ESSENTIAL ELEMENTS

OF AGENCY

Prepared by:
Michelle G. Malinao
Agency
• An agency is created when one person, called the principal, delegates
to another person – called the agent – the right to act on the principal's
behalf in dealing with third parties.
• The principal in an agency relationship can be either a natural person
or a legal person, such as a corporation.
• An agent can either be a natural person or a corporation such as a real
estate brokerage company.
• The people and firms with whom the principal and agent negotiate are
called third parties.
Levels of Agency
• Universal agency
• General Agency
• Special Agency
Universal Agency
• A universal agency is one in which the principal gives the agent
legal power to transact matters of all types on the principal's
behalf.
• An example is an unlimited power of attorney.
• Universal agencies are rarely encountered in practice, and courts
generally frown on them because they are so broad.
General Agency
• A general agency is one in which the agent is given the power to bind
the principal in a particular trade or business.
• For example, a salesperson is a general agent of his or her employing
broker. Another example is that of a property manager for a property
owner.
Special Agency
• A special agency is one in which the principal empowers the agent to
perform a particular act or transaction.
• One example is a real estate listing. When a salesperson lists a
property for his firm, the agency relationship created between the
seller and broker is a special agency.
Creating an Agency
• Written agreement
• Ostensible agency
• Agency by ratification
• Agency coupled with an interest
• Dual agency
Written Agreement
• A written agreement is the preferred method of creating an agency
because it provides a document to evidence the existence of the
agency relationship.
Ostensible Agency
• An ostensible agency is created when a principal gives a third party
reason to believe that another person is his agent even though that
person is unaware of the appointment. If the third party accepts this as
true, the principal may well be bound by the acts of his agent.
Agency by Ratification
• An agency by ratification is one established after the fact.
Agency Coupled with an Interest
• An agency coupled with an interest is said to exist when an agent
holds an interest in the property he is representing.
Dual Agency
• A dual agency is created when there are two principals in the same
transaction. A dual agency requires that the agent have written
permission from each principal to perform in that capacity.
Subagents
A broker's sales associates are general
agents of the broker. With regard to third
parties, the sales associate owes them
honesty, integrity and fair business dealings.
Because a sales associate is an agent of the
broker and the broker is an agent of the
principal, the sales associate is sometimes
called a subagent of the principal.
In approximately 70% of all sales made
through multiple listing services, the broker
who locates the buyer is not the same
broker that listed the property.
Termination of Agency
• An agency is terminated by the operation of law upon the death
or incapacity of either party (except that an agency coupled
with an interest is not terminated by the death of the principal),
by the destruction or condemnation of the property, upon the
bankruptcy of either party, or foreclosure of the principal.
Termination of Agency
An agency is rarely terminated by operation of law, however, and
is most often terminated in one of the following ways:

• By the purpose of the agency being completed

• By expiration of the term of the agency
• By mutual agreement
• By revocation. An agency may be revoked by either party at
any time, except that an agency coupled with an interest may
not be revoked by the principal.
Fiduciary Obligations
• The broker, as an agent, owes his or her principal certain
duties. These duties are clear and specific. They are not simply
moral or ethical; they are the law -- the law of agency. An agent
has a fiduciary relationship with his or her principal; that is, a
relationship of trust and confidence between employer and
employee.
Fiduciary Obligations
This confidential relationship carries with it certain duties that the broker
must perform. The duties can be remembered by the word "POLAND:"

• Personal performance (must have authorization for sub-agency)

• Obedience
• Loyalty
• Accountability
• Notice
• Due or reasonable care
Fiduciary Obligations
Care
• The broker, as an agent, must
exercise a reasonable
degree of care while
transacting business
entrusted to him by the
principal. Remember, the
broker is liable to the principal
for any loss resulting from
negligence or carelessness.
Obedience
• The broker is at all times
obligated to act in good
faith and in conformity with
his or her principal's
instructions and authority.
• The broker is obligated to
present all offers to the
seller.
Fiduciary Obligations
Accounting
• The broker must be able to report the status of all funds entrusted to him
or her by the principal.
• In addition, the license laws generally require the broker to promptly
deposit all funds entrusted to him or her in a special trust, or escrow
account; the laws make it illegal for the broker to commingle such money
with personal funds. The broker may, however, use his or her own funds to
open an escrow account.
• Once funds have been placed in an escrow account they may only be removed
under one of the following conditions:
1. Upon completion of the transaction
2. With written consent of all the parties
3. With a court order directing the disposition of the funds