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© 2011 Rockwell Publishing Lesson 7: Real Estate Agency Law Washington Real Estate Fundamentals.

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Presentation on theme: "© 2011 Rockwell Publishing Lesson 7: Real Estate Agency Law Washington Real Estate Fundamentals."— Presentation transcript:

1 © 2011 Rockwell Publishing Lesson 7: Real Estate Agency Law Washington Real Estate Fundamentals

2 © 2011 Rockwell Publishing Introduction to Agency Agency relationships Agency relationship: When one person authorizes another to represent her in dealings with third parties.

3 © 2011 Rockwell Publishing Agency Relationships Parties Principal: Person who authorizes another to represent her. Agent: Person authorized to represent principal. Third party: Person outside agency relationship who deals with principal through agent.

4 © 2011 Rockwell Publishing Agency Relationships In real estate transactions Real estate licensee acts as representative (agent) of seller or buyer (principal/client). In many transactions, each party has own agent: licensee who lists property is seller’s agent licensee who shows buyer properties is typically buyer’s agent

5 © 2011 Rockwell Publishing Agency Relationships In real estate transactions In Washington, real estate licensee can’t represent seller or buyer directly. Must be affiliated with real estate firm. Affiliated licensee acts as firm’s agent. Technically: firm is principal’s agent licensee is subagent Subagent: An agent of an agent.

6 © 2011 Rockwell Publishing Introduction to Agency Agency law Agency relationship has important legal implications for both parties. Dealing with agent is usually legal equivalent of dealing with principal. Example: agent’s authorized signature on contract is legally binding on principal Agent owes special duties to principal.

7 © 2011 Rockwell Publishing Agency Law General agency law General agency law: Body of law that governs agency relationships in most contexts. Examples: attorney and client, trustee and beneficiary Traditionally also governed relationship between real estate licensee and client.

8 © 2011 Rockwell Publishing Agency Law Washington statute In Washington, real estate agency is now governed by Real Estate Brokerage Relationships Act (1997). Statute is based on general agency law. But it made changes to address problems with agency in real estate transactions.

9 © 2011 Rockwell Publishing Agency Law Real estate exam Both general agency law and Washington statute are tested on state license exam. National portion includes questions about general agency law. State portion includes questions about: Real Estate Brokerage Relationships Act agency disclosure rules

10 © 2011 Rockwell Publishing Principal Agent Third party Subagent General agency law Real Estate Brokerage Relationships Act Summary Introduction to Agency

11 © 2011 Rockwell Publishing Creating an Agency Relationship Agency duties and liabilities arise automatically when relationship created. Under general agency law, agency relationship may be created by: express agreement ratification estoppel implication

12 © 2011 Rockwell Publishing Creating an Agency Relationship Express agreement Agency by express agreement: Principal appoints agent, agent accepts appointment. Most agency relationships created by express agreement. Examples: listing agreement buyer representation agreement power of attorney

13 © 2011 Rockwell Publishing Requirements for creating agency by express agreement: legally competent parties mutual consent purpose of agency must be lawful Not required: consideration written agreement Agency by Express Agreement Requirements

14 © 2011 Rockwell Publishing Agency relationship can be created by oral agreement. But real estate licensee can’t sue for compensation without written agreement. However, agency duties and liabilities arise even when no right to sue for compensation. Agency by Express Agreement Oral agreement

15 © 2011 Rockwell Publishing Agency by ratification: Principal gives approval, after the fact, to acts performed by: person with no authority to represent principal agent whose actions exceeded granted authority Principal may ratify actions expressly, or by accepting benefits of actions. Creating an Agency Relationship Ratification

16 © 2011 Rockwell Publishing Agency by estoppel: Created when it would be unfair to third party to deny there was an agency. Apparent agent acts on behalf of another without authorization. Other person (principal) allows third party to believe actions were authorized. Principal estopped from denying agency. Creating an Agency Relationship Estoppel

17 © 2011 Rockwell Publishing Agency by implication: When one person’s behavior misleads another into believing there is an agency relationship between them. Mistaken party believes other is acting as her agent. Other fails to correct misunderstanding. May be intentional or unintentional (inadvertent). Creating an Agency Relationship Implication

