8/30/09 California Real Estate Practice Introduction Definitions Introduction Definitions Introduction Definitions

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1 California Real Estate Practice Lesson 1: Real Estate Agency Relationships Introduction Definitions Real estate profession is driven by agency relationships. Salesperson who lists property is seller s agent. Salesperson who helps buyer find home is buyer s agent. Introduction Definitions Agent: Someone who has been authorized by another person to represent him in dealings with third parties. Principal: Person who hires agent to represent him. Introduction Definitions Agent sometimes may represent both parties in transaction, acting as dual agent. Agent may also act as finder or middleman in transaction without representing either party. Real Estate Agency Law Unilateral offer of subagency Until 1980s, most listing agreements contained unilateral offer of subagency clause. Made any member of an MLS who found buyer for property into subagent for seller. Often led to inadvertent dual agency because buyers thought agent represented them, not seller. Real Estate Agency Law Offer of cooperation In early 1990s, unilateral offer of subagency replaced by offer of cooperation clause. Allowed other members of MLS to act as cooperating agents: any MLS member who attempts to find buyer. 1

2 Allowed other members of MLS to act as cooperating agents: any MLS member who attempts to find buyer. Real Estate Agency Law Offer of cooperation Cooperating agents could choose to represent buyer or seller. But most chose to represent sellers, so confusion continued. Real Estate Agency Law Agency disclosure law In response to confusion, California passed agency disclosure law in Agents must give both parties a disclosure statement stating which party they represent. Reduces: buyers confusion danger of undisclosed, inadvertent dual agency Summary Real Estate Agency Law Agent Principal Cooperating agent Agency disclosure law Real Estate Agency Duties Agent is fiduciary Real estate agent is a fiduciary. Fiduciary: Person who occupies position of special trust in relation to another person. 11 Agent owes fiduciary duties to her principal regardless of whether she represents buyer, seller, or both. Real Estate Agency Duties Duties owed to principal Agent owes principal five common law fiduciary duties: reasonable care and skill obedience and utmost good faith accounting loyalty disclosure of material facts 2

3 loyalty disclosure of material facts Duties to Principal Reasonable care and skill Every agent must act with reasonable care and skill. Agent is held to level of skill expected of competent real estate agent (rather than ordinary person). Duties to Principal Obedience and good faith Agent must: obey principal s instructions make good faith effort to achieve principal s goals Duties to Principal Accounting Agent must: report promptly on status of principal s funds whenever principal demands it keep principal s funds separate from his own funds Duties to Principal Loyalty Agent must put principal s interests above anyone else s, including agent s own interests. Loyalty Confidentiality If principal gives agent confidential information, agent may not disclose that information to other parties. Confidential information generally is: given to agent by principal in confidence, and acquired by agent during course of fiduciary relationship. Loyalty Confidentiality Information given in confidence may be shared if it is: already a matter of general knowledge, or a material fact, such as latent defect of property. Loyalty Confidentiality 3

4 Confidentiality Confidential information about principal cannot be disclosed even after agency relationship terminates. Loyalty Dual agency Dual agent cannot be entirely loyal to both parties. Instead, she must take no action that is harmful to either party s interest. Dual agent cannot disclose one party s negotiating position to the other party while agreeing on a sales price. Duties to Principal Disclosure of material facts Agent must disclose all material facts to principal. Material fact: Fact likely to affect principal s decision about transaction. Duties to Principal Disclosure of material facts Agent doesn t have to explain ramifications of a material fact just fact s existence. Some material facts, such as defects not readily apparent to buyers, must be disclosed to other parties too. Disclosure of Material Facts Property inspection California law requires listing agent and cooperating agents to do visual inspection of property. Any material facts found during inspection must be disclosed to any prospective purchaser. Disclosure of Material Facts Property inspection Inspection required only for one- to four-unit residential properties. Inspection need not include matters such as: either party s financial condition 4

5 either party s financial condition independent verification of third party information Disclosure of material facts Other material facts Certain material facts concerning transaction should always be disclosed to principal: all written offers to purchase true value of property any conflicts of interest (such as relationship with third party) whether agent is dual agent Summary Duties to Principal Reasonable care and skill Obedience and good faith Accounting Loyalty Confidential information Disclosure of material facts Conflict of interest Real Estate Agency Duties Duties owed to any party Agent owes following duties to any party (not just principal): reasonable care and skill honesty and good faith agency disclosure Reasonable care and skill Agent owes duty of reasonable care and skill to all parties to a transaction. Agent who causes harm because of negligence may be held liable for damage. Under duty of honesty and good faith, agent may not: make inaccurate statements, or misrepresent property or other facts about transaction. 5

