Agency Principles Flashcards
When I refer to the common law of agency, I mean the body of laws affecting agency that are the result of custom and/or case law, as opposed to statutory law introduced at the state or federal level.
Common law can be traced back to customs and precedent established by court decisions over the centuries in England, well before the creation of the U.S. as a country.
The law of agency that exists today in Arizona is a blend of both common and statutory law.
Due Diligence
Due diligence is a term you’ll hear and see a lot in Arizona. It is a modern-day version of caveat emptor or buyer beware. Due diligence is not just a buyer’s responsibility, but the bulk does tend to fall to them.
For example, a buyer needs to do their homework and not rely on the words, documents, or actions of others to verify material facts that are discoverable. They need to consider when to employ professional inspectors and when to search the public record to confirm what they are being told.
That aside, the state does require sellers of real estate to provide buyers with a written disclosure of property condition. And sellers and their brokers can be held responsible for material defects that they knew of or should have known about.
But, if the defect is easily observable, and the buyer fails to do their due diligence in their inspection of the property, they might have little in the way of recourse after closing. (We’ll get into all of this in more detail in this and other levels of this course.)
Seller Due Diligence?
Yes, the seller has a degree of responsibility for matters that are considered a matter of due diligence. This includes things such as:
Keeping current on the buyer’s financial ability as portrayed in a lender’s prequalification statement (or proof of funds if a cash buyer)
Resolving existing liens prior to closing
The Common Law of Agency
While we’ll explore the roles and definitions of an agent more thoroughly as we go through this course, for now, you should understand that an agent is an individual with the authority to act on behalf of another.
In real estate, both brokers and their salespersons operate as agents in this sense. The individual who grants the agent the authority to act on their behalf is the client or principal.
The Trusty Fiduciary
A fiduciary is an individual upon whom is placed the highest levels of trust and confidence when acting on behalf of another. So serious are the obligations of fiduciaries that they are expected to put their client’s interests ahead of anyone else’s — including their own.
Agents & Fiduciaries
Any discussion about the law of agency ultimately comes back to a relationship between two parties. The fiduciary duty of an agent refers to the high level of trust and confidence the principal places upon the agent.
In an agency relationship, one party authorizes another to represent their best interests, and that second party accepts the responsibility.
Mutual Consent Required
It takes two to form an agency relationship, Anthony. Agency relationships require the mutual consent of both parties (the agent and the client/principal). This can be entered into by one of three methods:
Written agreement
Oral agreement
Action
To prevent miscommunication (and protect their commissions), brokers should always form their agency relationships in writing.
In Arizona, listing agreements MUST be in writing.
Building Blocks of an Agency Relationship
From what we’ve covered thus far, you can see that there are three components to an agency relationship in real estate:
Two parties (agent and principal)
An agreement
A fiduciary obligation
Created on the Broker Level
Before we get any further along in our discussion of the law of agency as it pertains to real estate, here’s an important fact: Agency relationships are created on the broker level.
When a seller or buyer signs an agency agreement with a salesperson, they are actually agreeing to an agency relationship with that license holder’s sponsoring broker.
This is because a broker can choose to sponsor salespersons to help them fulfill their fiduciary responsibilities to their clients.
Agency Relationships in Real Estate
As a real estate professional, you’ll be responsible for fulfilling your agency responsibilities to the different people you encounter in a typical real estate transaction.
These individuals generally participate in the transaction under one of the following roles:
Client (your principal)
Customer (the “other” principal)
Third party (anyone other than your client)
A “Principal” Point of Clarification
Within the context of real estate, a principal can be understood as:
An individual who authorizes an agent to represent their best interests
A party to a real estate transaction (a buyer, seller, landlord, or tenant)
Let’s look at an example that employs the term in both ways.
EXAMPLE
Jami is looking to sell her home and has entered into an agency relationship with Broker Betty. Within that relationship, Jami is Broker Betty’s principal.
Then, with Betty’s help, Jami sells her home to Buyer Jenna. As the seller and buyer, Jami and Jenna are both considered the principals in that real estate transaction.
The Client
In real estate, a client is an individual who has signed an agency agreement with a broker, authorizing that broker to represent them in a real estate transaction.
