1 Chapter 21
CHAPTER 21: The Principal-Broker Relationship: Agency
I. Discuss creating the Agency and Establishing
the Agent’s Authority
II. Discuss the Broker’s Obligations to his
Principal
A. Faithful performance
B. Loyalty to principal
C. Protecting the Owner’s Interest
D. Reasonable Care
E. Accounting for Funds Received
F. Problems of Commingling
III. Discuss the Broker’s Obligations to Third
Parties
A. Red Flags
B. As Is
C. Masking
D. Puffing
IV. Discuss Buyer Agency and the Shift of
Fiduciary Duty
V. Explain Principal’s Obligations to the Broker
VI. Discuss complex Agency Relationships
A. Broker’s Sales Staff
B. Cooperating Broker
C. Complicating Issues and Possible
Alternatives
1. Seller Representation, Traditional View
2. Middleman Principle
3. Buyer’s Broker
4. Dual Agency
D. Agency Disclosure
VII. Discuss the advisability of Owner Disclosure
Statements
VIII. Discuss Interstate Land Sales Disclosure
Statements
A. Property Report
B. Not an Approval
IX. Antitrust Laws
A. Define and give examples of Price Fixing
B. Define and give examples of Boycotting
X. Explain the applicability of Errors and
Omission Insurance
Emphasize the duciary duties here,
particularly those of full disclosure and
This is the expanding area of liability. An agent
must disclose defects that may affect a
purchaser’s decision.
“As is” is not a good defense if the broker
This is the new trending area of the law. Discuss
how your state is handling these issues.
All broker commissions are
negotiable.
Chapter 21 2
Page Ref.
Hard
Soft
365 383
365 383
Agency
366 384
366 385
367 385
367 385
368 386
368 387
369 387
Topic
Opening
Remarks
Establishing the
Agent’s
Authority
Broker’s
Obligation to his
or her Principal
Loyalty to
Principal
Protecting the
Principal’s
Interest
Accounting
for
Teaching
Tips
Start this chapter with a discussion of the
“traditional” agency relationships, i.e., that
cooperating brokers are sub-agents of the listing
broker. Surveys show that most consumers were not
aware of this relationship, so your students may also
be unaware.
Stress: Each of the bold terms listed on this page
are important. Address any related terms that may
be unique to your market.
Stress: Without a written listing (employment)
agreement, one may not be able to prove that he/she
is entitled to a commission.
Stress: Also known as obedience of lawful
instructions.
Stress: The third sentence in this paragraph.
According to NAR, most unsatised sellers are such
because their agent “loved them and left them.” Lack
of communication is disloyalty. If the agent intends to
buy the property, he must notify the seller that he,
the buyer, is a licensee, and should make certain that
the price is “fair market value.”
Stress: Changing market conditions in a
neighborhood may require changing a listing
agreement.
Stress: Care implies competence and expertise; at
the same time, brokers are to avoid legal
interpretations.
Local Distinction: Address your state’s laws)
3 Chapter 21
Page Ref.
Hard Soft
back back Topic Teaching Tips
369 388 Commingling Local Distinction: Define commingling and cite examples of
local/state brokers (if any) who have had their license revoked for
mishandling funds. Consult your state real estate commission.
Memory Hook (Fiduciary Responsibilities):
Care
Obedience COAL
Accounting
Loyalty
Summary: The broker must:
1. Obey all of the principal’s legal instructions.
2. Be loyal to the principal, i.e., be trustworthy, act in confidence,
and be responsible.
3. Protect the owner’s interest, especially his/her financial interest.
4. Act competently and expertly on the principal’s behalf
(reasonable care) .
5. Properly account for all funds that come into his/her
possession without commingling funds.
369 388 Broker’s Obligations Stress: A broker’s fiduciary obligations are to the principal who
to Third Parties hired him. However, he owes the third party (most typically the
buyer) honesty, integrity, and fair business dealings.
370 389 Red Flags Expanding the Text: The Easton case involved the sale of house
built on filled land that was not properly engineered. Several “red
flags” were ignored: house was built on fill land, netting on a
slope had been repaired, floor of the guest house was uneven.
The seller did not disclose the problems to any of the brokers and
the sales agents involved, and the salespeople did not investigate
any of these “red flags.”
After closing, the problems got worse and the property was
practically worthless. The jury awarded the buyer $197,000 and
held the seller, the listing broker, and the selling broker liable.
371 390 Buyer Agency Stress: This is a shift in the normally accepted duty of care to
the seller. An agent working for the buyer will have responsibili-
ties and goals diametrically opposed to those of a seller’s agent.
373 392 Cooperating Broker Summary: Four Theories
1. Everyone is an agent or a subagent of the seller.
2. Since cooperating broker has no contract with seller and none
with the buyer, he is the agent of neither.
3. Cooperating broker is trying to find property for buyer, so he is
the buyer’s agent.
4. Real estate agent can represent both parties, dual agency.
Carefully list and discuss the primary components of each theory
as found on the next page.
Chapter 21 4
Page Ref.
Hard Soft
back back Topic Teaching Tips
374 394 Agency Disclosure Local Distinction: Does your state have mandatory agency
disclosure? Does it require a state form? If so, make a copy
available to your class.
375 396 Seller Disclosure Local Distinction: Address your state’s laws) and/or rules for
Statement Seller disclosure. Have available the state-approved form, if
appropriate.
378 397 Interstate Land Sales Expanding the Text: The law is the Interstate Land Sales Full
Disclosure Statements Disclosure Act. It became effective April 28, 1969 and, among
other things, requires one who is selling or leasing 25 or more lots
of unimproved land as part of a common promotional plan in
interstate commerce to file with HUD a `Statement of Record’
disclosing certain information.
379 399 Price Fixing Stress: You can hardly over-stress the importance of never engag–
ing in a price fixing conversation–not even as a silent listener.
380 400 Errors and Omission Stress to your students that some brokers pass a proportionate
Insurance share of the E&0 costs to each agent.
380 400 Wrap-Up 1. An agency relationship is a fiduciary relationship? (True)
2. List a broker’s obligations to his principal: (Faithful perfor–
mance, Loyalty, Protect the principal’s interest, Reasonable
care, Accounting for funds, or COAL)
3. List a broker’s obligations to third parties: (Honesty, Integrity,
Fair business dealings)
4. Brokers must disclose known defects in properties that are
being sold “as is”? (True)
Class Activity If your state has an “Agency Disclosure Form,” have students pair
up to practice explaining it to prospective sellers or buyers.
Reverse roles so that each has a turn as a Licensee.
This chapter takes a close look at the agency aspects of the principal–
broker relationship—that is, the legal responsibilities of the broker toward
the principal and vice versa. The concept of agency is changing
dramatically and is being addressed on a state-by-state basis, so a working
knowledge of any individual state’s license law is going to be of primary
importance in determining the scope of a real estate agency. This chapter
covers creation of the agency relationship and obligations of the broker
both to the principal and to third parties. Owner disclosure statements and
buyer agency are also discussed.