Professional Documents
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RES 301 LECTURE NOTES WEEK 10, 11 and 12
RES 301 LECTURE NOTES WEEK 10, 11 and 12
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UNIVERSITY OF BOTSWANA
FACULTY OF ENGINEERING AND TECHNOLOGY
Department of Architecture and Planning
RES 301 ESTATE MARKETING AND AGENCY LECTURE NOTES WEEEK 10, 11 AND 12
consideration of possession of honour and integrity. This development which started in Medieval
Europe at the rise of Feudalism, (in the 16th century) spanned through the 18th century during the
enclosure movement and also the industrial revolution and finally metamorphosed into the estate
surveying profession in the 19th century.
Estate agency is one aspect of the multi-faceted profession of Estate Management/Real estate.
Estate agency in its simplest form means acting on behalf of a principal in the disposal, purchase,
lease or development of a landed property. Landed property here could be bareland or land and
buildings. (Ubosi, 2001). In United Kingdom, it is called house agency. It is a profession or
commercial operation which has affected so many people and lives.
AGENCY: Agency is a comprehensive word used to describe the relationship that arises when
a person is appointed by another to act on his/her behalf. In this regard, agency could be said to
be the relationship existing between parties, where one party known as the principal appoints
another known as agent to enter into a contractual obligation with a third party on his behalf and
act in his best interest. The word agency has been variously defined as follows:
A relationship by which one party, usually the agent, is empowered to enter into binding
transactions affecting the legal rights of another party, usually called the principal, as, for
example, entering into a contract or buying or selling property in his name or on his
behalf (McGraw-Hill Dictionary of Architecture and Construction, 2003)
The legal relationship between a principal and his agent arising from a contract in which
the principal engages the agent to perform certain acts on the principal’s behalf (Real
Estate Dictionary, 2004)
A contractual relationship between one party called the ‘Principal;’ confers authority on
another called the ‘Agent’ to perform defined functions wholly on his/her behalf.
Relationship between a principal and another party, named as agent, who is authorized to
carry out the principal’s instructions in transactions with a third party (Banking
Dictionary, 2006)
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A legal relationship involving a person the principal and another who acts for the person
the agent or the area of law concerned with such relationship (Encarta Dictionaries, 2007)
A relationship in which one party (the agent) acts on behalf of and under the control of
another (the principal) in dealing with third parties (Britannica Concise Encyclopedia,
2006)
The relationship between principal and agent which arises out of a contract written or oral
wherein an agent is employed and authorized by the principal to represent him/her in
business transactions with a third party (Escarpment Reality Inc., 2007).
As stated in Law Encyclopedia (1998), ‘ The law of agency allows one person to employ another
to do her or his work, sell her or his goods, and acquire property on her or his behalf as if the
employer were present and acting in person. The principal may authorize the agent to perform a
variety of tasks or may restrict the agent to specific functions, but regardless of the amount, or
scope, of authority given to the agent, the agent represents the principal and is subject to the
principal’s control. More importantly, the principal is liable for the consequences of acts that the
agent has been directed to perform.’
ESTATE AGENCY: As its name connotes, Estate Agency is the performance of acts by a party
referred to as an agent on the instruction of another party referred to as the principal leading to
the disposal or acquisition of an interest in landed property by way of sale or purchase and for an
indefinite or definite period of time for the payment of a consideration termed commission. As a
result estate agency involves the agent in a full range of services including advice to a vendor or
purchaser, lessor or lessee with the aim of availing his client of the maximum benefits from the
transaction.
Estate Agency Institute Chamber (UK) defines an agent as someone who buys, sells or lets
properties and the interest therein. Research Institute for Consumer Affairs―RICA (UK) defines
it as the selling of houses. Agency relationship is the relationship that exists between one person
called the principal and another person called agent.
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The various segments of real estate agency practice include Property management, valuation,
project development and management, letting, buying and selling real estate products.
Parties in An Agency:
The creation of an agency necessitates the existence of only two parties the principal and the
agent. The principal can either be a vendor or a purchaser or he can be lessor or lessee. In the
event of an instruction to sell or to purchase an interest in a property the principal is either the
vendor or the purchaser whereas the principal is either the lessor or the lessee in a case of letting.
In the case of managing a property the principal is usually a lessor but can equally be a lessee.
