”
The Court’s statement makes clear that in Oregon a commission is not due until the buyer takes title in accordance with the contract. The single exception is a sale that is not completed because of the “wrongful act or interference of the seller.”
Requiring a closed transaction before a brokerage fee can be earned makes the buyer’s performance of the contract part of procuring cause. That goes a long way toward explaining why the work of real estate agents does not end with the acceptance of the sale agreement. Although often cast in terms of “agency duty,” the continuing efforts of the agents to close the sale after the parties have a contract is really just an artifact of being paid commissions under a procuring cause standard.
If continuing efforts on the behalf of the client is an artifact of procuring cause, one would expect changes in what agents do or are expected to do for clients when commissions give way to fee for service arrangements. The beginnings of such changes can be seen in the industry today. MLS only and Limited Service brokerage models are fee-based. It is hardly surprising that these fee-based relationships significantly change the continuing efforts of the agents. It really doesn’t have anything to do with agency duties or providing minimum services. Click here for detailed discussion of working with MLS Only and Limited Service listings.
Being clear on what it means to “procure” a buyer in Oregon is useful in dealing with procuring cause issues. We know as a result of the clear standard that no commission is due any agent if the buyer for whatever reason does not close the transaction. Entitlement to a commission is less clear when the deal fails because of the seller’s actions instead of the buyer’s. Although a commission can be due if the buyer’s failure to close is the result of the “wrongful act or interference of the seller,” it is not clear exactly what acts a court might consider “wrongful” or what kind of seller “interference” would justify a commission on a failed deal.
Two reoccurring patterns emerge from the legal standard of procuring cause used by Oregon courts. In one pattern, competing brokers fight over who “caused” the sale. In the other pattern, the dispute involves whether the seller wrongfully prevented or interfered with the buyer’s performance. Both of these patterns are discussed in the following Applying Procuring Cause to Real Estate section of this topic.
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Applying Procuring Cause to Real Estate
In the Legal Definition of Procuring Cause section of this topic, we saw that procuring cause fights tend to fall into one of two patterns. In one pattern, competing brokers fight over who “caused” the sale. In the other pattern, the dispute involves whether the seller breached the listing agreement by wrongfully preventing or interfering with the buyer’s performance. The second pattern is by far the more rare and more easily understood.
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Seller Wrongful Interference
The key to understanding whether a commission is due because of the “wrongful act or interference of the seller” is the legal concept of a “wrongful act.” A “wrongful act” is “any act which in the ordinary course will infringe on the rights of another to his damage, unless it is done in the exercise of an equal or superior right.” The seller’s willful and unexcused refusal to perform under a valid contract would be “wrongful” because it would infringe on the buyer’s rights under the contract to the buyer’s damage. Similarly, a seller who conspires with the buyer to terminate a purchase agreement and substitute a new one for the purpose of avoiding a commission wrongfully interferes with the closing of the transaction. That is the case because the seller’s actions demonstrate bad faith in the performance of the listing agreement to the broker’s damage and are thus “wrongful.”
A reoccurring “wrongful act” scenario occurs when the seller refuses to take a full price offer for the purchase of the property. Agent entitlement to a commission, either listing or seller side, in such circumstances depends on the seller’s refusal being in some way “wrongful.” There is nothing in the law that would require a seller to accept a full price offer, or any offer, simply because the property is advertised for sale. Refusal to accept an offer is never “wrongful” with respect to the buyer because asking for offers at an advertised price creates no legal obligation to accept any particular offer at that price or any other price.
Because the seller is not legally obligated to accept any offer simply because they listed the property, any “wrongful” act in not accepting a particular offer will have to be “wrongful” with respect to the listing broker’s rights, not the buyer’s rights. The seller’s action with respect to the listing broker can be wrongful only if it deprives the listing broker of some legal right. The legal right at issue, of course, is the right to a commission under the listing agreement. That, in turn, takes us full circle to procuring cause because the broker is entitled to the commission only if the buyer is “willing and able to buy on the terms fixed by the owner.” Click here for a detailed discussion of the procuring cause standard in Oregon.