Clients are the people you will work for as an agent. They’re the people with whom you (on behalf of your broker) sign agency agreements.
Although many in the industry use the terms client and principal interchangeably, a client is not simply a principal. A client is your principal.
To remember, think of your client as your pal, as in “princiPAL.”
EXAMPLE
Toni signed an agency agreement with you to represent her in the sale of her home. Toni is your client (your principal), and you owe her fiduciary duties, as you must represent her best interests in the transaction.
Until someone signs an agency agreement with you, you should not call that person your client. I can never say this too often: Get your agency agreements in writing, Anthony!
The Role Players: Clients
The Customer
A customer is a person with whom no agency relationship exists and to whom no fiduciary duties are owed. The customer is the principal on the other side of a real estate transaction and is often — but not always — represented by a license holder from an unaffiliated brokerage.
If you represent a principal in a transaction, that principal is your client and the other principal (on the other side of the transaction) is your customer.
EXAMPLE
You represent Seller Maggie as the listing agent in a real estate transaction. Buyer Tony is represented by a buyer’s agent. Tony is a principal on the other side of the transaction AND is your customer.
“The Other Principal as Your Customer” Scenarios:
If you are the listing agent, the buyer principal is a customer to you.
If you are the buyer’s agent, the seller principal is a customer to you.
If you are the landlord’s agent, the tenant principal is a customer to you.
If you are the tenant’s agent, the landlord principal is a customer to you.
Working Directly with a Customer
A license holder can work directly with but not for a customer to achieve that customer’s goals and still not have entered into an agency (fiduciary) relationship with that customer. While possible, this is usually not advisable, as it can give rise to implied agency relationships (or just be a waste of a salesperson’s time).
No matter the circumstances, the duties of fair dealing and honesty are always required of a licensee in their dealings with customers.
EXAMPLE
Agent Camile offered to drive buyer Arnold around town and show him some properties. She did this even though Arnold had not signed an agency agreement with her. The next day, Camile saw Arnold riding around with her nemesis, an agent from a competing brokerage! What a waste of gasoline and time Arnold was for Camile!
And who knew agents had nemeses?!
The Third Party
A third party is ANY person involved in a real estate transaction who is not your client. While similar to customer, the term third party is more encompassing.
Third parties include customers as well as all other non-client participants in a transaction.
Common Non-Client Participants in a Real Estate Transaction The customer (other principal) on the other side of the transaction
The title officer
The inspector
The loan officer
The insurance agent
The appraiser
In other words, a third party is anyone with whom the license holder does NOT have an agency relationship.
Role Player Recap
So, in the course of any given real estate transaction, as an Aceable agent, you will likely encounter three role players:
Clients
Customers
Third parties
How many interactions you have with each of them or whether or not you deal with them in group or individual settings… well, that will vary from one transaction to another.
The Role Players: Customer and Third Party
Now that we’ve covered the primary role players that you’ll encounter in a real estate transaction, let’s talk about how you fit into the picture.
The Team
The Designated Broker
The designated broker is the one with whom the client has legally entered into an agency relationship.
While the broker might actively carry out the agent duties of that relationship, more likely, they will entrust one of their sponsored license holders to fulfill these responsibilities on the broker’s behalf.
The Associated Licensees
An associated licensee is someone sponsored by the broker to act as an agent on their behalf.
This could be an associate broker or a salesperson. The interactions of an associated licensee with any of the role players in a transaction is always done on behalf of their sponsoring broker.
Shows who works at a brokerage: the designated broker, sponsored salespersons, and associate brokers.
The Role Players: Where You Come In
Earlier in this chapter, you learned that mutual consent is required in order to create an agency relationship. A principal or client enlists an agent to act on their behalf, and the agent willingly accepts that responsibility.
But what exactly does that responsibility entail? How much authority does the agent have to act?
Great questions, all of which can be answered by taking a look at what I like to call agency classifications.
When a principal enlists an agent to represent them, the authority granted is rarely given without some constraints. Scope of authority is the term used to describe how narrow or wide the authority to act is.
The three classifications of agency, based on the scope of authority granted, are:
Special agency
General agency
Universal agency
In upcoming screens, we’ll go over each type of agency in detail.