6 misrepresent property or other facts about transaction Includes unintentional as well as intentional misrepresentation. Critical part of duty of honesty and good faith is disclosure of latent defects. Latent defect: Any problem with property that would not be readily apparent to buyer. In general, no legal duty to disclose information that doesn t affect property s physical condition or condition of title, such as fact that: property was site of political or religious activity, or crime or death occurred on property. However, duty of honesty and good faith may require agent to disclose facts that aren t legally required to be disclosed otherwise. Example: If prospective buyer asks if any crimes have been committed on property, agent must answer truthfully, even though no legal duty to volunteer this information. Note: California law requires disclosure of death on property within last three years, if it would affect desirability of property to buyer. If previous occupant had AIDS, that should never be disclosed. It would violate antidiscrimination laws. Disclosure of crime would be required if it had substantial adverse effect on property. 6

7 adverse effect on property Example: If property was used for drug manufacturing, it may pose a residual health hazard and should be disclosed. Buyer cannot waive duty to disclose latent defects. Even if deposit receipt contains as is clause. Seller and seller s agent still must disclose latent defects on Transfer Disclosure Statement. Transfer Disclosure Statements are required in most sales of one- to four-unit residential properties. Even if disclosure statement is not required, real estate agents must still perform visual inspection of property and disclose any observed defects. Agency disclosure Agent owes all parties duty of agency disclosure. Before a party signs offer, agent must disclose in writing whether she represents buyer, seller, or both parties. Summary Reasonable care and skill Latent defects Agency disclosure Legal Effects of Agency For third party, dealing with agent may be legal equivalent of dealing with principal. If principal authorizes agent to sign document or make promise, principal will be bound by agent s signature or promise. Legal Effects of Agency Vicarious liability 7

8 Legal Effects of Agency Vicarious liability Harm caused to third party by agent s actions may create liability for principal This is vicarious liability: Injured person may sue principal as well as agent. If injured party prevails, both agent and principal will be liable for damages. Vicarious Liability Requirements Vicarious liability applies if principal: authorized agent s actions, or approved of them after the fact. Vicarious Liability Principal unaware of agent s actions Vicarious liability applies even if principal had no knowledge of agent s actions. In this situation, principal found liable to injured party could then sue agent for reimbursement. Vicarious Liability Broker/salesperson relationship Vicarious liability also applies to broker/salesperson relationship. Broker may be liable for salesperson s acts, even if broker didn t participate. Creating Agency Relationships Agency relationship may be created by: express agreement ratification estoppel implication Creating Agency Relationships Express agreement Most agency relationships are created by written express agreement, although oral agreement may be sufficient. Written listing agreement creates agency between broker 8

9 Written listing agreement creates agency between broker and seller. Written buyer agency agreement creates agency between broker and buyer. Creating Agency Relationships Ratification Principal may create agency by ratification if she: approves agent s unauthorized actions after the fact, or accepts benefits of unauthorized actions. Creating Agency Relationships Estoppel Agency can be formed through estoppel if it would be unfair to a third party if principal denied existence of agency relationship. Creating Agency Relationships Implication Agent can create agency relationship through implication by behaving in manner that causes another person to believe agent represents him. For person s protection, agent cannot deny agency relationship was formed. Creating Agency Relationships Implication Agency by implication can be created even if agent already has existing agency relationship with another party. If agent represents seller but causes buyer to believe agent represents her, this would create: buyer agency by implication, and undisclosed inadvertent dual agency. Once agency relationship has been created, agent must disclose to each party which party she represents. When disclosure required Buyer s agent s disclosure is made before preparing offer to purchase on buyer s behalf. 9

10 Seller s agent s disclosure is made before seller signs listing agreement. Disclosure form California law requires each party be given agency disclosure form. Agency disclosure form: describes duties of buyer s agent, seller s agent, and dual agent, and asks agent to explain which type of agent she will be. Agency confirmation statement Agent must also have each party sign agency confirmation statement. Confirmation statement may be within purchase agreement form itself or may be separate form. Acting in accordance with disclosure Once agency disclosure is made, agent must act in accordance with disclosure. Failure to do so can create undisclosed dual agency. Acting in accordance with disclosure Agent who fails to act in accordance with agency disclosure may be penalized by Department of Real Estate with: suspension or revocation of real estate license, and a fine of up to $10,000. Agent is buyer or seller If agent is acting as buyer or seller in transaction, additional disclosures should be made, including that agent: is licensed real estate agent in California, is purchasing or selling property for his own benefit, and intends to make profit on transaction. Summary 10