The “willing and able to buy on the terms fixed by the owner” part of the dispute will turn on the nature of the buyer’s offer. It must be an offer that meets the terms fixed by the seller or the “procured” part of the fight is over. Typically, those terms are found in the listing agreement itself. Unfortunately, all that is usually found in the listing agreement is the listing price. Thus, only one of the terms (the listing price) is actually fixed. What about the rest of the terms of an offer? How can the terms be said to be “fixed by the seller” in a case where the seller rejects an offer at the listed price?
The key again is the requirement that the seller’s actions be “wrongful.” What the broker will ultimately need to show is that the seller’s rejection of the full price offer was in breach of the listing agreement. To do that, the broker will have to show the terms of the offer would be acceptable to a reasonable seller in the same circumstances. That standard may prove difficult to meet given the contingencies associated with a typical buyer’s offer. There is, of course, a lot more to what is and isn’t an acceptable offer than just the price.
Lawyers, of course, understand the nature of wrongful acts and will always argue their client’s actions were not wrongful because the actions were done in the exercise of an equal or superior right. For instance, faced with the buyer’s demand to close, the seller will claim a prior material breach on the buyer’s part justified the seller’s refusal to perform. Similarly, a broker claiming the seller’s bad faith performance of the listing agreement can expect the seller to counter with a claim that the broker did not perform their end of the bargain. In a “refusal to accept a full price offer” fight, the seller will simply point out why the offer was unacceptable even though at the listed price. It is hardly surprising then that collecting a commission simply because the seller refuses a full price offer is a very uphill and uncertain undertaking.
Less uncertain by far are cases in which the seller and buyer conspire to deprive the broker of the commission by terminating the transaction and later making a new one on the same terms. There is no question in such a case that the actions of the both the buyer and the seller are wrongful. The only issue, therefore, will be proving the intent. Similarly, where the seller refuses to perform a valid contract without excuse, there is no question of the seller’s actions being wrongful. That wrongful action (unexcused failure to perform a valid contract) will likely entitle the broker to the commission under the procuring cause standard used in Oregon.
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The legal definition of procuring cause focuses on “cause.” Cause is about responsibility. What procuring cause fights are about is figuring out who is responsible for the buyer purchasing this house at this time. For there to be a fight about responsibility, you must have more than one person claiming they are responsible for the sale.
In the typical competing broker case, you have one agent who has in some way helped the buyer identify the property and another agent who helped them write the contract or assisted the buyer in performing the contract once written. Choosing between competing brokers requires a close examination of the entire course of events, from the time the buyer first learns of the property until they close the transaction. What this examination of events is aimed at is finding the actions that proved essential to the outcome.
The actions of an agent that are essential to a buyer closing a deal cannot simply be listed from showing to walkthrough inspection. Every deal is different. To decide procuring cause you have to find the point in time when the buyer decides this is the house they want to purchase. At that point, the buyer has been procured. Everything that comes after that decision is simply the buyer doing what has to be done to accomplish what the buyer has already decided to do. The agent who brings the buyer to the decision to purchase point is the procuring cause of the sale.
This way of looking at procuring cause is quite foreign to real estate agents. Real estate agents tend to think procuring cause is about the amount of work an agent does with a buyer or who represented the buyer or who worked with the buyer. It is not. Sellers do not pay agents to work with, assist or represent buyers. It just seems that way to the agent. What sellers pay for is the same thing they have always paid for: a buyer ready, willing and able to purchase on terms set by the seller. The amount of work involved for the buyer’s agent is completely irrelevant to the seller. The seller is paying the buyer’s agent to find the buyer and bring them to the place where they will do what is necessary to purchase the seller’s house.
Because procuring cause happens when the decision to purchase is first made, competing broker cases mostly split between showing and writing. One agent shows the property and another agent ends up writing the deal. There are, of course, thousands of variations. In the old days, local boards would sometimes try to resolve messy procuring cause fights by having “rules” like the “threshold rule” or the “he who writes” rule.
