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A relationship created when one person, the principal, delegates to another, the agent, the right to act on his or her behalf in business transactions and to exercise some degree of discretion while so acting. An agency gives rise to a fiduciary or statutory relationship and imposes on the agent, as the representative of the principal, certain duties, obligations, and high standards of good faith and loyalty.

A vast body of common and statutory law controls the rights and duties of principal and agent. In addition to this general law of agency, which applies to all business transactions, state real estate licensing laws directly affect the agency relationship among real estate licensees, their clients, and the public. Even though agency law is separate from contract law, the two frequently come together in interpreting relationships between real estate agents and their principals.

Note that the payment of consideration need not be involved in an agency relationship. One may gratuitously undertake to act as an agent and will be held to the standards of agency upon assumption of those duties.
An agency may be a general agency, as when a principal gives a property manager the power to manage a real estate project on behalf of the principal on a continuing basis, or it may be a special agency, such as the standard listing contract wherein the broker is employed only to find a ready, willing, and able buyer and is neither authorized to sell the property nor to bind his or her principal to any contract for the sale of the property.

The creation of the agency relationship may be implied from the acts of the parties and does not depend on the existence of a written contract. A licensee often represents the buyer in a transaction without having any written agreement. Once the agency relationship is created, certain rights and obligations attach to it, making the broker liable for any breaches of duty.

In the typical real estate transaction, the broker who represents the seller is called the listing agent (which includes the associate licensees working for the broker); the broker who works with the buyer is called the selling agent (or cooperating broker) and is either the agent of the buyer or less likely, the subagent of the seller. In some cases the listing agent is the only broker involved. If the broker also represents the buyer, then the broker may become a dual agent or limited agent. In some states, this relationship defaults to transaction brokerage.
The real estate licensee is generally subject to two distinct areas of liability for breach of fiduciary duties to his or her principal: (1) The principal can bring civil action against the licensee-agent for money damages. (2) The state licensing authority can bring disciplinary proceedings for violation of its regulations. The state is very protective of the consumer in this area, for the principal is legally bound to the acts and representations of the agent done within the scope of authority.

Under common-law principles, the agent owes the principal personal performance, loyalty, obedience, disclosure of material facts (such as a proposed new school, highway relocation, or new zoning ordinance that would tend to increase the property value over the agreed-on listing price), reasonable care not to exceed the authority granted to the agent or not to misrepresent material facts to the principal or to third parties, proper accounting of all monies, and placement of the principal’s interests above those of the persons dealing with the principal. Note that an agent has expanded authority in an emergency, including the right to disobey instructions when it is clearly in the best interests of the principal to do so.

Without the principal’s authorization, an agent cannot disclose to a third party confidential information or information that hurts the principal’s bargaining position. For example, the fact that the seller is forced to sell due to a loss of job, poor health, or a pending divorce, or that the seller will actually accept less than the listing price cannot be disclosed without authorization.
In most states, confidential information learned during the course of the agency cannot be used at a later date against the principal, even after the transaction is closed. This includes financial information used in negotiations involving subsequently listed properties.

Agents are required by law to provide their principals with all material and pertinent facts, but race, national origin, color, handicap, religion, familial status, and sex are not material facts and should not be disclosed even at the principal’s request.
Frequently, an agent may secure an offer to purchase from a buyer who agrees to list the buyer’s own home with the same agent. A prudent broker will disclose this fact to the seller when submitting the offer; otherwise, the broker may be accused of receiving undisclosed profits.

Various state license laws require additional duties of the agent in a principal/agent relationship. For instance, an agent must disclose in writing any interest the agent may have in the property, such as when one of his or her salespeople or a relative or related corporation offers to purchase the listed property; for example, an agent must disclose that his wife was submitting an offer using her birth name. An agent may not act for both the seller and the buyer without their written consent, nor may the agent commingle the principal’s money or other property with his or her own. A broker may not advertise property without the specific authorization of the owner. A broker must present all written offers to his or her principal.
Most states have adopted agency disclosure laws requiring the licensee to disclose early in the transaction whom the licensee represents and to verify this disclosure in writing. States have also created new classifications of agency, such as “limited agent,” “designated agent,” “transaction coordinator,” and “facilitator.”

In dealing with third persons (for whom he or she is not the agent), an agent must be honest and must exercise care and diligence because he or she is liable for any material misrepresentations or negligent acts made by the broker. The principal may also be vicariously liable to the third person for all acts the agent performs within the scope of his or her employment. Some states have statutorily removed liability back to the consumer (abrogated vicarious liability).

An agency may be terminated between a principal and an agent at any time, except if the agency is coupled with an interest. However, if the agency is terminated before the stated expiration date, there could be a claim for money damages. An agency is terminated by the death or incapacity of either party (notice of death is not necessary), destruction or condemnation of the property, expiration of the terms of the agency, mutual agreement, renunciation by the agent or revocation by the principal, bankruptcy of the principal (because the title of the property is transferred to a receiver), or completion of the agency.
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.