As Charlie walked into the office, there was the usual stack of phone messages awaiting him. Although he had been out only a short time, it seemed like everybody had been calling. There was a phone call from a travel agent, wanting to confirm details about his flight to Chicago. There was a call from the ad agency, wanting to drop by with new ideas for an advertising campaign. There was a call from a talent agent, wanting to know if Charlie had ever considered becoming a lecturer in real estate, appearing before various national conventions.
"Whew!" he said. "It seems like everybody is going to be an agent sooner or later."
He chuckled when he remembered the sermon at church last week. The minister had raised the possibility that the serpent in the Garden of Eden was the agent of Satan in tempting Adam and Eve with the apple. Charlie had to confess he didn't know.
Well, whether agency was a part of the divine plan or an invention of human beings, it certainly had been around for a long time. Contrary to popular opinion, maybe "agent" was the oldest profession.
An agency relationship is created when one person authorizes another to act is that person's behalf in business transactions with others. The person who appoints or designates another is called a principal; the person who is so appointed is called an agent; and "third parties" are everyone with whom the agent deals in behalf of the principal. Thus, the law of agency details and defines relationships between a principal, an agent and third parties.
Existence of Agency
Society exhibits many examples of agency relationships. The entertainment industry usually operates on the basis of agents. A person desiring a public appearance by a performer negotiates for that appearance or performance with the agent of the performer. The entertainer has authorized the agent to negotiate on behalf of the entertainer with persons desiring the entertainer's talent. The performer is the principal; the representative is the agent; the public is the third party.
In the field of real estate, agency relationships are also quite common. The owner of real property, desiring the services of someone experienced in such transactions, normally designates an agent (a broker) to be the representative of the owner in negotiating the sale or lease of real property. The seller (or lessor) becomes the principal; the broker becomes the agent; and the public with whom the broker negotiates represents the third party.
Creation of Agency
An agency may be created in a variety of ways. In general, the law1 allows anyone (who has the legal capacity to make a contract) to designate another person as agent. A person who is a minor (or is mentally incompetent) lacks the legal competence, and therefore does not have the ability to designate an agent. Conversely, any person can be designated as an agent. Hence, a minor can be an agent; but a minor cannot be a real estate licensee. Naturally, one should designate the most competent person available to be one's representative.
An agency need not be created in writing, provided it deals with a subject which does not require a written contract. This is known as the Equal Dignities Rule2, the principle which requires "Equal Dignity" for an agency agreement when the subject matter covered by the agreement requires a written document. Hence, a listing for the sale of real property must be in writing, since the goal desired, namely the conveyance of real property, can be achieved only by a written instrument.
Usually the agency relationship is created by express agreement; that is, the principal intentionally gives the agent the power to act in his or her behalf. In real estate, agency is normally achieved through a written listing contract.
One may also become the agent of another by actions instead of by express contract. Thus, if a person acts in such a manner as to indicate that he or she is acting on behalf of another, that person may be responsible for the obligations normally reserved for designated agents.
An agency may also be created by ratification: A principal may later ratify actions taken on his or her behalf by a person who had not been previously given authority. For instance, a broker who presents an offer on unlisted property, which is accepted by the seller, may be regarded as agent of the owner, because the owner ratified the unauthorized representation.
Since the designation of an agent is usually achieved by a contract, the essential elements of a contract must be present (mutual consent, consideration, legally competent parties, and lawful purpose). The law has held, however, that a person can serve as the agent of another without compensation.3 Such an arrangement is known as a gratuitous agency. The lack of consideration does not relieve the agent of the responsibilities of being the representative of the principal. For example, if a broker offers assistance to a buyer in obtaining financing, the broker is acting as agent of the buyer in doing so, even if not separately paid for such help. All of the obligations of an agent rest on a gratuitous agent.
Effects of Agency Relationship
The agency relationship created between a principal and an agent is described as a fiduciary relationship; that is, it is based upon faith and trust. The word "fiduciary" comes from the Latin word fides, which is the Latin word for faith. Thus, the law expects of the agent faithful performance of the lawful instructions of the principal; highest loyalty to the best interests of the principal; honesty and faithfulness; and full disclosure of facts and information.
Principal's Liability
In response, the principal takes on certain obligations to the agent. The principal is liable for the agent's compensation; that is, when a broker has performed on the listing, the principal is obligated to pay the broker for the services rendered. It is not necessary for the property actually to sell in order for the broker to be able to claim a commission; the listing merely authorizes the broker to find a "ready, willing and able" buyer. When the broker has done so, the broker has earned the commission, even though it is not normally paid until the transaction has closed.
Additionally, the principal is responsible to the agent for indemnification. The principal is obligated to indemnify the agent against loss arising because of the principal's act. If a seller gives false information to the broker, and the broker, without notice to the contrary, passes on the information to the buyer, the seller is liable for any damages; generally, the broker is not. The law in each case would determine whether or not the broker should have known that the information was false. If the court decides that the broker should have known, then both the broker and seller would be liable.