The “threshold rule” favored showing by siding with the agent who first gets the buyer to look at the property. The “he who writes” rule favored writing the contract by siding with the agent who actually got the buyer’s signature on the line. Such local rules are now banned by the National Association of REALTORS®. Banning rules, of course, doesn’t have any effect on the actual dispute between agents when one shows and the other writes. Showing and writing still remain important events that have to be considered in determining procuring cause.
Because showing will always play an important role in procuring cause, a common ploy is for the agent who is going to write a deal for a buyer who has been working with another agent to schedule and conduct another showing. However, if the buyer is committed to the purchase already due to the efforts of the other agent, the second showing will not change anything. If the buyer is not committed, because they don’t trust the other agent or that agent has abandoned them or some other legitimate reason that would explain why they are going to another agent, the second showing will still not change anything. The real question is why the buyer is not writing with the first agent, not whether the second agent showed the property.
Procuring cause ploys have developed at every stage of the transaction. For instance, there have been cases of agents convincing buyers involved in a dual representation transaction that they need “their own agent,” getting the buyer to sign an exclusive buyer service agreement and then claiming the selling side of the commission in a deal already written. That simply will not work under a procuring cause standard. Such cases point clearly at the difference between procuring cause and representation. The seller, through the listing agent, is not paying for buyer representation. The seller is paying for the buyer, not the buyer’s representation.
For REALTORS®, procuring cause fights are a matter for arbitration by a Professional Standards Panel of their local board. Procuring cause arbitration requires the Principal Broker’s permission. An agent considering bringing a procuring cause action should therefore start by bringing the matter to their principal broker. From there, filing is a matter of contacting the local board for an arbitration packet and following the procedures outlined in the packet. Larger boards have on-line filing programs that make filing a procuring cause claim fast and easy.
Procuring cause arbitration at the local board level is conducted under rules established by the National Association of REALTORS® (NAR). NAR publishes detailed “factors” for the use of arbitration panels in determining procuring cause. You can review these detailed factors online at: http://www.realtor.org/LetterLw.nsf/pages/95procuringcausefactors?OpenDocument.
It is not hard to see that determining between competing agents whose actions lead to a sale can be very difficult. That difficulty creates uncertainty when competing broker situations arise. It is for that reason that experienced agents watch for potential procuring cause situations and either avoid them (“no, I can’t write this for you”) or negotiate around the problem (“let me get this straightened out with the other agent before we write this”). Negotiating around potential procuring cause problems may, of course, not always be possible. In such cases, documenting the buyer’s reasons for not continuing with the other agent will be much more useful if there is later a procuring cause fight than re-showing the property.
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The Economics of Commission Sharing
Sharing commissions is one of the oldest practices in real estate. Real estate commissions have historically been paid only by sellers. Although other methods of payment exist in the industry today, commissions paid only by sellers continue to dominate. The seller pays tradition, and its continuance, are a consequence of a “sales” based approach to real estate services. If the industry continues to be more about client services than about sales, in the future you can expect tremendous changes in commissions and how they are shared.
Commissions are a transaction cost. No different than marketing costs, or taxes, repairs, insurance or any other transaction cost. Such costs are normally paid by the seller of goods. They are, of course, to the extent the market will bear, included in the price paid by the buyer. It is, therefore, no simple matter to allocate commission costs between buyer and seller in a transaction. About all that can be said is that the cost is assessed to the seller who will, to the extent possible, try to recapture those costs from the buyer.
This background understanding of commissions is critical to understanding commission sharing. Sellers hire brokers to market the property, find a buyer and help close the deal. How much a seller is willing to pay a broker for those services, all things being equal, depends on the market for such services. Supply, in the form of number of brokers providing services, and demand, in the form of sellers seeking service, will set the commission rate. It will not, however, determine the structure of the real estate service market.
Similar to other markets, the structure of the real estate service market will tend to be driven by efficiency. Efficiency is a way to lower costs and thus capture market share. As in any business, there are economies of scale. Sure, every market will have its niches where special abilities or circumstances create opportunities for small operators but, generally, size matters in markets.