Whereas only two parties are needed for an agency created, its accomplishment calls for a
minimum of three parties. To conclude an agency for sale where the principal is the vendor, a
purchaser must emerge thus calling for a tripartite game. It is even possible for four people to be
involved and this is in a situation where the purchaser has his own agent. In situations like this
the agents from the two parties are deemed to fuse into one since their interests are similar
(commission). Similarly, the principal in an agency for the purchase to be concluded, a third
party- a vendor must emerge. This vendor again may have his own agent leading to the
possibility of four people meeting to conclude the agency but again having the two agents fusing
as earlier explained.
It is a characteristic feature of agency to have more than one agent in a transaction. This may be
as a result of the vendor (in the event of a sale) instructing more than one agent, or a situation
where an agent has been given instruction-appointing sub-agents himself. Whether the
instruction to more than one agent is from the vendor directly or has been occasioned by the
agent instructed by him what has resulted in the final analysis is the existence of four types of
agency namely: -
Open agency
Sole agency (exclusive agency),
Exclusive right to sale agency
Multiple agency.
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Exclusive-Right-To-Sell-Agency:
The exclusive-right-to-sell-agency is a second type of sole agency and a more committal form of
it. It operates within a time frame also and only differs from sole agency in the sense that
whoever procures the buyer (the owner inclusive) within the time allowed, for the sale the
exclusive right to sale agent is entitled to his commission.
Joint Agency
A situation may arise whereby the sale, letting/leasing or purchase of a property could be given
to a number of firms to work under one umbrella; where such occasions arise, it is referred to as
joint agency. This occurs when two or more agents are briefed by a principal to act jointly on his
behalf in carrying out a property transaction. The agents briefed are known to each other or one
another, in cases where there are more than two. An overall coordinator may be appointed
among the participants and no estate firm is superior to the other under this arrangement. They
all have the same rights and powers. Remuneration is also shared equally. This type of agency is
mostly common (in some countries) in the letting of commercial properties where large coverage
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is required. The commission realized from the property is shared between the agents on
percentage basis regardless of who carried out the transaction.
Sub Agency
This is a situation where by an agent deems it fit to appoint another agent who acts as a sub agent
to the principal agent and he participates in marketing the property. However, appointment of a
sub agent is geared towards achieving a quicker sale. Both parties usually agree on a fee sharing
ratio which is usually the guiding rule.
Escrow:
In sales, the term ESCROW is used to describe an arrangement for keeping in trust by a third
party documents relating to a property for which closing cannot be made and the parties do not
intend to meet again. This is usually done at the instance of the purchaser and the documents are
retained by the “Escrow” until all matters have been cleared up after which he delivers the papers
to the purchaser.
The relationship of agency in real estate management practice can be created in a variety of
ways. It must be noted that the primary element of creation is conferment of authority to ‘Act.’
These include:
1. Express agency: Agency created expressly means that a verbal (oral) or written
agreement has been made between a principal (owner) and the agent (could be an agency
real estate surveyor/consultant). This is carried out with little or no formality, however
for matter of convenience and avoidance of future dispute, the arrangement is best made
in a written form.
2. Implied Agency: This type of agency is made or implied by law. The agency
relationship here is one entered into by parties’ principal (owner) and the agent and is
signed and sealed at law to undertake some action on behalf of the instructing principal.
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In real estate agency, the agent does not merely sell landed properties, he also negotiates the sale,
purchase and leasing of houses on behalf of clients. He is equally concerned with land, shops and
office buildings, other commercial and industrial premises. He offers guidance as to the
appropriate method of sale whether by private treaty auction or tender and his counsels are, in
effect, a catalyst for all property transactions.
The practice of estate agency embraces a full range of services which include:
Advising the vendor, purchaser, lessor or lessee on the state of condition of the property
Compiling detail description of all types of properties namely – offices, warehouses,
shops, residential accommodation and industrial premises
Assessment analysis and comparison of values and rents of all types of real estate
transactions
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The estate agent must have the necessary background in law including the law relating to estate
agency, knowledge of the property market, the principles and process of valuation, sources of
finance and high degree of meticulousness.
4.1.5 PRINCIPAL/AGENT RELATIONSHIP
The Agent and The client.
Specifically however the agent acts for the principal in order to bring him into legal relations
with others. Once the relationship is created the agent in carrying out his functions is expected to
be in a fiduciary with his principal. This means that he is expected to have a confidential
relationship requiring the highest degree of loyalty to his principal.
