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 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 Relationshipssection 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. Great turmoil in the industry has resulted. Click here for a detailed white paper on the subject.
Notwithstanding the turmoil 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 begun to talk about developing 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.
The distinction between agency duties and the scope of an agency is very poorly understood in the real estate industry. The industry has been slow to adopt industry-wide Standards of Practice. It has been equally slow to use private agreements to limit the scope of agency relationships with buyers. Things, however, are starting to change. Whatever the standards of practice or scope of agency changes coming, it will remain important to understand the agency duties the law imposes on all agency relationships whatever their scope.
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