© OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Learning Objectives Define the basic concepts of agency.

Chapter 7

© OnCourse Learning. All Rights Reserved.

Laws and Regulations Governing Brokerage Relationships

Learning Objectives

Define the basic concepts of agency Define three types of agency Define the employment authority of real estate agents Describe agency and subagency relationships in real estate contract Define duties and liability of principals and real estate agents Describe examples of willful misrepresentation and negligent misrepresentation


General Agency Concepts and Definitions

Agency: • A legal relationship that considers firms, agents, subagents, and principals as

the same legal entity Agent: • One authorized by another to act on the latter’s behalf

Principal: • One who appoints agent to represent him or her

Subagent: • Any licensee or firm working through the agent; thus owing the same duties

and responsibilities to the principal Fiduciary relationship: • A relationship of trust between the agent and principal• Agent becomes trustee of principal

Disclosure of agency relationships in real estate MUST be in writing

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Classification of Agency Relationships

Universal agency: • Authority to handle all areas of business for a principal• Typically requires a Power of Attorney

General agency: • Authority to handle all aspects of a particular area of a principal’s

dealings Special agency: • Limited to one well defined task• The agent is not authorized to make decisions on the part of the

principal but only to stand in the principal’s place to receive information and to bring this information to the principal for a decision.

• Ex: Most real estate agency relationships

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Creation of Agency Relationships

Relationships Between Transactions Parties:• Created by contractual agreement between the firm and the principal• Example: Listing agreement. Firm is the agent; seller is the principal

Relationships Between Brokers/Firms:• In-house brokerage employment agreement between firm and agent• Co-brokerage agreements between listing and selling firm

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Implied agency: • The actions of the principal and agent indicate that they have an agency

agreement• Duties and responsibilities created by an implied agency are the same as

those created by an express agency• Unacceptable in real estate because North Carolina Real Estate Commission

rules require all agency agreements to be in writing• Review of the “Working with Real Estate Agents” pamphlet at first

substantial contact is mandatory

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Estoppel:• An individual claims incorrectly that a person is his/her agent• A third party relies on the incorrect representation• Individual is prohibited (stopped, estopped) from later claiming the agency

relationship does not exist• Individual will be liable for the actions of the incorrectly claimed agent

Scope of agent’s authority:• Expressed• Agent’s authority is limited to a single charge

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Scope of agent’s authority:• Expressed:• Authorized to do specifically what the agency agreement states

• Implied:• Based upon custom and may be the result of an expressed agreement• Example: Agents lists a foreclosure property for the bank. Bank’s

agreement says agent is to maintain the property. Agent is authorized to do what is reasonable and customary to maintain the property.

• Apparent:• Based on appearances to a third party that an agent has certain authority

when in fact the agent does not possess such authority

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Agency & agent compensation: • Agency relationships are not determined by the source of the

agent’s compensation• Agency is defined by contract• Agents owe a fiduciary duty to their principal, regardless of the

source of compensation

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Agency and Sub-Agency Relationships

Single Agency: • Limited to being able to represent only one of the parties in a

transaction• Primary advantage is that of reduced risk• Major disadvantage is the limitation of being able to only

represent one party

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Exclusive Seller Agency: • Listing with an independent broker:• This is the clearest of the agency relationships• The independent broker has a one-on-one relationship with his/her seller

• Listing with a multi-agent firm • Agency agreements are between the principal and the brokerage firm:• Individual brokers become subagents of the principal through the firm• Communication to any subagent is considered the same as communication

to the principal• Sub-Agency:• Individual brokers become subagents of the principal through the firm• Communication to any subagent is considered the same as communication

to the principal

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Cooperating with Other Brokers:• Listing firm and agents are sub-agents of the seller• Listing firm and agents work with-not for- the buyer

Cooperating Firm Acting as Seller Agent:• The listing and selling brokers work exclusively for the seller• Buyer should acknowledge he has been informed the agent is working for the

seller Exclusive Buyer Agency:• The buyer is the broker’s principal (client) • Agency relationship is between the buyer and the broker