In the United States of America where estate agents are known as brokers, licensing is a pre-
requisite for the practice of brokerage in all the states. To be licensed, the candidates should pass
a written examination and should have been associated with a real estate broker for one or two
years.
To the Estate Agent therefore honour, trust and integrity still count as at the medieval ages when
these formed the only qualifications for appointment as agent (then steward, or bailiff). To
engage in dishonourable or untrustworthy acts is to ask for sanctions from the regulatory body
which could include the withdrawal of the seal of practice. This however is of serious
consequence to a agent/surveyor with honour and integrity because those that lack these
attributes quickly join the big crowd of quacks.
An agent is a person who is legally empowered to enter into contracts on behalf of another called
the principal, an agent must obtain the authority or permission of his/her principal before final
conclusion with a prospective third party. The Advanced Oxford (English) Dictionary defined an
agent as ‘a person who acts for, or who manages the business affairs of another or other’. In
creating an agency, the capacity to act as principal and the capacity of both parties to enter into a
relationship are basic requirements. Thus, infants and mentally unsound persons have limited or
no capacity to act as a principal or be appointed an agent.
In most parts of the world, agency is best created in writing. This is an agreement between the
agent and his client/principal who is either a vendor or a purchaser for the sale or purchase of
property. Of specific mention in the agreement must be such terms as:-
- Commission
- The duties of the agent
- The commencement date
- The duration
- Type of agency
- The address and description of the property to be sold
- The full identities of both parties.
The commonest form of agency is that of sales while the contract between a seller and his agent
(broker) is called a listing agreement. Some agency contracts of sale between a vendor and his
agent are usually by word of mouth or oral. However, the best way to have an agency contract is
through written documents. In America however, the contract of sale between a vendor and his
agent is covered by the Statute of Frauds which insists that the contract must be in writing. The
law stipulates that among other things the description of the property must be included in the
contract. These laws cover mainly the contract of sale with only few sections addressing the
other aspects of agency such as leasing and management.
Principal and agent relationship may be created in two main ways namely:
a. Express Agency: This may be orally or in writing. The major consideration is that it is
usually under seal by way of Power of Attorney. This type of agency is either in written
or oral form. It is an agreement made between a principal and the agent with little or no
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formality. Express agency might be created by deed where the agent is expected or
required to execute deeds on behalf of the principal.
b. Implied Agency: This type of agency is created or implied by law. The agency
relationship here is entered into by the principal (owner) and the agent is compelled by
law to undertake some action on behalf of the principal.
i. Agency by ratification: Ratification occurs where an agent performs an act which is not
within this his actual authority, but which later becomes binding because the principal
accepts the act as having been done on his behalf. The following conditions must be
fulfilled for a valid ratification.
The person doing the act must purport to do it as agent and not on his own
behalf.
The principal must be the person the agent had in mind as at the time of the
act.
At the time of ratifying the act, the principal must be aware of all
circumstances relevant to the act or must have waived further enquiry.
The principal must have been in existence when the act was done
The principal must have the capacity to do the act
The ratification must take place within reasonable time
The whole contract must be ratified
A good example of an agency created by ratification is a situation whereby an agent without the
principal’s prior consent , sources for a good tenant to occupy his newly completed property ,or
his newly vacated property, after which the principal consents to it.
ii. Agency by estoppels: This can be referred to as an agency created out of mutual benefits.
This occurs where there is a relationship between the principal and the agent. For
instance, a transaction involving husband and wife. If an innocent party enters into a
contract with either of the couple, neither of them (the couple) can claim ignorance of
the other.
iii. Agency by necessity: In emergency situations where a person is obliged to act in order to
prevent loss to the other person, such a person that so acts has become an agent of
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necessity to the other. This is created when an agent acts beyond his conferred
authority in executing or performing some functions. This type of agency is created
under the following condition:
- It must be impracticable to obtain the principal’s instruction
- There must be a real emergency that renders it neccesry for the agent to act as he did that
is, there must be imminent commercial necessity.
- The agent must have acted in good faith that is, the agent must act in the best interest of
the client (that is the principal).