18 © 2011 Rockwell Publishing Agency by implication similar to agency by estoppel, except: In agency by estoppel, principal required to acknowledge agency to protect a third party. In agency by implication, agent required to acknowledge agency to protect principal. Creating an Agency Relationship Estoppel vs. implication

19 © 2011 Rockwell Publishing Agency relationship between seller and licensee created by written listing agreement. Under state law, agency relationship between buyer and licensee created when: licensee performs real estate brokerage services for buyer unless there is written agreement to the contrary (such as listing agreement with another party) Creating an Agency Relationship State statute

20 © 2011 Rockwell Publishing Agency by express agreement Agency by ratification Agency by estoppel Agency by implication State rules Summary Creating an Agency Relationship

21 © 2011 Rockwell Publishing Legal Effects of Agency General agency law includes rules regarding: Agent’s authority when agent’s actions are binding on principal Vicarious liability when principal is liable for agent’s mistakes or misconduct Imputed knowledge when principal is held to have information known by agent

22 © 2011 Rockwell Publishing Legal Effects of Agency Agent’s authority Extent to which principal can be bound by agent’s actions depends on scope of authority granted to agent. Principal is bound by acts within scope of agent’s authority. Principal not bound by acts that fall outside scope of agent’s authority.

23 © 2011 Rockwell Publishing Depending on scope of authority granted, agent may be classified as: universal agent general agent special agent Real estate agent is ordinarily special agent. Limited authority for single transaction. Not authorized to sign contract, deed. Agent’s Authority Types of agents

24 © 2011 Rockwell Publishing Principal bound: not just by actions within scope of agent’s actual authority but also by actions within scope of agent’s apparent authority Agent’s Authority Actual vs. apparent authority

25 © 2011 Rockwell Publishing Agent’s Authority Actual authority Actual authority: Authority granted to agent by principal, either expressly or by implication. Express actual authority: Authorization communicated to agent orally or in writing. Implied actual authority: Authorization to do what is necessary to carry out expressly authorized acts.

26 © 2011 Rockwell Publishing Apparent authority: Agent’s actions are unauthorized, but principal allows third parties to think they are authorized. Apparent agent (also called ostensible agent): may have no authority to act may be exceeding actual authority Agent’s Authority Apparent authority

27 © 2011 Rockwell Publishing Apparent authority corresponds to agency created by estoppel, discussed earlier. To be bound, principal must have: known about agent’s actions failed to deny they were authorized Third party should make reasonable effort to determine scope of agent’s authority. Agent’s Authority Apparent authority

28 © 2011 Rockwell Publishing Legal Effects of Agency Tort liability Tort: Negligent or intentional wrongful act that results in injury or financial harm to another. Breach of a duty imposed by law, rather voluntarily taken on by contract. Person who commits a tort may be sued by injured party. If held liable (legally responsible), required to compensate injured party.

29 © 2011 Rockwell Publishing Vicarious liability: Under general agency law, principal liable for agent’s torts as if he had committed them himself. Injured party sues principal and agent. Principal and agent jointly responsible for paying judgment awarded to plaintiff. Innocent principal can in turn sue agent. Tort Liability Vicarious liability

30 © 2011 Rockwell Publishing Washington’s real estate agency law eliminates vicarious liability in most situations. Generally, seller or buyer not liable for her agent’s torts. Injured party may sue only agent, not principal, for agent’s torts. Tort Liability In real estate context

31 © 2011 Rockwell Publishing Under real estate agency law, vicarious liability still applies in two situations: Principal participated in or authorized agent’s actions. Principal benefited from agent’s conduct and injured party probably couldn’t collect judgment from agent. Tort Liability In real estate context

32 © 2011 Rockwell Publishing Legal Effects of Agency Notice of information Imputed knowledge rule: Under general agency law, principal is held to have notice of information in agent’s possession. Agent’s knowledge is automatically imputed to principal. Even if agent never actually tells principal.

33 © 2011 Rockwell Publishing Notice of Information Imputed knowledge rule Because of imputed knowledge rule: Principal has notice of information a third party told agent, even if agent never told principal. Principal may be liable for failing to disclose problem to a third party, even if agent never informed principal about the problem.