Real estate used to be a “mom and pop” or “cottage” industry. “Mom and pop” industries are made up of many small operators. Small operators lose potential business simply because they do not have the resources or personnel to provide the services necessary to capture or sustain a larger market share. If you apply these economic ideas to the real estate industry, you will see that commission sharing is simply a mutual benefit program intended to increase total volume in a particular market.
Brokers offer to share the commission they earn from the seller with other brokers because they believe that at the end of the day they will make more money by sharing commissions than they would make if they serviced every potential client or customer themselves. For example, suppose an individual broker-owner can close twenty transactions a year by working alone. In the parlance of the industry, that is forty “sides.” If the market is such that by sharing half his commission the broker can get more than forty sides a year, then that broker will cooperate and share commissions. Modern franchise companies, who run “in-house” numbers well above fifty percent, are beginning to reassess commission sharing.
In the past, the “mom and pop” structure of the real estate services market was such that commission sharing was of huge economic benefit to almost every real estate service provider. The only problem with this kind of economic “bootstrapping” is the transaction costs associated with creating cooperation among many small brokers. Those costs include the cost of sharing the information necessary to make cooperation possible and the cost associated with negotiating commission-sharing agreements repeatedly among many different parties.
Cooperation transaction costs are managed in the real estate industry by creating multiple listing services (MLS). An MLS is nothing more than a vehicle to make possible cooperation and commission sharing among competing brokers. The fees paid by brokers to multiple listing services are a measure of the actual cost of cooperation. As long as the cost of MLS services does not exceed the total benefit the broker gains from cooperation, MLS services will remain central to the practice of real estate. Cooperation and commission sharing will last exactly as long as it continues to be true that the majority of real estate service market participants make more money sharing commissions than would not sharing commissions.
Many of the difficult issues in the real estate industry today revolve around the economics that have structured the existing market in real estate services. The rise of large franchise offices and the reduction of transaction costs made possible by modern communication and computer technology put tremendous pressure on the previous structure. It is hardly surprising that at the center of these pressures is the MLS. Every change in MLS operations and rules reflects real changes in the real estate services market. A wise participant in the market will consider these changes in the context of the basic economics of commission sharing.
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Typical Commission Sharing Issues
Commission Sharing Agreements
Commission sharing is central to the day to day practice of real estate in the existing real estate services market. Central to commission sharing are multiple listing services. That is the case because it is through the MLS that individual market participants share commissions. Commission sharing is a matter of contract. It has nothing to do with license status, who represented whom, procuring cause or anything else. Being the “procuring cause” is relevant only if you can point to a contract in which someone promises to pay you for being the procuring cause.
Listing brokers point to their listing agreement with the seller to establish the legal right to a commission upon procuring a buyer. A cooperating broker has no agreement with the seller. Typically, they have no agreement with the buyer. To collect a coop commission, the cooperating broker must be able to prove the existence of an agreement with the listing broker. No contract with the listing broker means no coop commission. This simple truth is often missed by agents.
The reason agents miss the importance of commission sharing agreements is that usually the agreement is handled automatically by the MLS. Every MLS has a provision in its membership rules that requires members to state as a sum certain the amount of money they will pay another MLS member in a coop transaction. This rule results in brokers who file a listing with the MLS making a unilateral offer of compensation to all other members of the MLS. The terms of that offer are stated in the MLS filing for the listing.
A unilateral offer is one that can be accepted only by performance. Most contracts, including contracts for the purchase and sale of real estate, are bilateral contracts. A bilateral contract is one in which the parties exchange promises for performance. I promise to pay you the listed price for your home if you promise to transfer title to me. That’s a bilateral offer. A unilateral offer contains only one promise. When it comes to commission sharing that promise is: I will pay you a specific percentage (or specific amount of money) if you procure a buyer for the listed property. A unilateral offer cannot be accepted by promising to find a buyer. Instead, the offer is accepted and becomes binding when the buyer is actually procured.
