Principles of California Real Estate Lesson 8 Real

Principles of California Real Estate Lesson 8: Real Estate Agency Law © 2010 Rockwell Publishing

Definitions Agency relationship: Established when one person (principal) authorizes another (agent) to represent her in dealings with third parties. © 2010 Rockwell Publishing

Definitions A principal who engages agent’s services is also known as a client, while a third party is known as a customer. © 2010 Rockwell Publishing

Agency Relationship Seller or buyer hires broker to act as agent in real estate transaction. Many real estate transactions involve more than one agency relationship. l Each party may have her own agent. l Typical transaction also involves real estate salespersons working for brokers. © 2010 Rockwell Publishing

Agency Law Agency relationship has important legal consequences for both parties. l Third parties dealing with agent may be legal equivalent of dealing with principal. l Agent owes certain legal duties to principal and to third parties. © 2010 Rockwell Publishing

Creating Agency Relationship Duties and liabilities of agency relationship arise automatically. Under agency law, relationship created by: l express agreement l ratification l estoppel l implication © 2010 Rockwell Publishing

Creating Agency Relationship Express agreement: Principal selects person to act as agent, and agent agrees to agency. l Most agencies created this way. l No writing necessary (although customary). l No consideration necessary. l Examples: listing agreement, buyer agency agreement. © 2010 Rockwell Publishing

Creating Agency Relationship Ratification: Principal gives approval— after the fact—to acts not authorized at time they were performed. Principal may ratify by: l expressly approving unauthorized acts or l accepting benefits of unauthorized acts © 2010 Rockwell Publishing

Creating Agency Relationship Estoppel: Agency is created by estoppel when: l principal allowed third party to believe there was agency authority for action, and l it would be unfair to third party to deny agent’s authority. Principal is estopped (prohibited) from denying agency, to protect innocent third party. © 2010 Rockwell Publishing

Creating Agency Relationship Implication: Person’s behavior implies that he’s acting as another person’s agent. If person believes that someone is acting as her agent, and that person fails to correct the impression, he may actually be held to owe agency duties. © 2010 Rockwell Publishing

Summary Creating Agency Relationship • • • Agency Express agreement Ratification Estoppel Implication © 2010 Rockwell Publishing

Legal Effects of Agency Once agency relationship established, principal is bound by agent’s acts that are within scope of agent’s authority. © 2010 Rockwell Publishing

Legal Effects of Agency Scope of authority Extent to which principal is bound by agent’s acts depends on kind of agency that was created. There are two basic types of agents: l general l special © 2010 Rockwell Publishing

Scope of Authority General agent: Agent authorized to handle all of principal’s affairs in one or more areas. l Often handles all matters for particular business/property owned by principal (example: property managers). © 2010 Rockwell Publishing

Scope of Authority Special agent: Agent has limited authority to do specific thing or conduct specific transaction. l Broker typically authorized to represent seller/buyer in single transaction only, and powers are limited (can’t sign contracts, change price, etc. ). © 2010 Rockwell Publishing

Scope of Authority Actual vs. apparent authority Two types of agency authority: l actual l apparent © 2010 Rockwell Publishing

Actual vs. Apparent Authority Actual authority: Express or implied authority granted to agent by principal. l Express actual authority: Principal specifically directs agent to do something. l Implied actual authority: Agents have implied authority to do what’s necessary to carry out acts expressly authorized by principal. © 2010 Rockwell Publishing

Actual vs. Apparent Authority Apparent authority: Agent appears to have authority, although principal didn’t actually grant it. l Agent has apparent authority when principal negligently or deliberately allows it to appear that unauthorized actions were authorized. © 2010 Rockwell Publishing

Actual vs. Apparent Authority Good faith deposit If listing agent doesn’t have authority (in listing agreement) to receive good faith deposits, then she acts as buyer’s agent if she accepts deposit. l If agent absconds with deposit, it’s buyer’s loss. (If seller had given authority it would be seller’s loss. ) © 2010 Rockwell Publishing

Legal Effects of Agency Vicarious liability Under theory of vicarious liability, principal may be held liable for her agent’s wrongful acts. l Buyer or seller may be liable for acts of broker, and for salesperson working for that broker. © 2010 Rockwell Publishing

Vicarious Liability Damages In cases involving vicarious liability, injured party may sue both principal and agent, and collect damages from both. However, if principal did nothing wrong, she may then sue agent for damages she paid to injured party. © 2010 Rockwell Publishing

Summary Legal Effects of Agency • • • Scope of authority General agent Special agent Actual authority Apparent authority Vicarious liability © 2010 Rockwell Publishing

Duties in Agency Relationship Agent owes duties to principal, and both agent and principal have duties to third parties. © 2010 Rockwell Publishing