Buyer as Principal:• All agents are working for the seller

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Both Seller and Buyer Agency with Dual Agency for In-house Sales:• Listing firm will also represent the buyer interested in that listing• Dual agency cannot be entered without being disclosed and “informed

consent” being obtained in writing Agency Relationship and Real Estate Rentals:• In property management the landlord is the agent’s principal• A prospective tenant may hire a broker to find a property. The tenant would be

the broker’s principal Agency’s Effect on Communication Requirements for Contracts:• The buyer is the broker’s principal (client) • Agency relationship is between the buyer and the broker

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Agency’s Effect on Communication Requirements for Contracts:• Agency status is an important determinant on when communication of

acceptance, rejection, or withdrawal of an offer occurs• Acceptance, rejection, or withdrawal of an offer requires

communication to the offerer, and/or his agent to be effective• Communication can be by any reasonable means

Agency’s Effect on Disclosure of Material Fact:• An agent must disclose all material facts he/she knows or reasonably

should have known, regardless of who he/she represents• Agent must disclose personal information about a third party to the

principal

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Termination of Agency:• Agency relationships end in accordance with terms of agency contract• Agency contracts must have definite expiration date• Can be terminated by agent or principal breach of duties

Disclosure of Agency Relationships:• Must be in writing• Must be for a definite period of time• Must contain pre-defined (by NCREC) non-discrimination clause• Agent is required to review Commission’s Working With Real Estate

Agents brochure with potential client’s by first substantial contact



First Substantial Contact:• Flexible point in time in which the seller/buyer would start to disclose

any personal (confidential) information they would not want a third party to know

• Open House Rule:• First substantial contact would only occur when a prospect shows

sincere interest in a property as opposed to “looking”• If first substantial contact is by telephone or other electronic

communication the agent immediately disclose who they represent and send copy of Working With Real Estate Agents brochure within 3 days

First Contact vs. First Substantial Contact:• First contact always occurs at first contact• First substantial contact may not occur at first contact

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Duties and Liabilities of Agents

Agents Duties to Principals:• Broker is in a fiduciary (trust) relationship to the principal

Loyalty:• Broker must work diligently to serve the best interests of the principal• The broker cannot work for any adverse interests to the principal without

disclosure and principal’s consent• Requires the agent puts the client’s interests above their own

Obedience:• The broker is to obey all reasonable and legal instruction from his principal

Skill, Care, Diligence:• Broker is expected to perform with a degree of skill, care, and diligence

common to other reasonable prudent professionals in a similar undertaking• Failure to exercise skill, care, and diligence is a breach of agency law and

grounds for disciplinary action

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Disclosure of Information:• Broker must disclose all information material to the transaction• Brokers must not disclose certain information to third parties• Brokers will be liable for misrepresentation

Accounting:• Broker must account for and promptly remit, as required, all

money or property entrusted to the broker for the benefit of others• Brokers are required to adequate and accurate records• Monies must be kept in a separate “trust” account or “escrow”

account

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Agent’s Duties to Principal Under Real Estate License Law and Commission Rules:• Addressed in Licensing Law and Rules and Regulations in

Appendix C Agent’s Duties to Third Parties:• Agent owes third party honesty and disclosure of material facts

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Material Facts

Facts About the Property Itself (Defects) Facts Relating Directly to the Property (Surrounding Influences Facts Relating Directly to the Ability of the Agent’s Principal to

Conclude the Transaction Facts Known to be of Specific Important to a Particular Party Third Party Personal Information That Must be Disclosed to Agent’s

Principal:• Willingness to agree to terms other than those stated previously• Motivation• Information that might influence the principal’s decision in a

transaction

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Material Facts

Misrepresentation:• False or incorrect information• Willful Misrepresentation:• Stated intentionally or without regard to actual facts

• Negligent Misrepresentation:• Unintentional • Had the agent utilized reasonable skill, care, and diligence the

misrepresentation would not have occurred • Agent “reasonably should have known”