Agency Classifications
Special agency, aka limited agency, restricts an agent’s scope of authority to one or more specific acts as directed by the principal — usually towards a single, specific objective, end, or goal. Special agency, therefore, is typically not ongoing but ends upon completion of the goal for which the specific tasks were authorized.
Of the three types of agency discussed in this chapter, special agency is the most limited in scope.
EXAMPLE
Due to a scheduling conflict, Betty couldn’t make it to the Pleasantville Chamber of Commerce charity auction. So she authorized Buddy to attend the auction and bid on an exquisite vase she’s been eyeing. Betty instructed Buddy to bid on that one item only, and she made it clear that he had a top-bid limit of $750.
Buddy’s special agency was restricted in scope in two respects: He could only bid on the specific vase Betty wanted, and he could bid no more than $750 for the vase.
Special Agency in Real Estate
The most common example of a special agency in real estate is the relationship between a real estate broker and their client. And when brokers are granted special agency by their principals, it is usually accomplished via listing agreements and buyer-broker agreements.
An arrow shows the relationship between broker and client in special agency, broker is authorized to preform specific action for client.
Specific actions that often fall under a broker’s special agency include:
Listing the principal’s home on the MLS
Showing the principal’s home to potential buyers
Representing the principal’s interests as a buyer at an open house
Special Agency ≠ Binding
A significant limitation in special agency relationships is that special agents are unable to make decisions that would bind or obligate their principals.
EXAMPLE
When Seller Tim signs a listing agreement with Broker Julia, he grants Julia special agency to list his house on the MLS, negotiate with potential buyers, and host open houses at his residence on the weekends.
Seller Tim does not, however, authorize Julia to make decisions that bind him. For example, Julia cannot accept an offer from a buyer on Tim’s behalf. Tim still gets to make the decision to accept a buyer’s offer.
Between the Broker and Client
As mentioned before, agency is created on the broker level, not the salesperson level. This means that not only does the broker owe the client (principal) fiduciary duties, but ALL of that broker’s sponsored salespersons owe that client fiduciary duties as well.
Special Agency
A general agent is authorized to manage all of a principal’s affairs within certain specified areas. And because those affairs or business interests are often ongoing, the authority granted is also usually open-ended.
General Agency in Real Estate
The relationship between a broker and a sponsored salesperson is a common example of general agency in action.
How so?
The broker uses the salesperson to accomplish the broker’s ongoing efforts to build the brokerage business.
The authority to act is broad as long as those acts have to do with matters of concern to the brokerage. And because those concerns are ongoing, the authority granted is also ongoing.
In the general agency relationship between a broker and a sponsored salesperson:
The broker is the principal of the salesperson.
The salesperson (sponsored licensee) is the agent of the broker.
An arrow shows in general agency, a broker entrust licensee to act as a special agent & perform fiduciary duties dot their clients.
General Agency = Binding Authority
Another major difference between general agency and special agency is the ability to bind.
EXAMPLE
When Salesperson Selah signs a listing agreement with Seller Sam, Salesperson Selah has created a binding agency relationship between Seller Sam and Selah’s broker.
Because of the general agency relationship that exists between Selah and her broker, Selah’s broker will honor Selah’s signature on the listing agreement.
Recap
Special agency = short-term authority
General agency = ongoing authority
Special agency ≠ binding authority
General agency = binding authority
It should be noted that universal agency (the broadest form of agency) — which we’ll discuss shortly — also has binding authority.
General Agency in Property Management
License holders operating as property managers also require general agency to carry out their duties, for a couple of reasons:
Their duties are ongoing and multifaceted within their area of concern, so a wider scope of authority is needed.
They typically have the power to bind the principal (property owner) to rental agreements and other needed contracts
General Agency
Universal agency is the broadest type of agency. It gives agents the power to act on behalf of the principal AND make decisions on behalf of the principal in all business matters of concern to the principal.
This is different from general agency. A general agent has broad authority to act, but only in regards to a specific business concern of the principal. Universal agency, on the other hand, gives the agent the scope of authority to act on the principal’s behalf for ALL business concerns.
