Unit 9 Flashcards
Law of agency
The law of agency defines and regulates the legal roles of the most primary of relationships in real estate brokerage: that between broker and client, the relationship known in law as the agency relationship.
The parties to an agency relationship are the principal (a client), the agent (a broker), and the customer (a third party).
Agency law is distinct from contract law, although the two groups of laws interact with each other. For example, the listing agreement – a contract – establishes an agency relationship. Thus the relationship is subject to contract law. However, agency law dictates how the relationship will achieve its purposes, regardless of what the listing contract states.
The essence of the agency relationship is trust, confidence, and mutual good faith.
The principal trusts the agent to exercise the utmost skill and care in fulfilling the authorized activity, and to promote the principal’s best interests. The agent undertakes to strive in good faith to achieve the desired objective, and to fulfill the fiduciary duties.
It is important to understand that the agency relationship does not require compensation or any form of consideration. Nor does compensation define an agency relationship: a party other than the principal may compensate the agent.
For Tennessee real estate agents, agency law is found in Part Four of the Licensing Act, “Representation by Real Estate Agents.”
Agency duties and creation of the agency relationship
A real estate licensee may provide real estate services to any party in a prospective transaction, with or without an agency relationship to one or more parties to the transaction.
Without a specific written agreement to establish an agency relationship with one or more parties, a licensee is considered a facilitator and not an agent or advocate of any party to the transaction.
There is no assumed, implied or created agency or subagency relationship without a written bilateral agreement that establishes the terms and conditions of the relationship.
The negotiation and execution of either an exclusive agency listing agreement or an exclusive right to sell listing agreement with a prospective seller establishes an agency relationship with the seller.
Limited agency
Scope of agency
The agency relationship created between a licensee and a client to provide real estate services is a limited agency.
The licensee may function as an intermediary in negotiations between parties to a transaction unless the parties choose to negotiate directly.
The licensee owes certain duties to all parties to the transaction, and other specific duties to the client the licensee represents as an agent.
Liability of client and broker
A client or other party to whom a real estate licensee provides services as an agent, subagent or facilitator is not liable for damages for the misrepresentations of the licensee unless the client or party knew, or had reason to know, of the misrepresentation.
The managing broker remains responsible for misrepresentations committed by the managing broker’s licensees.
Disclosure of agency relationships
To a buyer or seller who is not represented by any licensee in a transaction, a licensee who personally assists the prospective buyer or seller must:
Verbally disclose the licensee’s status as facilitator, agent, subagent or designated agent in the transaction before any real estate services are provided.
To an unrepresented buyer, the verbal disclosure of agency status must be confirmed in writing prior to the preparation of an offer to purchase.
To an unrepresented seller, the verbal disclosure of agency status must be confirmed in writing prior to execution of a listing agreement or presentation of an offer to purchase, whichever comes first.
Obtain a signed receipt for the disclosure from the party to whom it was provided. The signed receipt must contain:
a statement acknowledging that the buyer or seller was informed that any complaints alleging a violation of § 62-13-312 must be filed within the applicable statute of limitations for the violation set out in § 62-13-313(e)
the address and telephone number of the Commission
The disclosure of agency or facilitator status is not a substitute for a written agreement to establish an agency relationship between the broker and a party to a transaction.
To other licensees involved in the same prospective transaction, the licensee must:
immediately disclose, on initial contact, the licensee’s role in the transaction, including any agency relationship
immediately notify the other licensees and any parties to the transaction of the change in status if the licensee’s role later changes
The previous disclosure requirements do not apply in the case of transactions involving:
commercial properties
the lease or rental of residential properties
properties to be transferred by public auction
transfers of residential properties of more than four (4) units)
Dual agency
"Dual agency" refers to a situation in which the licensee has agreements to provide services as an agent to more than one party in a specific transaction and in which the interests of such parties are adverse. Disclosed dual agency is legal in Tennessee, but because it is fraught with difficulties and problems in terms of fulfilling duties to clients, it is mostly avoided in favor of a: single agency (representing one party) designated agency (representing one party) facilitator relationship (no agency) An undisclosed dual agency is not legal.
Designated agent
A designated agent is a licensee appointed by his or her managing broker to be the designated and individual agent of a party with whom the licensee has entered into a written representation agreement, to the exclusion of all other licensees employed by or affiliated with that managing broker.
In a designated agency situation:
the managing broker is not considered to be a dual agent in the transaction as long as the licensee appointed does not represent interests of any other party to the same transaction
there is no imputation that clients, managing broker, and designated agents are improperly sharing knowledge or information.
A designated agency does not:
abolish or diminish the managing broker’s contractual rights to any listing or advertising agreement between the firm and a property owner
lessen the managing broker’s responsibilities to ensure that all his or her affiliated or employed licensees conduct business in accordance with appropriate laws, rules and regulations
Disclosure of agent’s interest
Licensees must identify themselves as licensees when buying or selling property for themselves.
A broker or affiliate broker must first disclose his true position to the owner of a property listed with him or his firm or to any prospective purchaser before attempting to acquire any interest in the property. This also applies if the owner has approached him or his company to act as broker.
After acquiring any such personal interest, either directly or indirectly, the broker or affiliate broker must make a full disclosure of his true position to prospective purchasers who tender offers to buy the property.
Exclusive buyer representation agreements
An exclusive buyer representation agreement is an agreement in which a licensee is engaged to represent a buyer in the purchase of a property to the exclusion of all other licensees.
