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Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice Learning Objectives Define the basic concepts of agency Define three types of agency Define the employment authority of real estate agents Describe agency and sub-agency relationships in real estate contract Define duties and liability of principals and real estate agents Describe examples of willful misrepresentation and negligent misrepresentation © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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 © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice Creation of Agency Relationships Implied Agency: The actions of the principal and agent indicate that they have an agency agreement. Duties and responsibilities same as 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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. © OnCourse Learning

Creation of Agency Relationships Chapter 7 Creation of Agency Relationships Scope of Agent’s Authority Expressed: Authorized to do specifically what the agency agreement states. Agent’s authority is limited to a single charge Implied: Based upon custom and may be the result of an expressed agreement. Apparent: Based on appearances to a third party that an agent has certain authority when in fact the agent does not possess such authority. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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 © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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: All agents become subagents for any buyer or seller represented by 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice Agency and Sub-Agency Relationships Agency’s Effect on Communication Requirements for Contracts: Agency status is an important determinant of when communication of acceptance, rejection, or withdrawal of an offer occurs. Acceptance, rejection, or withdrawal of an offer requires communication to the buyer, 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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. Listing contract can be terminated if either agent or principal breaches any duties. Disclosure of Agency Relationships: must be in writing must be for a definite period of time must contain pre-defined non-discrimination clause Agent is required to review Commission’s Working With Real Estate Agents brochure with potential client’s by first substantial contact. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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 must 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

Duties and Liabilities of Agents Chapter 7 Duties and Liabilities of Agents Agents Duties to Principal: 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. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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 keep adequate and accurate records. Monies must be kept in a separate “trust” account or “escrow” account. © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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: honesty and disclosure of material facts © OnCourse Learning

Brokerage Relationships: Laws and Practices Chapter 7 Brokerage Relationships: Laws and Practices Material Facts The best advice will typically be: when in doubt, it is best to disclose. The following are considered to be 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 importance 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 © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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” © OnCourse Learning

Brokerage Relationships: Laws and Practice Chapter 7 Brokerage Relationships: Laws and Practice 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” © OnCourse Learning

Chapter 7 Other Laws Governing the Disclosure of Information in Real Estate Transactions Stigmatized and Psychologically Affected 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. Unfair and deceptive acts include the offering of a misleading opinion, failure to disclose a material fact, misleading advertising, misrepresentation, and false inducement. North Carolina allows treble damages for violations. © OnCourse Learning

Chapter 7 Other Laws Governing the Disclosure of Information in Real Estate Transactions Seller’s and Buyer’s Responsibilities Under Common Law: Under the doctrine of caveat emptor (let the buyer beware), the seller has no disclosure of information obligation to the buyer beyond avoiding intentionally 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 © OnCourse Learning

Chapter 7 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. © OnCourse Learning

Chapter 7 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 even disclose if property was 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) © OnCourse Learning

Brokerage Relationships: Laws and Practices Chapter 7 Brokerage Relationships: Laws and Practices Dual Agency Dual Agency 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. involves inherent potential conflict 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 © OnCourse Learning

Chapter 7 Dual Agency How To Handle Intentional, Disclosed Dual Agency 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: 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 when 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

Duties and Liabilities of Principals Chapter 7 Duties and Liabilities of Principals Principal’s Duties to Agent: must generally cooperate with the agent compensation Principal’s 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 that a reasonable inspection would not disclose Liabilities and Consequences of Principal’s Breach of Duties: civil liability criminal liability compensation to the agent for legal action brought for withholding or giving false information © OnCourse Learning