Although extremely efficient, there are a number of consequences to using unilateral offers through the MLS to create commission sharing agreements. The first is that the offer is only made to and enforceable by members of the MLS because the offer is made only to MLS members. For most of the history of real estate, this has not been a problem because real estate was broken up into many small isolated markets with little or no overlap. As market isolation has broken down, multiple listing services have consolidated to create larger cooperative real estate service markets.
Getting a signed written commission sharing agreement with the listing broker is always the safest way to proceed when operating outside your MLS. When it is not possible or practical in the circumstances to get a written agreement, entitlement to a coop commission can be evidenced by a confirming letter or e-mail. Before showing a listing not in your MLS, call the listing broker and discuss the coop commission. Always arrive at a specific percentage or dollar amount. Then, follow the telephone conversation with a letter or e-mail that memorializes the agreement you reached. Here is an example:
This is to follow up on our conversation today regarding your listing #____ at _________, [any street], [any city]. As we discussed and agreed, you will pay a coop commission of ____ % if my buyer purchases your listing. I look forward to working with you to complete a transaction that benefits both our clients. Please do not hesitate to call me if you have any questions or there is any change in the status of the listing.
If you end up writing and closing a deal on the property, your confirming letter will be sufficient to prevent any serious argument over the coop commission.
Determining the Split
Notwithstanding the contractual basis of coop commissions, battles over the amount owed a selling broker are everyday occurrences. Much of this fighting stems from not understanding the legal source of coop commissions. That source, as detailed in the section of this topic on Commission Sharing Agreements, is a contract. Because compensation agreements must state a sum certain to be enforceable, there should be no fighting about coop commission. That such fighting exists is evidence that the existing system is breaking down, being ignored or is simply not understood.
Because the coop commission is earned by performance of a unilateral contract that states a sum certain, there should be no opportunity to fight about the split. The split is whatever was offered, period. That is the case because the offer becomes binding on its maker at the moment the called for performance takes place. Assuming the deal closes, that moment is the acceptance of the buyer’s offer. Unless there is some other source of agreement or modification, determining the coop split simply requires looking at the MLS filing and reading the sum certain expressed there.
Notice the caveat: unless there is some other source or modification. Commission split fights invariably devolve into fights about the source of the commission offered, or some modification to that source. Common dispute patterns involve oral or implied sources of agreement or modification of the offered split being indeterminate. Oral or implied source or modification fights are, for the most part, evidence battles. Evidence battles are generally so difficult to win that without some sort of confirmation letter or other contemporaneous evidence of contract or modification; such fights are rarely won or even undertaken.
Implied contracts and implied modifications to existing contracts are no easier to prove than oral contracts. What must be implied is not some new split or new circumstance but an agreement to pay or change the existing split. You will sometimes see listing agents try to reduce the commission to the cooperating broker based on a seller price concession or give back to the buyer. Such changed circumstances do not, however, automatically change an existing coop agreement. To change an existing agreement like the unilateral offer of compensation made in the MLS, you must have evidence the other party agreed to the change, not just that you had good reasons for changing it.
A perceived source for changing the coop commission expressed in the MLS has been the buyer and seller’s sale agreement. Until very recently, sale forms used by REALTORS® in Oregon contained a provision at the very end of the document where agents could fill in the names of the listing and selling firms and state the coop commission. The provision was intended to provide information to escrow regarding commissions already agreed to separately.
Coming, as it did, after the signatures of the parties and having nothing to do with parties’ agreement itself, the provision was not a term of the sale agreement. At the same time, the provision itself contained no words of promise. The blanks were typically filled in by the selling agent, not the listing side who was offering the coop commission. Because it contained no promise to pay and was not even authored by the listing side, the coop provision was not an agreement to pay anyone anything.
Notwithstanding the informational purpose of the coop provision in the sale agreement, selling agents were often temped to fill in the coop commission they wanted or expected rather than the one published in the MLS. This practice, of course, produced nothing but disputes. As a result, the company that publishes the sale form used by REALTORS®in Oregon removed from the form the blanks for stating the coop commission.