Other reasons why clients use qualified agents are (in order of priority):
Convenience
Speed of transaction
Coverage of access to sellers/tenant
Skill
Good selling price/rent
The specific functions of an estate agent can be examined from two distinct perspectives: his
duties under the law and in his daily delivery of his professional services. However,
professionals have common grounds in the modus operandi of agency assignments. The day to
day functions include:
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Attending to clients: This is the most prominent function of the real estate agent. It
involves taking requests and /or instructions through interviews or questionnaires which
are completed by the clients depending on the circumstance of each case. For instance, an
interview is enough in the case of sale/purchase of property, while a questionnaire will be
more appropriate in letting.
Securing accommodation and /or property for clients in line with their requests. He
negotiates the terms and ensures that his client’s interests are well protected.
Selection of tenants: This is one of the most important decisions of a real estate agent.
They have to choose the prospective tenant who has the ability and willingness to meet
the terms of lease (especially of rent), the most suitable for the type of use the property is
to be subjected to.
Negotiation of terms: He acts in the negotiation of terms for and on behalf of his client
which includes:
- Amount of rent payable
- Duration of Term of lease and possible renewal
- Define tenant/landlord repairs liabilities
The real estate agent acts as an image maker for his firm through his day to day contact
with people of diverse social status. It is therefore his duty to portray his ideas and those of the
institution he represent by carrying out his functions with transparent honesty.
Other functions include liaising with other divisions e.g. management. valuation, legal,
account etc. of the firm, collection of bank cheques, keeping and updating records, replying
correspondences and inspection of properties.
1. Positive Action:
In agency generally, once the agent’s instructions are express, the relationship thus created
makes it mandatory for the agent to make the principal’s instructions paramount. Any agent who
disobeys such express instructions is liable for any loss suffered by the principal in the
transaction. The duty of obedience as a matter of fact over-rides the duty of care and skill which
may need to be exercise in the interest of the principal. In order to exercise the rights of the
principal in cases of disobedience by the agent, the instruction by the principal must be capable
of only one interpretation. Therefore it must not be ambiguous so that the apparent disobedience
may not be as a result of a misunderstanding of the instruction. Where however, the agents
instruction as is occasionally the case is ambiguous any agent who acts upon a reasonable
interpretation of it is not liable for disobedience for incorrect interpretation. In some cases the
agent’s instruction may be so worded as to allow him a degree of discretion.
The agent will not therefore be liable for disobedience where his action portrays the fact that the
discretion so exercised is fair and reasonable even though it is contrary to the principal’s
instruction – because this action will be seen to have merged with the agents’ duty of care and
skill.
The agent must in all circumstances during the performance of his duty be seen to exhibit the
duty of care and skill in the interest of the principal. The non-exercise of the duty of care and
skill does not invalidate the agent’s action. Rather it makes the agent liable to the payment of
damages for any loss suffered by the client even though he is still entitle to the payment of his
commission. In this circumstance the contractual relationship must not be gratuitous.
The agent’s duty of care is subordinate to his duty of obedience in which case he cannot claim to
be fighting in the client’s best interest when he acts in disobedience to the duty of care and skill.
3. Duty of Loyalty:
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Arising out of the fiduciary nature of his relationship with his principal is a duty of loyalty to the
principal. This means that the agent must not allow his personal interest to becloud that of his
client neither should he allow the interest of third parties to come into conflict with the
principal’s interest.
The duty of loyalty can also be termed the “duty of fidelity” or of “utmost good faith”.
Where an agent allows a conflict of interest to arise in his duty, he is guilty of a breach of the
duty of loyalty. The duty of loyalty or uberrima fidei is the most observed amongst all the duties
of an agent to the principal. This arises from the fact that an agent is only entitled to the
remuneration agreed with the principal since any and every other benefit arising from the
transaction he is conducting belongs in equity to the principal.
The stand was clearly established in the case of Denton Properties Ltd V. Coles, Knapp and
Kennedy Ltd. where a farm was being sold to a sitting tenant. Three days before the sales
contract was concluded, the agents discovered that the tenant had secret plans to resale the farm
but believing that at the stage already attained in the sales they no longer had any duties to report
to the vendors they failed to disclose the discovery to them. The Appeal Court felt that the
information was relevant and ought to have been passed to their clients. The agents were
therefore liable to damages for allowing a third party to enjoy an interest which rightly belonged
to their clients.
5. Acting in good faith: The real estate agent is obliged to carry out client’s instructions as far as
are illegal, fulfill his terms and conditions, and uphold utmost good faith, transparency and
honesty to the client.