34 © 2011 Rockwell Publishing Notice of Information In real estate context Under Washington’s real estate agency law, imputed knowledge rule no longer applies to real estate transactions. Seller or buyer not automatically considered to have knowledge of facts known by his real estate agent.

35 © 2011 Rockwell Publishing Summary Legal Effects of Agency Actual authority Apparent authority Ostensible agent Tort Vicarious liability Imputed knowledge

36 © 2011 Rockwell Publishing Duties in an Agency Relationship Agency is a fiduciary relationship. Fiduciary: One who acts for benefit of another in relationship founded on trust and confidence. Law holds fiduciaries to high standards of conduct. Agent is fiduciary in relation to principal. Owes principal fiduciary duties.

37 © 2011 Rockwell Publishing Duties in an Agency Relationship Traditionally, real estate agent’s fiduciary duties to principal were expansive. In contrast, duties to third parties were limited. Only a duty of honesty and fair dealing.

38 © 2011 Rockwell Publishing Duties in an Agency Relationship Under Washington real estate agency law: agent still has greater responsibility to her principal but protection for third parties expanded Duties under this law fall into two categories: duties licensee owes to all parties additional duties licensee owes only to principal

39 © 2011 Rockwell Publishing Duties to All Parties Reasonable skill and care Honesty and good faith Presenting all written communications Disclosing material facts Accounting Providing agency law pamphlet Making agency disclosure

40 © 2011 Rockwell Publishing Duties to All Parties Reasonable skill and care Real estate licensee held to standard of skill and care a competent licensee would use. If licensee’s carelessness or incompetence harms a party, licensee may be liable.

41 © 2011 Rockwell Publishing Duties to All Parties Honesty and good faith Licensee must avoid making inaccurate or misleading statements. Even unintentional misrepresentations may constitute fraud. Injured party may rescind purchase agreement or sue for damages. However, generally can’t be sued based on opinions, predictions, or “puffing.”

42 © 2011 Rockwell Publishing Duties to All Parties Present written communications Licensee must transmit written communications from one party to the other in timely manner. All written offers must be submitted, even if: property or buyer already subject to a contract offer seems unacceptable

43 © 2011 Rockwell Publishing Duties to All Parties Disclosure of material facts Fact is “material” if it: has substantial adverse effect on property’s value affects a party’s ability to perform contractual obligations defeats purpose of transaction

44 © 2011 Rockwell Publishing Disclosure of Material Facts Latent defects Latent defect: Problem with property that buyer wouldn’t discover through ordinary inspection. Known latent defects must be disclosed: by licensee to all parties by seller to buyers Even if buyers don’t ask. Even if property for sale “as is.”

45 © 2011 Rockwell Publishing Disclosure of Material Facts Limits on agent’s duty Agent not required to investigate: condition of property financial condition of parties statements made by parties (Unless agent agrees to the contrary.)

46 © 2011 Rockwell Publishing Disclosure of Material Facts Seller disclosure statement Washington law requires residential seller to give buyer property disclosure statement. Discloses seller’s knowledge regarding: title and encumbrances utilities condition of buildings other aspects of property

47 © 2011 Rockwell Publishing Disclosure of Material Facts Stigmatized properties Information that could stigmatize property generally need not be disclosed: violent crime suicide or other death drug or gang activity political or religious activity presence of sex offender in area Exception: affects property’s condition or title.

48 © 2011 Rockwell Publishing Duties to All Parties Accounting Licensee must: keep trust funds in firm’s trust account, separate from other funds provide periodic reports on status of trust funds to owner of funds

49 © 2011 Rockwell Publishing Duties to All Parties Real estate agency law pamphlet Licensee must give pamphlet to each party she renders services to before that party: signs agency agreement with licensee signs offer consents to dual agency waives rights granted by real estate agency law

50 © 2011 Rockwell Publishing Duties to All Parties Agency disclosure Before buyer or seller signs offer, licensee must disclose in writing whether he represents: buyer seller both neither (Requirement covered in more detail later.)