When entering into any such agreement a licensee must advise and confirm in writing to the buyer the following:
that the buyer should make all arrangements to view or inspect a property through the licensee and should not directly contact other licensees
that the buyer should immediately inform any other licensee the buyer may come into contact with that he or she is represented by the licensee
whether the buyer will owe a commission in the event the buyer purchases a property without the assistance of the licensee through another licensee or directly from an owner
Owner’s requirement to disclose material facts
The owner of a residential property must make a property condition disclosure or disclaimer if:
the transfer is a sale, exchange, land sales contract, or lease with option to buy
the property consists of one to four (4) dwelling units, site-built or non site-built
a licensed broker or salesperson is assisting or there is no assistance
The owner must give the required disclosure to potential buyers in good faith.
The written disclosure or disclaimer statement must be delivered to the purchaser prior to the acceptance of a purchase contract.
The statement may be included with the purchase contract or be given in a separate document.
Failure of the owner to provide the required statement is not cause for the purchaser to terminate the contract, but the purchaser is free to pursue other legal actions.
What the owner must provide
The seller must furnish a purchaser one of the following:
A residential property disclosure statement regarding the condition of the property, including any material defects known to the owner. The form must include all items listed on the disclosure form provided in 66-5-210, including:
a notice that the prospective purchaser and the owner may wish to obtain professional advice or inspections
a notice that the information contained in the disclosure consists of the representations of the owner and are not the representations of the real estate licensee or sales person
The owner is not required to undertake or provide any independent investigation or inspection of the property in order to make the disclosures required by this rule.
A residential property disclaimer statement stating that the owner makes no representations or warranties about the condition of the real property or improvements and that purchaser will be receiving the real property “as is,” that is, with all defects which may exist, if any, except as otherwise provided in the real estate purchase contract. The disclaimer statement is only permitted if the purchaser explicitly waives the required disclosure.
In addition:
In the first sale of a dwelling, the owner must furnish the buyer a statement disclosing any impact fees or adequate facilities taxes paid to the city or county.
The property disclosure must include the results of any known percolation test accepted by the department of environment and conservation.
Owner liability for property disclosure
The owner is not liable for errors or omissions in the disclosure provided:
the actual fact was not within the actual knowledge of the owner, or
the error was based on information provided by public agencies or by other professional experts, engineers, inspectors, etc., or
the owner reasonably believed the information to be correct; and
the owner was not grossly negligent in obtaining the information from a third party and transmitting it
The owner is not liable for errors or inaccuracies resulting from a change in the condition or circumstances of the property that happens after the delivery of the disclosure;
However, the owner must disclose any material change in the physical condition at or before closing or certify that there is no change.
Licensee obligations regarding property disclosure
To the owner
A real estate licensee representing an owner of residential real property as the listing broker has a duty to inform the owner of the owner’s rights and obligations concerning property disclosures.
To the purchaser
A real estate licensee representing a purchaser has the duty to inform the purchaser of the purchaser’s rights and obligations concerning property disclosures.
If a purchaser does not have representation, it is the duty of the owner’s agent to inform the purchaser.
The licensee must also disclose known adverse facts about a property but is not obligated to discover or disclose latent defects in a property or to advise on matters outside the scope of the licensee’s real estate license.
Adverse in this context refers to conditions that present a risk to the structure of the property or the health of occupants (but see the exception on the next screen).
Licensee liabilities regarding property disclosure
A licensee who has properly informed the parties of their rights and obligations:
has no further duties to the parties regarding the property condition disclosure
is not liable for any failure to disclose information regarding the property condition
However, the licensee may be subject to legal action for:
intentional misrepresentation
defrauding a purchaser
failure to disclose adverse facts of which the licensee had actual knowledge or notice
A real estate licensee or property owner cannot be held liable for failure to disclose that:
an occupant of the house was afflicted with HIV or other disease presumed not to be communicable through occupancy of the house
an event occurred on the property that had no effect on the physical structure or its environment
the property was the site of a homicide, felony, or suicide
Purchaser’s remedies for misrepresentation or nondisclosure
In the event of a misrepresentation in the property disclosure statement, the purchaser has three remedies:
an action for actual damages, provided that the purchaser has suffered from defects that existed at the time of executing the purchase contract, but that the purchaser did not know about at the time of closing or occupancy, and the seller furnished a disclosure statement in accordance with law
termination of the contract prior to closing other legal remedies against an owner for intentional or willful misrepresentation
The purchaser may not sue:
the owner for failing to provide the required disclosure or disclaimer
a closing agent or attorney for the owner’s failure to provide the required disclosure or disclaimer statement or for any misrepresentations the owner may have made on the disclosure
a real estate licensee for any information provided by experts, such as inspectors, or for any information in the disclosure form unless the licensee is a signatory of the form.
Transfers exempt from the property disclosure requirement
Transfers specifically excluded from the disclosure requirement are those:
pursuant to court order
by a trustor who is in default to a beneficiary of a deed of trust
pursuant to a foreclosure sale or a sale conducted pursuant to a foreclosure sale or a deed in lieu of foreclosure
by a fiduciary in the course of the administration of a decedent’s estate, guardianship, conservatorship or trust
from one co-owner solely to another co-owner holding property either as a joint tenancy, tenancy in common or tenancy by the entirety
made solely between spouses or to close blood relatives of a transfer or
between spouses resulting from a decree of divorce or a property settlement stipulation
made by virtue of the owner’s failure to pay any federal, state or local taxes
to or from any governmental entity of public or quasi-public housing authority or agency
involving the first sale of a dwelling provided that the builder offers a written warranty
sold at public auction
where the owner has not resided on the property at any time within three years prior to the date of transfer
from a debtor in a chapter 7 or a chapter 13 bankruptcy to another party by a deed in lieu of foreclosure or by a quitclaim deed