11 intends to make profit on transaction. Summary Creation of Agency and Vicarious liability Creation of agency Inadvertent dual agency Agency disclosure requirements Seller Agency Duties owed to seller Listing agent in transaction represents seller. Seller s agent owes seller the five common law agency duties owed to principal. Seller Agency Duty owed to buyer Seller s agent owes duty of honesty and good faith to buyer as well. Seller s agent should disclose latent defects and answer buyer s questions honestly. Seller Agency Must be loyal to seller Seller s agent should not: give buyer advice on how much to offer for listed property, put buyer s interests above seller s interests in any way, or disclose seller s confidential information to buyer. Seller Agency Services to buyer Seller s agent may provide certain services to buyer without violating duties to seller: discussing buyer s housing needs disclosing information and answering questions about property discussing financing alternatives furnishing copies of documents that might affect property explaining negotiating and closing processes Seller Agency Previous relationship with buyer 11

12 Seller Agency Previous relationship with buyer If seller s agent has previous relationship with buyer, conflicts of interest may arise Agent should: remind buyer of her agency status and where her loyalty lies, tell buyer if he shares confidential information with her, she must disclose it to seller, and recommend buyer work with another agent. Buyer Agency Many buyers are now represented by their own agents in transactions. Buyer s agents owe agency duties to buyer rather than seller. Buyer Agency Benefits Benefits of buyer agency include: loyalty and protection of confidential information, objective advice on price and condition of homes, help with negotiation, and access to more properties (such as foreclosures and FSBOs). Buyer Agency Written agreement Buyer agency is usually created through written buyer agency agreement. Buyer and agent should enter into this agreement before agent performs any services for buyer. Buyer Agency Buyer agency agreement will: authorize broker to represent buyer, state that dual agency will be created if broker also represents seller, describe buyer s agent s authority, limit scope of buyer s agent s responsibilities, and detail promises buyer makes to buyer s agent. 12

13 limit scope of buyer s agent s responsibilities, and detail promises buyer makes to buyer s agent. Buyer Agency Compensation Buyer s agent will typically be compensated with portion of commission paid to seller s agent. Even though payment comes from seller, buyer s agent still represents buyer. Buyer Agency Buyer-paid fee Buyer s agent and buyer may agree to buyer-paid fee instead. May be: hourly fee percentage fee flat fee Buyer Agency Buyer-paid fee Usually used only if property search is expanded beyond MLS (for instance, to include FSBOs). Agent may insist on getting part of fee up front, through nonrefundable retainer. Summary Seller and Buyer Agency Establishing seller agency Advantages of seller agency Establishing buyer agency Advantages of buyer agency Compensation of buyer s agent Dual Agency Dual agency occurs when agent represents both buyer and seller in same transaction. Dual agent owes agency duties to both parties. Because interests of both parties often conflict, dual agent must refrain from acting to detriment of either party. 13

14 must refrain from acting to detriment of either party. Dual Agency Before disclosure laws Before agency disclosure laws were passed, dual agency relationships were often created inadvertently. Seller s agent would give advice to buyer, who assumed seller s agent represented his interests. Created undisclosed inadvertent dual agency. Dual Agency In-house transactions Today, most dual agencies occur in in-house transactions. In-house transaction: When salesperson representing buyer and salesperson representing seller both work for same broker. Dual Agency Written consent required Dual agency legal in California only with written consent of both parties. Most listing agreements and buyer s agency agreements allow parties to agree in advance to dual agency in in-house transaction. Separate dual agency disclosure forms also available for obtaining consent. Finders Person may be involved in transaction without forming agency relationship with either party. Known as finder or middleman, and is compensated through finder s fee. Finder may be unlicensed. Finders No agency duties owed Finder merely arranges introduction between property owner and prospective buyer, without participating in negotiations. Does not owe fiduciary duties to either party. Should not exercise any fiduciary duties. 14

15 76 77 Should not exercise any fiduciary duties. Finders No agency duties owed If licensee crosses line from finder to agent, at that point she must make proper agency disclosure. Summary Dual Agency Dual agency Written consent to dual agency Finder 15