REAL ESTATE TOPICS:  AGENCY RELATIONSHIP

An important legal concept like agency should be completely understood by every party to a real estate transaction.  Agency is the legal relationship created by a principal (either a Seller or a Buyer) and a real estate broker (to include any associate licensee of that broker, often called agents or salespersons) when they have chosen that broker to act on their behalf, or under their control, in business or financial transactions and in particular in the selling or buying of real estate.  Further, agency creates a fiduciary relationship with certain duties, obligations and high standards of trust, good faith, and loyalty.  Note that the payment of a fee or commission does not create the agency.

In many parts of the country, still today, real estate agents only have an agency relationship with the sellers of real estate.  This is true because the only written agency agreements have typically been the Listing Agreements.  When a Buyer engages a real estate agent to help them find and purchase property, they typically have not executed a Buyer Broker Agreement and therefore do not have an expressed agency relationship.  In other words, agents always worked for the sellers whether it was their listing or not.  Buyers could not be treated as clients, only as customers.  This is an important distinction.

This was also true in Arizona until in recent years, a new distinction was made regarding a real estate agent's responsibility to their clients.  We now have three types of agency possible:  seller agency, buyer agency, and dual agency.  Seller agency is created when a Listing Agreement is completed on a property for sale.  Buyer agency is created when a Buyer Broker Agreement is completed with the intent of purchasing property.  And, dual agency can be acknowledged and permitted by either type of agreement.

A vast body of common and statutory law controls the rights and duties of principal and agent.  In addition to this general law of agency, which applies to all business transactions, state real estate licensing laws directly affect the agency relationship among real estate licensees, their clients and the public.  Even though agency law is separate from contract law, the two frequently come together in interpreting relationships between real estate agents and their principals.  And of course, in addition to the statutory law, there is a large body of case law that helps establish legal practice.  Add to all of that, the Code of Ethics that is imposed and enforced upon Realtors about agency and fiduciary duty by the National, State and local Associations of Realtors.

Among the many requirements imposed by fiduciary duty are the following key elements:

Confidentiality

Without the principal's authorization, an agent cannot disclose to a third party confidential information or information that hurts the principal's bargaining position.  Further, the obligation to preserve confidential information continues after the agency terminates.

Accountability

An agent must fully account to all parties for all monies the agent accepts in the transaction.

Reasonable Skill and Care

The agent must perform to the high standards set by the real estate profession, as promised and must be knowledgeable in contract preparation, marketing efforts, advising on prices, meeting deadlines, and discovery of facts and defects.

Loyalty

Loyalty first means that the agent will not be in a position to benefit from the relationship or transaction, except from the compensation by commission paid (or as may otherwise be agreed upon in writing).  Faithful performance in the best interest of the client is required.  The agent must place the client's interest above their own.

Obedience

The agent must follow the client's instructions regarding the transaction unless they would violate the law or avoid proper disclosure.

Disclosure

The agent must make full disclosure to the client regarding:  conflicts of interest, other offers on the property and material defects in the property.

Seller Agency

An agent represents the seller only in a client relationship.  The only responsibility to the buyer is to deal honesty and fairly in a customer relationship.

Buyer Agency

The agent represents the buyer only, as a client.  The only responsibility to the seller is to deal honestly and fairly, as a customer.

Dual Agency

First of all, any dual representation requires full disclosure and the informed consent of all parties.  A dual agency relationship means that the agent has responsibility to both parties to the transaction as clients.  Agents may confront conflicts in the duties of loyalty, obedience, disclosure and confidentiality.  Therefore, disclosure of confidential information may be made only with written authorization. 

The agent always has the obligation to disclose all known facts which may materially or adversely affect the consideration to be paid by any party.  And, agents are required to exercise reasonable skill and care in the performance of their duties and also have a specific duty of full disclosure of material facts and, honest and fair dealing with all parties to a transaction regardless of their agency relationship.  And, regardless of the type of agency, know too that, Realtors shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, or national origin.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.

Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel.  Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.