51 © 2011 Rockwell Publishing Summary Duties to All Parties Reasonable skill and care Honesty and good faith Presenting all written communications Disclosure of material facts Accounting Agency law pamphlet Agency disclosure

52 © 2011 Rockwell Publishing Duties in an Agency Relationship Duties to principal Licensee owes principal the duties owed to all parties, plus these additional duties: loyalty disclosure of conflicts of interest confidentiality recommending expert advice good faith and continuous effort

53 © 2011 Rockwell Publishing Duties to Principal Loyalty Agent must place principal’s interests: above those of third party above his own interests May not take any action adverse to principal’s interests.

54 © 2011 Rockwell Publishing Duties to Principal Loyalty Agent may not collect secret profits. Secret profit: Financial benefit agent receives from agency without principal’s consent.

55 © 2011 Rockwell Publishing Duties to Principal Disclose conflicts of interest Conflict of interest: Agent has personal interest in transaction that might conflict with principal’s best interests. Agent faced with conflict of interest: isn’t required to withdraw from agency but must disclose conflict to principal

56 © 2011 Rockwell Publishing Duties to Principal Disclose conflicts of interest Examples of conflicts that must be disclosed: agent has personal relationship with third party agent is also representing other party (dual agency) agent has or will acquire interest in property

57 © 2011 Rockwell Publishing Duties to Principal Disclose conflicts of interest Self-dealing: Agent lists property for less than true value, buys it through intermediary, and immediately resells it at a profit. Not unethical for agent to buy client’s property, but must disclose: property’s true value intention of making a profit

58 © 2011 Rockwell Publishing Duties to Principal Confidentiality Agent may not disclose principal’s confidential information. Exception: when legally required to do so. Confidential information must be protected even after agency relationship ends.

59 © 2011 Rockwell Publishing Duties to Principal Confidentiality Information confidential if: 1.acquired by licensee during agency 2.principal reasonably expects confidentiality 3.principal has not disclosed it to third parties or authorized disclosure 4.disclosure would harm principal, and 5.principal not obligated to disclose it

60 © 2011 Rockwell Publishing Duties to Principal Confidentiality Agent does not owe duty of confidentiality to third parties. If buyer gives information to seller’s agent, agent must disclose it to seller. If seller gives information to buyer’s agent, agent must disclose it to buyer.

61 © 2011 Rockwell Publishing Duties to Principal Expert advice Agent must advise principal to seek expert advice on matters beyond agent’s expertise. Questions with legal implications should be referred to a lawyer.

62 © 2011 Rockwell Publishing Duties to Principal Good faith and continuous effort Agent owes principal duty of diligent representation. Must make good faith and continuous effort to find buyer, or to find suitable property.

63 Breach of Duty Tort liability If agent breaches a duty, one possible consequence is tort liability. Tort is a negligent or intentional act that breaches a duty imposed by law. Injured party can sue agent. If injured party wins lawsuit, agent ordered to pay compensatory damages. © 2011 Rockwell Publishing

64 Breach of Duty Disciplinary action Licensee’s breach of duty is often also a violation of license law. Dept. of Licensing may take disciplinary action even if injured party does not sue. Punishment may include: license suspension or revocation fine

65 © 2011 Rockwell Publishing Summary Duties to Principal Loyalty Confidentiality Conflict of interest Expert advice Good faith effort Breach of duty

66 © 2011 Rockwell Publishing Terminating an Agency Under general agency law, agency relationships may be terminated: by acts of the parties by operation of law

67 © 2011 Rockwell Publishing Terminating an Agency Termination by acts of parties Mutual agreement Revocation by the principal Renunciation by the agent

68 Termination by Acts of Parties Mutual agreement Principal and agent may mutually terminate agency relationship at any time. Termination should be put in writing, especially if agency was created by written agreement. © 2011 Rockwell Publishing

69 Termination by Acts of Parties Principal revokes Principal may revoke agency at any time. But if agency contract in effect, revocation of agency may breach the contract. Principal may be liable for damages. In real estate context, usually must pay agent’s commission. © 2011 Rockwell Publishing

70 Principal Revokes Agency coupled with an interest Exception: Principal can’t revoke agency coupled with an interest. Agency coupled with an interest: When an agent has a financial stake or other interest in the property (the subject matter of the agency).

