1. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Learning Objectives  Define the basic concepts of agency  Define three types of agency  Define the employment authority of real estate agents  Describe agency and subagency relationships in real estate contract  Define duties and liability of principals and real estate agents  Describe examples of willful misrepresentation and negligent misrepresentation

2. Laws and Regulations Governing Brokerage Relationships General Agency Concepts and Definitions  Agency: A legal relationship that considers firms, agents, subagents, and principals as the same legal entity  Agent: One authorized by another to act on the latter’s behalf  Principal: One who appoints agent to represent him or her  Subagent: Any licensee or firm working through the agent; thus owing the same duties and responsibilities to the principal  Fiduciary relationship: A relationship of trust between the agent and principal Agent becomes trustee of principal  Disclosure of agency relationships in real estate MUST be in writing © OnCourse Learning. All Rights Reserved.

3. Laws and Regulations Governing Brokerage Relationships Classification of Agency Relationships  Universal agency: Authority to handle all areas of business for a principal Typically requires a Power of Attorney  General agency: Authority to handle all aspects of a particular area of a principal’s dealings  Special agency: Limited to one well defined task The agent is not authorized to make decisions on the part of the principal but only to stand in the principal’s place to receive information and to bring this information to the principal for a decision. Ex: Most real estate agency relationships © OnCourse Learning. All Rights Reserved.

4. Laws and Regulations Governing Brokerage Relationships Creation of Agency Relationships  Relationships Between Transactions Parties: Created by contractual agreement between the firm and the principal Example: Listing agreement. Firm is the agent; seller is the principal  Relationships Between Brokers/Firms: In-house brokerage employment agreement between firm and agent Co-brokerage agreements between listing and selling firm

5. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Creation of Agency Relationships  Implied agency: The actions of the principal and agent indicate that they have an agency agreement Duties and responsibilities created by an implied agency are the same as those created by an express agency Unacceptable in real estate because North Carolina Real Estate Commission rules require all agency agreements to be in writing Review of the “Working with Real Estate Agents” pamphlet at first substantial contact is mandatory

6. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Creation of Agency Relationships  Estoppel: An individual claims incorrectly that a person is his/her agent A third party relies on the incorrect representation Individual is prohibited (stopped, estopped) from later claiming the agency relationship does not exist Individual will be liable for the actions of the incorrectly claimed agent  Scope of agent’s authority: Expressed Agent’s authority is limited to a single charge

7. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Creation of Agency Relationships  Scope of agent’s authority: Expressed: Authorized to do specifically what the agency agreement states Implied: Based upon custom and may be the result of an expressed agreement Example: Agents lists a foreclosure property for the bank. Bank’s agreement says agent is to maintain the property. Agent is authorized to do what is reasonable and customary to maintain the property. Apparent: Based on appearances to a third party that an agent has certain authority when in fact the agent does not possess such authority

8. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Creation of Agency Relationships  Agency & agent compensation: Agency relationships are not determined by the source of the agent’s compensation Agency is defined by contract Agents owe a fiduciary duty to their principal, regardless of the source of compensation

9. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  Single Agency: Limited to being able to represent only one of the parties in a transaction Primary advantage is that of reduced risk Major disadvantage is the limitation of being able to only represent one party

10. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  Exclusive Seller Agency: Listing with an independent broker: This is the clearest of the agency relationships The independent broker has a one-on-one relationship with his/her seller Listing with a multi-agent firm Agency agreements are between the principal and the brokerage firm: Individual brokers become subagents of the principal through the firm Communication to any subagent is considered the same as communication to the principal Sub-Agency: Individual brokers become subagents of the principal through the firm Communication to any subagent is considered the same as communication to the principal

11. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  Cooperating with Other Brokers: Listing firm and agents are sub-agents of the seller Listing firm and agents work with-not for- the buyer  Cooperating Firm Acting as Seller Agent: The listing and selling brokers work exclusively for the seller Buyer should acknowledge he has been informed the agent is working for the seller  Exclusive Buyer Agency: The buyer is the broker’s principal (client) Agency relationship is between the buyer and the broker  Buyer as Principal: All agents are working for the seller

12. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  Both Seller and Buyer Agency with Dual Agency for In-house Sales: Listing firm will also represent the buyer interested in that listing Dual agency cannot be entered without being disclosed and “informed consent” being obtained in writing  Agency Relationship and Real Estate Rentals: In property management the landlord is the agent’s principal A prospective tenant may hire a broker to find a property. The tenant would be the broker’s principal  Agency’s Effect on Communication Requirements for Contracts: The buyer is the broker’s principal (client) Agency relationship is between the buyer and the broker

13. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  Agency’s Effect on Communication Requirements for Contracts: Agency status is an important determinant on when communication of acceptance, rejection, or withdrawal of an offer occurs Acceptance, rejection, or withdrawal of an offer requires communication to the offerer, and/or his agent to be effective Communication can be by any reasonable means  Agency’s Effect on Disclosure of Material Fact: An agent must disclose all material facts he/she knows or reasonably should have known, regardless of who he/she represents Agent must disclose personal information about a third party to the principal

14. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  Termination of Agency: Agency relationships end in accordance with terms of agency contract Agency contracts must have definite expiration date Can be terminated by agent or principal breach of duties  Disclosure of Agency Relationships: Must be in writing Must be for a definite period of time Must contain pre-defined (by NCREC) non-discrimination clause Agent is required to review Commission’s Working With Real Estate Agents brochure with potential client’s by first substantial contact

15. Laws and Regulations Governing Brokerage Relationships Agency and Sub-Agency Relationships  First Substantial Contact: Flexible point in time in which the seller/buyer would start to disclose any personal (confidential) information they would not want a third party to know Open House Rule: First substantial contact would only occur when a prospect shows sincere interest in a property as opposed to “looking” If first substantial contact is by telephone or other electronic communication the agent immediately disclose who they represent and send copy of Working With Real Estate Agents brochure within 3 days  First Contact vs. First Substantial Contact: First contact always occurs at first contact First substantial contact may not occur at first contact © OnCourse Learning. All Rights Reserved.

16. Laws and Regulations Governing Brokerage Relationships Duties and Liabilities of Agents  Agents Duties to Principals: Broker is in a fiduciary (trust) relationship to the principal  Loyalty: Broker must work diligently to serve the best interests of the principal The broker cannot work for any adverse interests to the principal without disclosure and principal’s consent Requires the agent puts the client’s interests above their own  Obedience: The broker is to obey all reasonable and legal instruction from his principal  Skill, Care, Diligence: Broker is expected to perform with a degree of skill, care, and diligence common to other reasonable prudent professionals in a similar undertaking Failure to exercise skill, care, and diligence is a breach of agency law and grounds for disciplinary action

17. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Duties and Liabilities of Agents  Disclosure of Information: Broker must disclose all information material to the transaction Brokers must not disclose certain information to third parties Brokers will be liable for misrepresentation  Accounting: Broker must account for and promptly remit, as required, all money or property entrusted to the broker for the benefit of others Brokers are required to adequate and accurate records Monies must be kept in a separate “trust” account or “escrow” account

18. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Duties and Liabilities of Agents  Agent’s Duties to Principal Under Real Estate License Law and Commission Rules: Addressed in Licensing Law and Rules and Regulations in Appendix C  Agent’s Duties to Third Parties: Agent owes third party honesty and disclosure of material facts

19. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Material Facts  Facts About the Property Itself (Defects)  Facts Relating Directly to the Property (Surrounding Influences  Facts Relating Directly to the Ability of the Agent’s Principal to Conclude the Transaction  Facts Known to be of Specific Important to a Particular Party  Third Party Personal Information That Must be Disclosed to Agent’s Principal: Willingness to agree to terms other than those stated previously Motivation Information that might influence the principal’s decision in a transaction

20. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Material Facts  Misrepresentation: False or incorrect information Willful Misrepresentation: Stated intentionally or without regard to actual facts Negligent Misrepresentation: Unintentional Had the agent utilized reasonable skill, care, and diligence the misrepresentation would not have occurred Agent “reasonably should have known”

21. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Material Facts  Omission: Failure to disclose information Willful omission: Deliberate failure to disclose material facts known to agent Negligent omission: Unintentional failure to disclose material facts the agent “reasonably should have known”

22. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Other Laws Governing the Disclosure of Information in Real Estate Transactions  Stigmatized/Psychologically Impacted Properties: Serious illness, or death, of a previous occupant AIDS - considered a handicap by federal law and not to be disclosed Registered sex offender  Consumer Legislation: North Carolina Unfair and Deceptive Trade Practices Acts prohibits the use of unfair or deceptive practices in commerce North Carolina allows treble damages for violations  Seller’s and Buyer’s Responsibilities Under Common Law: North Carolina Unfair and Deceptive Trade Practices Acts prohibits the use of unfair or deceptive practices in commerce North Carolina allows treble damages for violations

23. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Other Laws Governing the Disclosure of Information in Real Estate Transactions  Seller’s and Buyer’s Responsibilities Under Common Law: Caveat Emptor (let the buyer beware) – Seller has no obligation to buyer beyond avoiding fraudulent acts Broker must disclose even if seller has no obligation to do so  North Carolina Residential Property Disclosure Act: Applies to most residential transfers (including owners selling own property) Some exemptions from this act Because of Caveat Emptor seller may select the box “No Representation” and seller is relieved of obligation to disclose even if he knew of condition Statement must be provided to buyer no later than the first Offer to Purchase If form not provided buyer has right to cancel within three days

24. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Other Laws Governing the Disclosure of Information in Real Estate Transactions  “As Is” Sale: Does not relieve agent of responsibility to reveal material facts including defects  Lead-Based Paint Disclosure: Applies to properties built prior to 1978 Buyers/lessees must be provided EPA pamphlet Protect Your Family From Lead In Your Home

25. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Other Laws Governing the Disclosure of Information in Real Estate Transactions  Synthetic Stucco Disclosure: NCREC considers existence of synthetic stucco to be a material fact Brokers must disclose even if property formerly covered in synthetic stucco  Liabilities and Consequences of Agent’s Breach of Duties: Disciplinary action by NCREC Civil liability of agent Criminal liability of agent Civil liability of principal (for agent’s misconduct)

26. © OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Dual Agency  Dual Agency Basics: Exists when a firm attempts to represent both the seller and the buyer in the same transaction It does NOT exist when the listing firm is working with a buyer that it does not represent since it does not have written or oral buyer agency agreement  Inherent Potential Conflicts of Interest  Unintentional, Undisclosed Dual Agency: Agents are prohibited from “acting for more than one party in a transaction without the knowledge of all parties for whom he or she acts” Often occurs when agent has written authority to represent one party but acts in such manner to benefit the other party without the principal’s knowledge or consent

27. Laws and Regulations Governing Brokerage Relationships Dual Agency  Intentional, Disclosed Dual Agency/How To Handle in North Carolina: Must be disclosed in advance and have written and “informed” consent of each party The firm shall not disclose personal information about one party to the other party without consent Must be disclosed to the other party at first contact  Designated Agency: Type of Dual Agency Limited to in-house transactions where one individual agent is designated to represent the interests of the seller and the other agent to represent the buyer Agent is not allowed to practice designated agency where the agent has obtained personal or confidential information about the other party prior to becoming designated BIC is not allowed to engage in designated agency with provisional broker under his supervision © OnCourse Learning. All Rights Reserved.

28. Laws and Regulations Governing Brokerage Relationships Duties and Liabilities of Principals  Principals Duties to Agents: Must generally cooperate with the agent Compensation  Principals Duties to Third Parties: Caveat Emptor Seller has no responsibility for disclosure of defects that should have been discovered during inspection Seller has duty not to conceal defects where a reasonable inspection would not disclose  Liabilities and Consequences of Principal’s Breach of Duties: Civil liability Criminal liability Liability to the agent for withholding or giving false information © OnCourse Learning. All Rights Reserved.