Agent’s Duties to Principal Agency is fiduciary relationship—agent owes fiduciary duties to principal. Fiduciary: Person who stands in special position of trust and confidence to someone else. l Law holds fiduciaries to high standard of conduct. l Fiduciary must serve best interests of principal. © 2010 Rockwell Publishing

Duties to Principal Agent owes principal fiduciary duties of: l utmost care l integrity and honesty l loyalty l disclosure of material facts Duties are owed to principal from time agency relationship begins through to end (and beyond). © 2010 Rockwell Publishing

Duties to Principal Utmost care When representing principal, agent must use same degree of care and skill ordinarily used by others competently engaged in same business. l Agent liable to principal for any harm caused by carelessness or incompetence. l Agent compared to competent real estate agents, not average citizen. © 2010 Rockwell Publishing

Duties to Principal Integrity and honesty Agent must account for any funds or valuables agent receives on principal’s behalf (trust funds). l In California, broker must deposit all trust funds in special trust or escrow account to help prevent commingling or improper use of funds. © 2010 Rockwell Publishing

Duties to Principal Loyalty Agent must put principal’s interests above those of third party, and above agent’s own interests. l Agent may not take any action detrimental to principal’s interests in transaction (such as making secret profit on deal). © 2010 Rockwell Publishing

Duties to Principal Loyalty Duty of loyalty prohibits agent from revealing principal’s confidential information to other parties, or taking advantage of it himself. l Duty not to disclose confidential information continues even after termination of agency relationship. © 2010 Rockwell Publishing

Duties to Principal Disclosure of material facts Agent must inform principal of any facts that could influence principal’s judgment in transaction. Information that must be disclosed: l all offers to purchase l property’s true value l any relationship between agent and buyer l dual agency © 2010 Rockwell Publishing

Duties to Principal Disclosure of material facts Seller’s agent must present all offers to purchase: l even if offer seems unacceptable l even if not accompanied by good faith deposit Duty ends if seller instructs agent not to present any more offers. © 2010 Rockwell Publishing

Duties to Principal Disclosure of material facts Failure to disclose property’s true value is breach of seller’s agent’s fiduciary duty. Seller’s agent must disclose: l if he is actual buyer l any relationship with prospective buyer © 2010 Rockwell Publishing

Duties to Principal Disclosure of material facts Seller’s agent must disclose dual agency. l Broker may act as dual agent only if both parties consent to arrangement. © 2010 Rockwell Publishing

Summary Duties to Principal • • Utmost care Integrity and honesty Loyalty Disclosure of material facts © 2010 Rockwell Publishing

Duties to Third Parties An agent also owes duties to third parties: l reasonable care and skill l good faith and fair dealing l duty to inspect property l disclosures © 2010 Rockwell Publishing

Duties to Third Parties Reasonable care and skill Agent owes duty of reasonable care and skill to third parties (as well as to principal). © 2010 Rockwell Publishing

Duties to Third Parties Good faith and fair dealing Both principal and agent owe third parties duty of good faith and fair dealing. l Seller and seller’s agent must treat prospective buyers fairly. © 2010 Rockwell Publishing

Duties to Third Parties Good faith and fair dealing Duty of good faith and fair dealing requires agent to avoid making inaccurate or misleading statements. Both intentional and unintentional misrepresentations may amount to fraud, giving third party right to rescind purchase agreement or sue for damages. © 2010 Rockwell Publishing

Duties to Third Parties Good faith and fair dealing Party generally can’t sue agent based on agent’s opinions, predictions, or puffing. l Puffing: Nonfactual or exaggerated statements, which party should recognize as unreliable. © 2010 Rockwell Publishing

Duties to Third Parties Good faith and fair dealing Duty of good faith and fair dealing requires agent to disclose material facts about property to prospective buyers, including known latent defects. Latent defect: Problem that wouldn’t be discovered in typical inspection (example: roof leaks in heavy rains). © 2010 Rockwell Publishing

Duties to Third Parties Good faith and fair dealing If agent (or seller) knows of any latent defects, she must disclose them to prospective buyers, even if buyer doesn’t ask. If seller asks broker to conceal latent defect, broker should refuse to take listing. l Agency duties don’t require broker to violate law. © 2010 Rockwell Publishing

Duties to Third Parties Good faith and fair dealing Under CA law, agent/seller not required to disclose: house was occupied by person with AIDS or HIV (in fact, illegal to disclose this) death on premises more than three years earlier (regardless of cause) But can’t give false answers if asked. © 2010 Rockwell Publishing

Duties to Third Parties Property inspection In residential transactions (1 -4 units) agent must inspect property and disclose any problems discovered. l Agent can’t simply rely on seller’s information about property. Agent only exempt from inspection requirement with new subdivision home being sold for first time. © 2010 Rockwell Publishing