71 Termination by Action of Parties Agent renounces Agent may renounce the agency at any time. But if agency contract in effect, renunciation may breach the contract. Agent may be liable to principal for damages. © 2011 Rockwell Publishing

72 Terminating an Agency Termination by operation of law Agency may terminate by operation of law through: expiration of term fulfillment of agency’s purpose death, incompetence, or bankruptcy of either party extinction of subject matter

73 © 2011 Rockwell Publishing Termination by Operation of Law Expiration of term Agency ends automatically when termination date in agency agreement is reached. If no termination date, agency expires after a reasonable time, as determined by a court.

74 © 2011 Rockwell Publishing Termination by Operation of Law Purpose fulfilled Agency terminates when its purpose has been fulfilled. In real estate context, this most commonly happens when transaction closes.

75 © 2011 Rockwell Publishing Termination by Operation of Law Death, incompetence, bankruptcy Agency terminates if either principal or agent: dies becomes mentally incompetent enters bankruptcy

76 © 2011 Rockwell Publishing Termination by Operation of Law Subject matter extinguished If the property that is the subject of the agency is extinguished, the agency ends. This can occur if the property is destroyed, for example.

77 © 2011 Rockwell Publishing Terminating an Agency Under state real estate statute Under Washington’s statute, real estate agency continues until one of four things occurs: licensee completes performance agency term expires parties terminate by mutual consent either party notifies the other that the agency is terminated

78 © 2011 Rockwell Publishing Termination under State Law Duties after agency ends Under the state statute, agent owes principal two duties after relationship ends: agent must account for money and property received during relationship agent must not disclose principal’s confidential information

79 Summary Terminating an Agency Mutual agreement Revocation Agency coupled with an interest Renunciation Expiration Fulfillment of purpose Death, incapacity, or bankruptcy Extinction of subject matter Real estate statute © 2011 Rockwell Publishing

80 Real Estate Agency Relationships Basic terminology in a real estate transaction: real estate agent client customer listing agent selling agent cooperating agent

81 © 2011 Rockwell Publishing Real Estate Agency Relationships Historical background Until mid-1990s, listing agreements had unilateral offer of subagency provision. Made any cooperating agent from MLS a subagent of listing firm’s principal. So all agents represented seller. But many buyers thought selling agent represented them. This created inadvertent dual agency.

82 © 2011 Rockwell Publishing Real Estate Agency Relationships Historical background In 1990s, unilateral offer of subagency replaced with cooperation and compensation provision. Allowed cooperating agents to choose whether they represented buyer or seller. But most selling agents still represented seller, and confusion continued.

83 © 2011 Rockwell Publishing Real Estate Agency Relationships Historical background Real Estate Brokerage Relationships Act: Washington statute passed in 1997 to address this confusion. Licensee who works with buyer is presumed to represent buyer unless there is written agreement to the contrary (such as listing agreement).

84 © 2011 Rockwell Publishing Real Estate Agency Relationships Types of agency relationships Under Washington statute, four types of agency relationships in real estate transactions: seller agency buyer agency dual agency non-agency

85 © 2011 Rockwell Publishing Types of Agency Relationships Seller agency Seller agency ordinarily created through written listing agreement. Listing broker, designated broker, and firm become seller’s agent. Broker is technically agent of firm and designated broker, and subagent of seller.

86 © 2011 Rockwell Publishing Seller Agency Role of seller’s agent Seller’s agent’s role is to: market property to best advantage find a buyer negotiate sale on most favorable terms possible

87 © 2011 Rockwell Publishing Seller Agency Assisting buyers Seller’s agent may perform certain services for buyers who don’t have their own agent, such as: filling out a purchase offer form helping buyer apply for financing Helps advance seller’s goal of selling the property, and therefore does not violate duty of loyalty.

88 © 2011 Rockwell Publishing Seller Agency Avoiding inadvertent dual agency Licensee who shows buyer one of her own listings must make sure buyer understands licensee is acting as seller’s agent.

89 © 2011 Rockwell Publishing Types of Agency Relationships Buyer agency Under the Washington statute, buyer agency created automatically when licensee begins providing brokerage services to a buyer. (Though again, this rule doesn’t apply if agent is already representing another party by written agreement.)

