Creating Agency Relationships

 

Let's learn how agency relationships are formed:

Agency relationships are covered on the Real Estate License Exam, but they're also something you should understand as you begin to practice real estate.

The methods for establishing an agency relationship are pretty universal. And while it’s a good idea to check your state’s license law to see which of these methods are recognized or prohibited, you should still understand what these methods are and how they work.

Express Agreement 

Express agency is created when the licensee and principal “express” their intentions,  either orally or in writing, to enter into an agency relationship.

The validity of an oral agreement in establishing an agency relationship varies from state to state. It may also be possible for an oral agreement to establish an agency relationship, but to not be enforceable by the licensee when trying to collect a fee.

The typical written agreement is a listing agreement or a buyer’s agency agreement. The written agreement is the most appropriate and legally safe way to create an agency relationship.

Implied Agency 

If it walks like a duck, acts like a duck and sounds like a duck then it must be... an agent! Implied agency establishes an agency relationship through the actions of the two parties. Although nothing formal has been said or written down, the real estate licensee and the principal act as if they have an agency relationship. Creating an implied agency may not be what the two parties intended, but an agency relationship can be created by their actions anyway.

Let’s look at an example:

Susan is selling her home by herself and puts up a for-sale sign on the lawn. You drive by, see the sign, and stop in. You identify yourself as a real estate agent and ask some questions about the house. Susan tells you she doesn’t want to list the house for sale with any brokerage, but she does tell you to bring any possible buyers around.

The next day you bring the Bauers, who really like the house and want to make an offer. You inform Susan and begin negotiating a deal. If this situation were to end with you filing a lawsuit for the commission, ultimately it would be up to a court to decide. But you and Susan would probably be considered to have established an implied agency relationship because both of you acted as though you were her agent.

Agency by Estoppel

Agency by estoppel is a little trickier. It happens when a person makes a representation to a third party, whether by words or conduct, that another person is their agent- and subsequently the third party deals with that person as an agent. The original person will not be permitted to deny the existence of the agency if to do so would cause damage to that third party. And by damage we mean financial loss.

The original person who makes the representation is treated as having created an agency relationship between himself (as the principal) and the other person (as the agent), even though there is no actual "express" agreement saying they want to do so.

Here are a couple examples: 

  1. Stephen is Oscar's agent. Oscar terminates the agency relationship but, unbeknownst to him, Stephen continues to transact with third parties on his behalf. If Oscar fails to notify any third parties of Stephen's termination, Oscar may still be bound to any agreement Stephen enters into. 

  2. Say you're the owner of a building and you tell your agent to show an apartment to a possible tenant. The agent goes ahead and negotiates a lease even though you didn't give the agent any direct authority to do so. The tenant assumes the agent has the authority, and an agency by estoppel has been created.

Ratification 

Agency by ratification occurs when a principal "ratifies", or approves and adopts, an act which has already been done in his name and on his behalf by another person (like a real estate licensee) who, in fact, had no actual authority (whether express or implied) to act on behalf of the principal.

However, ratification only creates an agency relationship between the principal and the agent for that one act that was ratified by the principal- not for any past or future action.

So what does this all mean?

Suppose a real estate agent, without authorization and without ever speaking to the seller, negotiates a deal for a house that's for sale by the seller. One day the agent arrives with a completed contract, simply awaiting the seller's signature and acceptance of the deal.

If the seller "ratifies" the agent's actions by accepting the deal, an agency by ratification has probably been created. The word "probably" is used here because the agent most likely wants a fee for his services and may have to sue the seller to collect. When that's the case, the courts will determine whether an agency relationship existed from the beginning of the negotiations.

Agency by Necessity

Agency by necessity arises when one party makes a decision on behalf of another person who is unable to do so. The decision must be essential in nature, and it must be in the principal’s best interests when making the decision.

Agency by necessity arises only when it is practically impossible for the agent to communicate with the principal, making it a "necessity" for the agent to act on behalf of the principal. It is difficult to prove this type of agency, which is why agency by necessity does not often arise. And authority to act, in case of emergency, usually doesn't prevail over any express instructions given by the principal.

Agency Coupled with an Interest

An agency coupled with an interest is a situation in which an agent has some kind of interest in the property that’s being sold.

For example:

Suppose a part-time broker is also an architect. The broker/architect agrees to design some houses for a builder, who’s giving the broker/architect the listings for the sale of the finished houses. In essence, the broker/architect has now made an investment in the project, so the builder can not cancel the agency agreement.

In conclusion, most agency relationships are established in writing, with different agreements for buyer and seller agency relationships. Listing agreements involve sellers, and buyer agency agreements involve buyers. Within the two categories are different kinds of agreements. Many details within various types of agreements are similar with respect to the duties to be performed.

The differences usually deal with circumstances under which an agent will or won't get paid.