The original escrow information function of the coop provision is now fulfilled by a provision directing escrow to the pay the commissions in accordance with the listing agreement, buyer service agreement or other written agreement for compensation.
The sale agreement shifts the coop focus back to the MLS unilateral offer of compensation or to separate coop commission agreements made outside of the contract. Incredibly, some brokers, evidently not understanding the source of coop commissions, have begun attaching “addendums” to their client’s offers purporting to establish their right to a coop commission. This approach is both ineffective and dangerous.
Commission addendums are ineffective because the coop commission comes from the listing broker, not the seller. The listing broker is not a party to the sale agreement and, therefore, not bound by its terms. At most (and this is what makes the approach dangerous) what is accomplished is confusion and controversy at the time of offer. An agent who, for their own purposes, creates confusion and controversy over their client’s offer, runs the risk of breaching their duty to their client. Click here for a detailed discussion of agency duties.
Because the use of addendums to dictate or change commission agreements between the agents is ineffective and dangerous, it has been suggested that the listing and selling brokers should sign and submit a commission form to escrow for each transaction. Although the idea has appeal, care must be taken to not create a commission re-negotiation vehicle. The purpose of making unilateral offers of compensation through the MLS, or having compensation agreements before showing the property or writing the deal, is to keep the deal from becoming hostage to commission negotiations. A separate escrow form that must be signed by both listing and selling side will quickly become the vehicle for just such conduct as either or both agents maneuver after the fact based on the existence and terms of their clients’ contract.
Maneuvering after the fact based on the existence and terms of the clients’ contract means trying to find a way around expressing compensation as a sum certain in the unilateral offer of compensation. A recent vehicle chosen by brokers who wish to avoid making a unilateral offer of compensation before they know the terms of the deal or the firm they will be dealing with is misuse of the MLS “variable commission” rule. Under MLS rules, a broker who agrees to a variable commission with their seller must designate the commission with a “V” to signal cooperating brokers that the commission the seller pays will be less if the sale is in-house.
Almost as soon as MLS rules were changed to require notice of a variable commission being paid by the seller, a few brokers began using the “V” to mean that the coop commission was variable. These few brokers evidently believed they had found a way to modify the coop commission based on the terms of the transaction, or the coop rate offered by the cooperating broker on their own listings or whatever criteria they might desire.
This flagrant misuse of MLS rules demonstrated a fundamental misunderstanding of cooperation and raised very serious antitrust issues. Click here for a detailed discussion of commissions and antitrust issues. Fortunately, the phenomenon has proved short lived because multiple listing services cracked down on the practice. Still, a wise agent will make inquiry if they see a “V” appended to the coop commission instead of just expressing the fact that the total commission paid by the seller may vary.
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Commissions and Antitrust
Antitrust laws are designed to promote business competition and prevent the creation of illegal monopolies. Antitrust laws are public protection laws but they are often used by business competitors and rivals as weapons. The operation of antitrust laws can be extremely complex. They are easy to violate and they are enforced by both state and federal agencies. Antitrust laws allow citizen lawsuits. The penalties are very stiff. REALTORS® need to understand enough about these laws to avoid walking into an antitrust action.
Antitrust laws are, for the most part, Federal laws. Chief among these Federal laws are the provisions of the Sherman Antitrust Act. Sherman Antitrust statutes prohibit any “contract, combination or conspiracy which unreasonably restrains trade or tends toward monopolization of a market; discriminates with an anti-competitive effect; or constitutes an unfair or deceptive trade practice.” Most states, including Oregon, have what are called “Little Sherman Acts.” These are state laws modeled after and enforced in the same way as the Federal laws.
A “contract,” for antitrust purposes, is any agreement with anyone. The agreement can be written or oral or implied. A “combination” is an agreement among separate entities to act as a single entity. A “conspiracy” is a combination for an illegal purpose. i.e., to restrain trade or create a monopoly or to discriminate or commit an unfair or deceptive trade practice.