6. Rendering accounts: A proper account of all transactions concluded on the client’s behalf
must be kept and rendered to the client regularly.
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7. Avoidance of negligence: Negligence is a breach of a legal duty of care and implied terms of
contract. Therefore, the agent has to exercise skill and diligence when carrying out his duties.
This obligation does not only stem from agency contract but also from his professional duty as
an agent saddled with the responsibility of executing agency contracts.
8. Extra profit without disclosure strictly forbidden: Aside from the commission, the agent is
not entitled to make any extra profit from the transaction without informing the client. Therefore,
the principal should be carried along as the transaction proceeds.
9. Unbridle loyalty of the real estate agent to the principal: The agent must act loyalty to the
client at all times during the transaction, and must not let his interest conflict with obligations as
an agent.
The obligation between the Principal and the agent include the following:
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Performance: The agent must personally perform the appointed duties as contained in
contractual agreement. The agent must act within the framework of the enabling authority
provided such must not be illegal.
Care and skill: An agent must exercise skill and diligence in the performance of his
duties. However, agents cannot guarantee successful outcome of the transaction
undertaken on behalf of the principal, but provided he acts honestly, no more can be
demanded of him than he should have done; thus, if an agent is employed to sell/let a
property, it is the duty of the agent to secure the best price or rent obtainable in the
market place which is determined by the forces of demand and supply.
Duty of account: It is the duty of the agent to render account to his client as soon as a
deal is concluded. Delay may be taken as dishonesty. The agent’s integrity must be
preserved at all times. He must render to the principal full financial account on the
property entrusted to him. It is also required of an agent to keep proper record of receipts
and payments or expenses in order to render accounts. Monies collected by the agent for
the principal must not be mingled with agent’s personal funds.
Obedience: The agent must be careful to obey the laid down instructions of the principal
and not act in excess of the authority or below the expectation of the principal; but in the
absence of express instructions an agent must act in accordance with the basic ethics of
the profession.
Non-disclosure: A real estate agent must not disclose to a third party any confidential
information about the principal except it is in the principal’s interest.
Avoidance of negligence: It is the duty of the real estate agent to ensure that his client’s
interests are well protected. His advice should be given with professional expertise. If the
agent is negligent in his duties, he will be liable in damages for any loss caused to his
principal.
Utmost good faith: The relationship between the principal and the agent is a fiduciary
one. It is therefore the duty of the agent to exhibit high sense of probity and transparent
honesty.
Commission: An agent reserves the right to commission after the successful completion
of a brief.
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Indemnity: The agent is entitled to be indemnified /reimbursed against any loss (other
than those resulting from the agent’s negligence) and expenses that may be incurred in
the course of his duties as an agent e.g. cost of advertisement and/or specified in the
contract with the client.
refusal of the buyer to pay for what he has purchased, that is, the agent stands as a surety
of the buyer who is liable on the buyer’s failure to pay up.
6. Factor: He is entrusted with the possession of the goods with discretionary authority to
sell, pledge or create any right on the goods with the third person. He sells the goods in
his own name at such price as he deems fit. He has the authority to receive the price of
the goods. He has a general lien on the goods for the money due to him.
7. Broker: He brings two parties together into a contract. He is employed to find a buyer or
seller. He is an intermediary. He has no possession of the goods and the contract is
entered into by parties directly. He buys and sells goods on behalf of another. His
contract is essentially with the person who employs him. He is an agent of both the buyer
and the seller. He negotiates and contracts for the principal. He cannot act or sue in his
own name. He has no implied power to delegate his authority.
8. Subagent: An agent appointed by the original agent is known as a sub agent. He is under
the control of the original agent to the business of the agency
9. Co-agent: When two or more persons are appointed as agents by the principal to act as
such, jointly or severally, they are called co-agents. They should concur in their work in
exception of their authority to bind the principal. Unless contrary is proved, they are
jointly responsible. An agent appointed as a co-agent must exercise some amount of
discretion as a man of ordinary prudence would exercise in his own case. If he does this,
he is not responsible to the principal for acts of negligence of the co-agent.
10. Substitute agent: Where an agent holding an express or implied authority to name
another person to act for the principal in the business of the agency, has named another
person accordingly, such agent is not a sub agent, but an agent of the principal for such
part of the business of the agency as is entrusted to him. Such an agent is called substitute
agent. A substitute agent is an agent of the principal and as much he is responsible to the
principal.