The Law of Real Estate Agency: An Overview
Real estate agency law is a critical component of the vast legal framework governing rights and obligations in the property market. At its essence, agency law applies to arrangements in which one party, the principal, expressly or impliedly delegates to another, the agent, the authority to act within a network of relationships and agreements, to further an interest of the principal. In other words, agency law governs the legal relationship between the agent and the principal in real estate transactions .
With respect to real estate transactions, the law of agency is an extension of the contracts that bind the principal and the agent. That is, for example, the hiring of a licensed and registered real estate agent triggers a fiduciary duty on the part of the agent to act in the utmost good faith in the interests of the principal. Although agency law can be triggered by the actions of the parties to a transaction, even in the absence of an explicit or implicit agreement, it is the terms of the agreement between the principal and the agent that will govern their respective legal duties and obligations in any given circumstance.
The Main Players in a Real Estate Transaction
In virtually every instance of a real estate transaction, a broker represents the parties involved. The broker, unlike the real estate agent, has a license to practice real estate. Real estate agents typically work for brokers, helping clients negotiate the purchase or sale of real estate. In most cases, a purchase or sale of property requires a written agreement. That written agreement should set forth all the terms and conditions of the sale as agreed upon.
Another key player in real estate transactions is the client. A "client" is the principal who hires an agent as their agent to assist them and help them accomplish their goals, subject to the restrictions imposed by the law of agency.
An agent, as previously noted, is the individual businessperson who represents the client in negotiations for the purchase or sale of real estate. The terms realtor and real estate agent are commonly interchangeable. But a realtor is a licensed real estate agent who is associated with a local real estate board or the National Association of Realtors. But is important to know that the term REALTOR refers to members of the National Association of REALTORS. In fact, some people use the term REALTOR in their names, as it relates to their status as such, and it is trademarked to the members as members of such an association.
Through their relationship to the buyer or seller in a real estate transaction, brokers, agents, and clients owe a duty to the other principals in the matter. That is the import of the law of real estate agency relationships.
Varieties of Real Estate Agency Relationships
The relationship formed between a real estate professional and a buyer or seller can take on various forms, each with distinct rights and obligations attached to the agency. In most jurisdictions, regulations under real estate licensing and professional conduct legislation stipulate that an individual cannot act as an agent for another without being registered as a licensed professional and there are rules that apply to the formation and maintenance of agency relationships in real estate.
From the perspective of the agent, and the principal, the distinction is significant because depending on the type of agency relationship that has been created, the agent may owe specific written, legal and fiduciary duties to the principal and/or the customer and different levels of compensation may be payable by the principal.
Buyer Agency
A buyer agency occurs where an individual enters into an agency relationship with a real estate professional for the purposes of finding a property to purchase. The buyer’s agent owes a fiduciary duty to the buyer and written representation obligations under fiduciary duty, professional conduct rules and agency legislation. The buyer is provided with exclusive representation and the agent has obligations to procure a property for the buyer on the best terms and for the lowest price possible. The cancelation of buyer’s agency depends on the agreement between the agent and the buyer.
Seller Agency
A seller’s agency occurs when a real estate professional has entered into an agency relationship with a real estate sales associate for the purposes of selling a piece of real estate that is owned by the seller. The seller has exclusive representation and the agent has obligations to procure a buyer for the seller on the best terms and for the highest sale price possible to the seller. The cancellation of the seller agency depends on the agreement and terms with the seller.
Dual Agency
Dual agency occurs when there are two individuals representing the buyer and the seller of a piece of real estate pursuant to an agency relationship that has been created by the parties. The real estate professional represents a buyer and seller in the transaction whereby the buyer and seller have agreed that both individuals will represent them. Each individual owes a fiduciary duty to the buyer and seller along with professional conduct and fiduciary obligations to act in the best interest of the buyer and seller. The cancellation of the dual agency depends on the agreement between the parties.
The Responsibilities of Real Estate Agents
The Law of Real Estate Agency: Duties and Obligations of the Real Estate Agent to his Principal
When a person authorizes another person, known as the agent, to perform a service on his or her behalf, the agent is legally bound to act in the best interests of the other person, or principal. The law of agency arises where one person (known as the principal) gives another person (known as the agent) authority to act on their behalf. In real estate transactions, a common form of authority is a written listing contract. Some legal relationships are created by occupation of offices. Examples of these types of relationships exist between directors, officers and shareholders in companies and other forms of business organizations. An agent must exercise normal care, skill and reasonable diligence in the execution of the agency. Failure to exercise due care will result in the agent being personally liable for negligent performance. Further, with respect to real estate agents, specific legislation regulates the activities they perform in the course of their agency. A violation of such legislation may expose the agent to civil liability.