Duties to Third Parties Property inspection Agent is not required to inspect areas that are not reasonably accessible to visual inspection. With condominiums, agent only needs to inspect unit for sale, not common areas. © 2010 Rockwell Publishing

Duties to Third Parties Property Inspection Agent still has duty to inspect property (and disclose any problems) even if property listed “as is. ” If buyer wants to sue for agent’s failure to inspect, he must file suit within two years of taking possession. © 2010 Rockwell Publishing

Duties to Third Parties Transfer disclosure statement A prospective buyer in transaction involving 1 - to 4 -unit residential property must be given transfer disclosure statement. l Statement has separate sections for seller, listing agent, and selling agent. l Agent should only fill out his own section of form—not seller’s section. © 2010 Rockwell Publishing

Duties to Third Parties Transfer disclosure statement is used to list seller’s disclosures concerning: l what’s included in sale l known defects in property l any other problems (environmental hazards, improvements without permits, nuisances, and so on) © 2010 Rockwell Publishing

Duties to Third Parties Transfer disclosure statement Selling agent is responsible for giving completed disclosure statement to buyer. l Exempt transactions include property transfers tied to foreclosure, probate, divorce, or other court actions. © 2010 Rockwell Publishing

Duties to Third Parties Transfer disclosure statement If buyer receives original or amended transfer disclosure statement, she may rescind purchase agreement if dissatisfied with disclosures. l Rescission must occur within 3 days of delivery in person, or 5 days if delivered by mail. © 2010 Rockwell Publishing

Duties to Third Parties Other disclosures Lead-based paint disclosure law: Federal law requires sellers and landlords to disclose any lead-based paint hazards to prospective buyers or tenants. l Applies to housing built before 1978. © 2010 Rockwell Publishing

Duties to Third Parties Lead-based paint disclosures Seller/landlord must: l disclose location of any lead-based paint l provide copy of any existing lead-based paint inspection reports l give buyers/tenants EPA pamphlet on lead-based paint © 2010 Rockwell Publishing

Duties to Third Parties Natural Hazards Disclosure Statement: Seller must disclose any risks from natural hazards, such as flooding or earthquakes. Seller’s disclosure must be based on maps prepared by state or federal authorities designating hazard areas, not personal knowledge. © 2010 Rockwell Publishing

Duties to Third Parties Earthquake guide Buyer of property built before 1960 must receive Homeowner’s Guide to Earthquake Safety. l If earthquake safety improvements have not been made to house, that must be disclosed to buyer. © 2010 Rockwell Publishing

Duties to Third Parties Mello-Roos lien disclosure Seller of a 1 - to 4 -unit residential property must disclose whether property is subject to Mello-Roos lien, which pays for local improvements. © 2010 Rockwell Publishing

Duties to Third Parties Breach of duty If agent breaches duties to principal and/or third parties, what are consequences? l Tort liability l Disciplinary action © 2010 Rockwell Publishing

Duties to Third Parties Breach of duty Tort: Breach of a duty imposed by law causing physical or financial injury. Breach of duty may result in tort lawsuit against agent (injured party can sue agent). l Injured party could be third party or agent’s principal. © 2010 Rockwell Publishing

Duties to Third Parties Breach of duty If salesperson commits tort (breach of duty), buyer can sue salesperson, salesperson’s broker, and broker’s principal (seller). l All defendants may be held liable. l If defendant did nothing wrong, but is still held liable, can sue responsible defendants for compensation. © 2010 Rockwell Publishing

Duties to Third Parties Breach of duty Remedies for injured party: l compensatory damages (most common remedy) l rescission of transaction © 2010 Rockwell Publishing

Summary Duties to Third Parties • • • Good faith and fair dealing Latent defects Property inspection Transfer disclosure statement Other disclosures Breach of duty © 2010 Rockwell Publishing

Terminating an Agency Termination of agency: Agent no longer authorized to represent principal. l Most agency duties and liabilities end. Agency relationship terminated by: l actions of parties l operation of law © 2010 Rockwell Publishing

Terminating an Agency Action of the parties Parties can terminate agency through: l mutual agreement l revocation by principal l renunciation by agent © 2010 Rockwell Publishing

Termination by the Parties Mutual agreement Principal and agent can terminate agency by mutual agreement at any time. l If original agreement was in writing, termination agreement should be in writing. © 2010 Rockwell Publishing

Termination by the Parties Principal revokes Principal can fire agent for any reason— or no reason at all. l However, revocation before agreed termination date might breach contract rights; if so, agent could sue principal for damages. © 2010 Rockwell Publishing

Termination by the Parties Principal revokes Exception to general revocation rule: Agency coupled with interest can’t be revoked. Agency coupled with interest: Agent has financial stake or other interest in agency subject matter (a co-owner). © 2010 Rockwell Publishing