Power of Attorney
When universal agency is employed, it is granted to an agent via a power of attorney. This is a legal instrument used to confer the right of one individual to act on behalf of another.
Armed with a power of attorney, the agent, as an attorney-in-fact, has the actual power to sign legal documents on behalf of the principal.
Universal Agency in Real Estate
Although the use of universal agency rarely happens in real estate, it can have its place.
One possible scenario could be when a principal is abroad and wishes to give their agent power of attorney to complete the sale of their property in their absence.
Universal Agency
We’ve covered a lot of ground in our discussion of agency classification, Anthony! By way of review, we’ve discussed:
Special agency: Special agency is the most limited form of agency and is typical of that which exists between brokers and clients. Special agents cannot make decisions that may bind their principals.
General agency: General agency, while somewhat limited, grants a broader scope of authority to the agent than does special agency, and is often ongoing in nature. It is the type of relationship that exists between brokers and sponsored licensees, and it is also the agency needed for a licensee to work as a property manager. It provides authority to bind.
Universal agency: The type of agency that provides for the broadest scope of power. It authorizes agents to make binding decisions on behalf of their principals across a wide range of concerns. It is rarely used in real estate.
The below image shows the progression of the scope of authority as you go from one agency classification to another.
Agency Classifications Review
Key Terms
Here are the key terms you learned in this chapter:
agent
an individual with authority to act on behalf of another; a state license is required to operate as an agent in real estate
broker
a licensee who holds a broker license and who engages in an activity enumerated in the license law for a commission or other valuable consideration
customer
an individual with whom a license holder has no agency relationship nor fiduciary duties but to whom fairness and honesty are still required
fiduciary
an individual upon whom is placed the highest levels of trust and confidence when acting on behalf of another
general agency
a form of agency relationship that authorizes an agent to manage all of a principal’s affairs within certain specified areas; provides broader authority than that of special agency but less than that of universal agency
law of agency
the body of laws affecting agency that have come about as a result of custom and/or case law, as opposed to statutory law introduced at the state or federal level
ministerial acts
an action performed for another according to established procedures or guidelines and without the need for discretion or individual judgment
mutual consent
agreement by all parties to either create, amend, or terminate a contract
power of attorney
a legal instrument used to confer the right of one individual to act on behalf of another
principal
the client of a broker in an agency relationship; the parties to a contract in a real estate transaction (as opposed to license holders, lenders, escrow agents, etc.)
special agency
a form of agency relationship in which agents are limited in scope and are only authorized to perform acts permitted by their principal
third party
any person involved in a real estate transaction who is not your client; includes not only customers (the non-client principal in a transaction) but also all other non-client participants in a transaction such as title officers, lenders, appraisers, etc.
universal agency
the broadest type of agency; gives agents the power to act AND make decisions on behalf of the principal in all business matters of concern; often granted via a power of attorney
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter:
The Common Law of Agency
When I refer to the common law of agency, I mean the body of laws affecting agency that are the result of custom and/or case law, as opposed to statutory law introduced at the state or federal level.
Building Blocks of an Agency Relationship in Real Estate
There are three components to an agency relationship in real estate:
Two parties (agent and principal)
An agreement
A fiduciary obligation
The Client
Although many in the industry use the terms client and principal interchangeably, a client is not simply a principal; a client is your principal.
Client and Customer Comparison
Understanding the difference between a customer and a client is crucial for understanding agency relationships. Here’s a quick snapshot of the difference:
A broker works for a client.
A broker works with a customer.
Agency Classifications Review
Special agency: Special agency is the limited form of agency typical of that which exists between brokers and clients. Special agents cannot make decisions that may bind or obligate their principals.
General agency: General agency, while somewhat limited, grants a broader scope of authority to the agent than does special agency, and is often ongoing in nature. It is the type of relationship that exists between brokers and sponsored licensees, and it is also the agency needed for a licensee to work as a property manager.
Universal agency: The type of agency that provides for the broadest scope of power. It authorizes agents to make decisions on behalf of their principals across a wide range of concerns. It is rarely used in real estate.
This diagram shows how special and general agency are used in real estate.
The agency relationship triangle between broker, client, and licensee.
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Chapter Summary