Legal Matters in Real Estate Transactions
Satisfying the legal requirements of operating a real estate agency is a pivotal concern for agent and agency law. Real estate agencies are governed by the Professional Standards Act 1997 (SA) and must ensure its operations satisfy the requirements of the Act. This includes licensing requirements under the Act, the Code of Conduct, payment of an annual contribution to the Real Estate Industry Training Trust Fund and compliance with the Fair Trading Act 1987 (SA) and its regulations. Much of the success of an Agency will depend on its ability to consistently operate within the bounds of the relevant laws and regulations that govern their conduct . In addition to determining who may operate as a real estate agent, the Professional Standards Act vests rights and obligations upon and Agency, its employees and representatives. It is not uncommon for penalties to be awarded for breaches of the provisions of the Act which can include fines, disqualification from holding a licence and/or suspension or cancellation of a licence. An Agency must, as one of its primary functions, make itself aware of the legal obligations of real estate agents, their employees and their representatives in order to mitigate the effects of non-compliance (both legislatively and ethically).
Typical Legal Concerns in Real Estate Agency
The most common legal issues in the field of real estate agency include obligations in law, in contract, and tort, including for example, duty of good faith (which has been referred to as the "most important common law obligation to arise so far between vendor, agent, and purchaser").
Misrepresentation, either by omission or commission, is an area that needs to be carefully managed. In the infamous case of Heritage Capital Corp. v Equitable Trust Co. 1SCC 2007: 1: Financial institutions were wrongfully induced to lend $8,500,000, and were kept in the dark concerning the default on the loan, as the principal bid them goodbye, laughing, in the parking lot without compensation or indemnity. There was a finding of fraudulent misrepresentation.
A further detailed look of the provisions included in the legislation, related to the duties of agents is required by all real estate agencies, and their employees. Further, it is fair to say that they must be properly disclosed to the professional liability insurers.
It was held in Keller v. Aiken & Rhoades 2004 BCPC 394: "a vendor’s agent who assumes responsibility to draft a warranty cannot evade liability when it favours him or her". The buyer was not aware that the representation contained in the contract was not in writing, and it was held that this was a material misrepresentation—or omission.
In the case of Smith v England Appraisal Ltd 2005 NSSC 256 Burbridge J. concluded that the relationship of the real estate agent and the appraiser was a fundamental aspect of the claim for negligent misrepresentation. Ontario case law supports the finding that a reliance based relationship exists (www.lersuch.com Pt 5).
How to Adjust to the Shifts in Real Estate Agency Law
As with all areas of law, the law of real estate agency is subject to change. Legislation can shift the specific responsibilities imposed on agents. Also, case law can influence the rights that agents and their principals have in particular situations. It is therefore important for agents to remain informed about recent developments in the law, so that they can ensure that their actions are in compliance with the law.
For example, on May 28, 2015, the Supreme Court of British Columbia released its decision in Wong v. 0853249 B.C. Ltd., 2015 BCSC 1002, which clarified that after an agent prepares a Form 1 (which is signed by both the buyer and the seller, whereby the buyer acknowledges it has received the disclosure form and the seller acknowledges that the buyer has waived the representation agreement), there is no need to complete a separate written termination of the representation agreement providing notice that the agreement is at an end. The court in Wong also found that, even though the buyer did not sign the Form 1 accepting the Seller Agency Notice, the agency relationship was at an end as of the earlier date on which the parties signed the Form 1.
Many of the recent changes to real estate agency laws have been related to the increased emphasis on consumer protection. In 2016, the BC Financial Services Authority released a report entitled Enhancing Consumer Protection in Real Estate Transactions in British Columbia, which made numerous recommendations for changes to real estate regulations. Pursuant to a recommendation in the report, the Real Estate Council of British Columbia has amended its rules to prevent dual agency and now requires agents to disclose all conflicts of interest to their client. Further proposed changes are currently being considered. These changes will affect the practices of industry members, including ensuring full and complete disclosure of any conflicts that may arise, whether known or should have been known.
To remain informed and compliant, brokers should regularly check the websites of provincial regulatory bodies for any updates or proposed changes to real estate agency laws and regulations.
Conclusion and Future Developments
Understanding the law of real estate agency is not only a fundamental issue for people who are buying or selling a property, it is also an important area for real estate practitioners and businesses to be aware of. While the legislation governing real estate agency varies from state to state, the common elements such as full and fair disclosure of the agency relationship will continue to apply in all cases. In addition, agency relations in real estate are expected to continue to be more complicated in the future, in large part because of the increased use of technology by buyers and sellers in executing real estate transactions .
One emerging area of concern is when potential buyers communicate with a business such as an online listing company that categorizes properties and may have an implicit financial interest in selling those properties. Such indirect forms of pricing or marketing may create an agency relationship or at least give rise to claims of such a relationship.
Further, it is anticipated that legislation might be enacted in the near future to specifically address issues such as dual agency, electric signatures, and the appropriate compensation for real estate agents.