Termination by the Parties Agent renounces Agent may terminate agency at any time, without principal’s consent. l However, renunciation before agreed termination date might breach contract rights; if so, principal could sue agent for damages. © 2010 Rockwell Publishing

Termination by Operation of Law Events that cause automatic termination of agency: l expiration of agency term l fulfillment of agency’s purpose (example: property sold) l death/incompetence of either party l extinction of agency subject matter (example: house burns down) © 2010 Rockwell Publishing

Summary Terminating an Agency • • • Actions by the parties Mutual agreement Revocation Renunciation By operation of law © 2010 Rockwell Publishing

Real Estate Agency Relationships Typical real estate transaction is likely to have more than one real estate agent. In California, real estate agents can have these types of client relationships: l seller agency l buyer agency l dual agency © 2010 Rockwell Publishing

Real Estate Agency Relationships Seller agency: Listing broker and his salesperson represent and owe fiduciary duties only to seller. © 2010 Rockwell Publishing

Real Estate Agency Relationships Buyer agency: Selling broker and her salesperson represent and owe fiduciary duties only to buyer. l Buyer’s agent should negotiate with seller through seller’s agent, rather than directly with seller. © 2010 Rockwell Publishing

Buyer Agency Compensation Buyer’s agent is often compensated through commission split with seller’s agent. ● Provision in most MLS listings states that any cooperating broker who procures buyer is entitled to selling broker’s commission. No writing is necessary. ● Buyer’s agent may also be compensated by buyer, instead of commission split. © 2010 Rockwell Publishing

Real Estate Agency Relationships Dual agency: Broker represents both seller and buyer in same transaction. l Legal in CA, but both parties must get full disclosure and give written consent. l Dual agent owes duties to both clients— can’t favor one client over other. l Violations of requirements could result in contract rescission and/or no commission. © 2010 Rockwell Publishing

Dual Agency In-house transaction Most common dual agency situation is inhouse transaction: The salespersons representing buyer and seller both work for same broker. © 2010 Rockwell Publishing

Dual Agency Inadvertent dual agency Many dual agency lawsuits involve inadvertent dual agency, in which listing agent’s conduct with buyer created an agency by implication between agent and buyer. © 2010 Rockwell Publishing

Dual Agency Cooperation and compensation MLS listing agreement forms contain “cooperation and compensation” provision. l Provides that any MLS member who finds buyer may decide who she represents (usually buyer)—she isn’t automatically subagent of seller. © 2010 Rockwell Publishing

Agency Disclosure Requirements California law requires agents in residential transactions to disclose to both buyer and seller which party (or parties) agent is representing. l Applies to properties with 1 -4 units. © 2010 Rockwell Publishing

Agency Disclosure Requirements Timing Listing agent must give seller agency disclosure form describing types of agency before seller signs listing agreement. Selling agent must give copy to each party as soon as practicable; buyer must receive form before signing offer, and seller must receive it before offer is presented. © 2010 Rockwell Publishing

Agency Disclosure Requirements Agency confirmation statement Each agent in a transaction must also provide parties with a statement explaining exactly who the agent represents. Statement usually contained in purchase agreement. © 2010 Rockwell Publishing

Summary Agency Relationships and Disclosure • • Seller agency Buyer agency Dual agency Agency disclosure © 2010 Rockwell Publishing

Broker/Salesperson Relationship Salesperson is agent of broker; broker is salesperson’s principal. l Salesperson not licensed to represent members of public directly; must work through broker. l Broker responsible for supervising salesperson’s real estate activities. © 2010 Rockwell Publishing

Broker/Salesperson Relationship Employee vs. independent contractor Independent contractor: Hired for particular job and/or outcomes, and allowed to use own judgment in carrying out the work. l Compensated for work performed, not fixed wage. Employee: Supervised/controlled much more closely; fixed salary, set hours. © 2010 Rockwell Publishing

Broker/Salesperson Relationship Employee vs. independent contractor Brokers are almost always independent contractors. l Most associate brokers and salespersons are independent contractors, too. © 2010 Rockwell Publishing

Broker/Salesperson Relationship Tax withholding If someone classified as employee, certain employment and tax laws apply. l If agent is employee, broker must withhold funds for income taxes and Social Security. © 2010 Rockwell Publishing

Broker/Salesperson Relationship Broker responsibility Even if salesperson is independent contractor (and not subject to tax withholding), broker is still responsible for supervising salesperson’s actions and may be held liable for her conduct. Brokers are also responsible for workers’ compensation for independent contractors (as well as for employees). © 2010 Rockwell Publishing

Broker/Salesperson Relationship Contracts California requires that brokers have a written employment agreement with each licensee who works for them. © 2010 Rockwell Publishing

Summary Broker/Salesperson Relationship • Employee • Independent contractor • Broker responsibility © 2010 Rockwell Publishing