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 poorly 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 dysfunction and paranoia in the industry. One place this dysfunction and paranoia 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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