Duration and Termination
The agency relationship usually continues for the period of time stated within the agency agreement. Agencies can be terminated, however, by operation of law or by certain events.
An agency is terminated by operation of law whenever the subject matter of the agency has been destroyed or extinguished. If a broker has a listing on a real property and the real property (or improvements) is destroyed, the listing terminates.
A listing can be terminated by the death of the principal. Thus, if the owner dies, the broker's authority to act on behalf of the owner also terminates.
An agency can be terminated by the death of the agent. If a broker dies, all property listed with that broker would need to be relisted by the one who becomes the owner of the brokerage business. The property owner had employed the deceased broker to render personal services in relationship to the property. If the broker dies, the broker obviously cannot render such services, and thus, all listings would terminate.
The agency may be terminated by the acts of the parties. The principal and agent may agree to mutual termination, each relinquishing their rights and releasing the other from the duties owed them under the contract.
The agency may also be renounced by the agent. If a person no longer desires to serve as the agent of the principal, that person has the power (but not necessarily the right) to resign, giving up his or her role and authority. The agent would be liable to the principal for any damages sustained by the principal.
The agency may generally be revoked by the principal. Thus, if an owner no longer desires the broker to be his or her representative in the sale of a property, the owner has the power to cancel the authority granted by the agency agreement. The principal would be liable to the agent for any damages.
There is an exception to the principal's power to revoke: A principal may not revoke an agency when the agent has an interest in that agency, or the property represented therein. For example, if a broker agreed to arrange financing for a subdivision project, with the understanding that the property, once developed, would be listed with the broker for sale to the public, the principal in that case (the subdivider) does not have the power (or the right) to revoke the broker's authority under the listing contract. In such a case, the broker would be determined to have an interest in that agency; the principal would not have the power to revoke the agency, and the agency would not be terminated by the death of the principal.4
Scope and Authority
The agent normally has the authority to do everything ordinary, necessary, and proper in order to carry out the purpose of the agency. The broker is not authorized to perform any illegal acts, nor is the broker authorized to go beyond the scope of the authority granted.
An agency may be granted as a universal agency (in which the agent has the authority to perform a wide variety of activities for the principal). The agency may be created as a general agency (in which the broker has the authority to act on behalf of the principal in all real estate transactions). Or the agency may be created as a special agency (the agent has the authority to find a buyer for a specific property).
The agent's authority may be described as either actual or ostensible. Actual authority is the authority a principal intentionally, or by lack of ordinary care, confers upon the agent.5 It is the type of authority normally granted by the usual listing contract.
When an owner lists the property with the broker, the broker is employed to find a "ready, willing, and able" buyer. The actual authority thus granted, by implication, can include also the right to advertise the property, the right to hold an open house, the right to show the property to prospective buyers, the right to erect a yard sign advertising the property for sale, etc. The actual authority granted by the owner gives the broker the right to do everything normal and customary in carrying out the assignment.
Ostensible authority refers to that type of authority which the principal, intentionally, or by lack of ordinary care, causes or allows third parties to believe the agent to possess.6 Ostensible authority is the apparent authority that an agent seems to have. The courts have determined that if the principal knows of ostensible authority being claimed by the agent and the principal does not deny such authority, the agent gains the added authority.
Suppose that a seller, having given a broker a listing, overhears the broker say to a prospective buyer, "I'm sure if you offer the listed price for this property, I can get the owner to put in new carpeting." If the broker makes such an implied promise without being authorized to do so by the owner, the broker is exercising ostensible authority. If the seller, knowing of such a promise, does not deny it, the act of the agent will bind the seller. The agent has both actual and ostensible authority.
The law even says that in the event of an emergency, the agent has expanded authority, including the power to disobey the instructions of the principal where it is clearly in the interest of the principal, and in circumstances where additional instructions from the principal cannot be obtained.7 For example, if an owner tells a property manager: "Never enter a tenant's unit without advance notice"; and the manager notices that dense smoke is coming from the apartment, the manager could (and probably should) investigate, even without prior notice to the tenant. Such authority is unique, and particular to the circumstances of the situation; an agent relies on emergency authority only in extreme cases.
There are some restrictions on the authority of an agent. An agent can never have the authority to do that which is a fraud upon the principal, nor does the agent have the authority to perform an act to which the principal is bound to give personal attention (since a principal cannot delegate to an agent any task which necessitates the principal's involvement).
The broker does not have the authority to accept an offer, to modify the seller's terms, or to enter into a contract binding upon the principal without additional authorization. While the agent has the authority to negotiate on behalf of the principal, the agent normally does not have the authority to bind the principal to acceptance of a particular offer.
- California Civil Code, Title 9, Chap. 1, Sec. 2292
- California Civil Code, Sec. 2309
- Rodes vs. Shannon (1963) 222 C.A.2d 721
- Restatement of agency, Sec. 138
- California Civil Code, Sec. 2316
- California Civil Code, Sec. 2317
- California Civil Code, Sec. 2320
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