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Material Facts

Omission:• Failure to disclose information• Willful omission:• Deliberate failure to disclose material facts known to agent

• Negligent omission:• Unintentional failure to disclose material facts the agent “reasonably

should have known”

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Other Laws Governing the Disclosure of Information in Real Estate Transactions

Stigmatized/Psychologically Impacted Properties:• Serious illness, or death, of a previous occupant• AIDS - considered a handicap by federal law and not to be disclosed• Registered sex offender

Consumer Legislation:• North Carolina Unfair and Deceptive Trade Practices Acts prohibits the use of

unfair or deceptive practices in commerce• North Carolina allows treble damages for violations

Seller’s and Buyer’s Responsibilities Under Common Law:• North Carolina Unfair and Deceptive Trade Practices Acts prohibits the use of

unfair or deceptive practices in commerce• North Carolina allows treble damages for violations

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Seller’s and Buyer’s Responsibilities Under Common Law:• Caveat Emptor (let the buyer beware) – Seller has no obligation to buyer

beyond avoiding fraudulent acts• Broker must disclose even if seller has no obligation to do so

North Carolina Residential Property Disclosure Act:• Applies to most residential transfers (including owners selling own property)• Some exemptions from this act• Because of Caveat Emptor seller may select the box “No Representation” and

seller is relieved of obligation to disclose even if he knew of condition• Statement must be provided to buyer no later than the first Offer to Purchase• If form not provided buyer has right to cancel within three days

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“As Is” Sale:• Does not relieve agent of responsibility to reveal material facts including

defects Lead-Based Paint Disclosure:• Applies to properties built prior to 1978• Buyers/lessees must be provided EPA pamphlet Protect Your Family From

Lead In Your Home

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Synthetic Stucco Disclosure:• NCREC considers existence of synthetic stucco to be a material fact• Brokers must disclose even if property formerly covered in synthetic

stucco Liabilities and Consequences of Agent’s Breach of Duties:• Disciplinary action by NCREC • Civil liability of agent• Criminal liability of agent• Civil liability of principal (for agent’s misconduct)

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Dual Agency

Dual Agency Basics:• Exists when a firm attempts to represent both the seller and the buyer in the

same transaction• It does NOT exist when the listing firm is working with a buyer that it does

not represent since it does not have written or oral buyer agency agreement Inherent Potential Conflicts of Interest Unintentional, Undisclosed Dual Agency:• Agents are prohibited from “acting for more than one party in a transaction

without the knowledge of all parties for whom he or she acts”• Often occurs when agent has written authority to represent one party but acts

in such manner to benefit the other party without the principal’s knowledge or consent


Dual Agency

Intentional, Disclosed Dual Agency/How To Handle in North Carolina:• Must be disclosed in advance and have written and “informed” consent of

each party• The firm shall not disclose personal information about one party to the other

party without consent• Must be disclosed to the other party at first contact

Designated Agency:• Type of Dual Agency• Limited to in-house transactions where one individual agent is designated to

represent the interests of the seller and the other agent to represent the buyer• Agent is not allowed to practice designated agency where the agent has

obtained personal or confidential information about the other party prior to becoming designated

• BIC is not allowed to engage in designated agency with provisional broker under his supervision

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Duties and Liabilities of Principals

Principals Duties to Agents:• Must generally cooperate with the agent• Compensation

Principals Duties to Third Parties:• Caveat Emptor• Seller has no responsibility for disclosure of defects that should have been

discovered during inspection• Seller has duty not to conceal defects where a reasonable inspection would not

disclose Liabilities and Consequences of Principal’s Breach of Duties:• Civil liability• Criminal liability• Liability to the agent for withholding or giving false information

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© OnCourse Learning. All Rights Reserved. Laws and Regulations Governing Brokerage Relationships Learning Objectives Define the basic concepts of agency.

Documents

principal relationships

agency agreements

definitions agency

types of agency

principal agent

agency agreement duties

subagency relationships

basic concepts of agency