A conspiracy to fix prices is the most common of antitrust violations. In real estate, that means a conspiracy to fix commissions. Price fixing is what the courts call a “Per Se” violation. That means there is no defense to having fixed prices. The court will not inquire into the reason prices were fixed or the effect of price fixing on the market. Price fixing is simply illegal.
Because price fixing is illegal without regard to intention or effect, REALTORS® must establish fees unilaterally without consultation or discussion with competitors. Commissions should never be discussed in a manner that would suggest the services are not independently priced. For instance, an agent questioned by a seller about their commission rate should never say: “Everyone charges that.”
Trade associations are called “walking conspiracies” by antitrust lawyers. A trade association is by definition made up of competitors. That creates an opportunity to conspire that just wouldn’t otherwise be there if there was no trade association. Given the ease with which competitors can conspire through a trade association, it is critical that certain subjects be avoided in Association meetings. Chief among these subjects is commissions.
As late as the 1960’s, local REALTOR® boards actually published a “board commission rate.” Board fixed commission rates ended when the Federal government started suing boards and winning. In its place, however, some brokers in some areas of the country started using board meetings or board facilities to “discuss” commission rates. This conduct resulted in a second round of Federal price-fixing suits. As a result, REALTORS® are, and should be, very paranoid about any discussion of commission rates.
Because commission rates are set individually, there is no “proper” or “traditional” or “expected” commission. As with any market, the market for real estate services will tend toward a market price. There will, however, be variations in that market. Discounts, promotions and price differences based on service differences are an ordinary part of any market. Commissions must always be viewed as a market phenomenon, not as what the industry charges or local brokers charge and never “what everyone charges.”
Price fixing is mostly an issue on the listing side. Historically, the price fixed was the commission charged to sellers by listing brokers. That is the case because coop commissions affect a much smaller, more integrated market and, therefore, show less variation. Because market participants are on both sides of the deal, there is little incentive to conspire to drive coop prices up or down. Instead, on the coop side the incentive is to engage in group boycotts.
A group boycott happens when two or more firms agree not to cooperate or to cooperate on less favorable terms with a third firm. Like price fixing, group boycotts are a “Per Se” violation of antitrust laws. Group boycotts involve ganging up on competitors to drive them out of the market.
One way to drive out newcomers is for existing market participants to have an agreement not to cooperate with newcomers or to cooperate on less favorable terms. Real estate has historically depended on cooperation among participants. Without cooperation in the form of commission sharing, small operators simply cannot compete. Click here for a discussion of the economics of commission sharing. It is for this reason that MLS rules make it difficult to refuse to cooperate with other members of the MLS or to cooperate with some members on less favorable terms.
Under MLS rules, a coop commission must be stated as a percentage of the sale price or as a sum certain. This is done so the MLS cannot be used as a vehicle for group boycotts. If everyone is offered the same coop rate before the listing broker knows who they will be cooperating with, there is no opportunity to refuse or to cooperate on less favorable terms. Any attempts by MLS members to misuse the “variable commission” rules to avoid having to make a uniform offer of compensation raises serious antitrust issues because of the group boycott potential they create. Click here for a detailed discussion of variable commissions.
Cooperative commissions have also become antitrust matters when brokers attempt to control cooperative rates by publishing their cooperation policies. For instance, brokers sometimes publish statements that say they will pay cooperating brokers only what the cooperating broker pays on their listings. Thus, if a cooperating broker pays 1.5% on his listings, they will receive the same 1.5% when they are the cooperating broker. A broker who pays 3% on their listing will receive 3% when cooperating. This manner of doing business depends on either misuse of MLS rules (typically by misuse of the “V”) or stating low coop rates in the MLS and then having side deals with other “favored” brokers to pay them more than listed in the MLS. These side deals are conspiracies in restraint of trade.
Unfortunately, the real estate industry has a long history of antitrust activity. Brokers and agents alike should carefully consider their actions and policies with respect to commissions in light of this historic fact.
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