90 © 2011 Rockwell Publishing Buyer Agency Advantages for buyer Primary advantage: agent owes buyer fiduciary duties (confidentiality, loyalty, etc.). Other advantages: objective advice on properties help with negotiating access to more homes (such as FSBOs and foreclosures)

91 © 2011 Rockwell Publishing Buyer Agency Buyer agency agreement Buyer and agent usually enter into written buyer representation agreement that states: term of agency characteristics of property buyer wants price range conditions necessary to earn fee who will pay the fee agent’s contractual duties

92 © 2011 Rockwell Publishing Buyer Agency Compensation Buyer’s agent’s compensation may be: retainer seller-paid fee (commission split) buyer-paid fee (hourly rate, percentage of price, or flat fee) By law, agency representation not determined by which party pays agent’s fee.

93 © 2011 Rockwell Publishing Types of Agency Relationships Dual agency Dual agency: When agent represents and owes agency duties to both buyer and seller in same transaction. Legal if both parties consent. Agent’s compensation must be disclosed before consent given. Consent must be in writing and signed.

94 © 2011 Rockwell Publishing Dual Agency Impartiality Conflict of interest inherent in dual agency. Duty of loyalty does not fully apply. Dual agent must refrain from acting in any way that will harm either party. Must not reveal one party’s confidential information to the other. Must not reveal negotiating positions. Must be impartial.

95 © 2011 Rockwell Publishing Dual Agency In-house transactions Dual agency now most common in in-house transactions. In-house transaction: Seller’s agent and buyer’s agent both work for same firm. Each affiliated licensee represents only his party. Firm and designated broker are dual agents.

96 © 2011 Rockwell Publishing Types of Agency Relationships Non-agency Real estate licensee may choose to act as a non-agent in a transaction. Non-agent acts only as a facilitator. Does not owe fiduciary duties (the ones owed to a principal) to either party. Non-agent still owes both parties same duties agents owe to all parties.

97 © 2011 Rockwell Publishing Agency Disclosure Requirements In Washington, agent must give anyone she renders services to: 1.Agency disclosure pamphlet. 2.Disclosure of which party or parties she’s representing in this transaction. Made to each party before he or she signs offer to purchase. In writing and initialed or signed by parties.

98 Summary Real Estate Agency Relationships Unilateral offer of subagency Inadvertent dual agency Seller agency Buyer agency Dual agency In-house transaction Non-agency Agency disclosure requirements © 2011 Rockwell Publishing

99 Designated Broker and Broker Employee or independent contractor For certain purposes, real estate licensee may be classified either as: firm’s employee, or independent contractor Some employment and tax laws apply only to employees, not to independent contractors.

100 © 2011 Rockwell Publishing Employee or Contractor General criteria Employee usually: works on schedule set by employer is paid hourly wage or salary is closely supervised and controlled Independent contractor usually: sets own schedule is paid by job or on commission basis uses own judgment in performing tasks

101 © 2011 Rockwell Publishing Employee or Contractor Licensees are usually contractors Real estate firm/designated broker is independent contractor in relation to seller or buyer. Affiliated licensees working for real estate firm are usually independent contractors in relation to firm.

102 © 2011 Rockwell Publishing Employee or Contractor Effect of classification Because affiliated licensee is independent contractor: Money not withheld from compensation for federal income tax, social security. These are licensee’s responsibility. No unemployment compensation. But firm must have workers’ compensation coverage, even for independent contractors.

103 © 2011 Rockwell Publishing Employee or Contractor IRS rules Internal Revenue Service has two requirements for classifying real estate licensee as independent contractor: Substantially all compensation must be based on commission, not hours worked. Licensee works under a written contract stating she will not be treated as employee for federal tax purposes.

104 © 2011 Rockwell Publishing Designated Broker and Broker Supervision Even when affiliated licensee is independent contractor, license law makes firm’s designated broker responsible for supervising licensee’s actions.

105 Summary Designated Broker and Broker Employee Independent contractor IRS requirements Tax withholding Unemployment compensation Workers’ compensation Supervision © 2011 Rockwell Publishing


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