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What Is Meant By An Agency Relationship In Real Estate Transactions?

There has been much discussion recently in the Real Estate Industry on the legal aspects of agency relationships. The central issue is who pays the real estate agent/who is the agent working for, and to whom is the agent legally obligated. The text below is taken from a pamphlet put out by the Toronto Real Estate Board that describes agency relationships with respect to Real Estate Agents (Realtors) and their clients (vendors and purchasers).

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Agency Relationships Explained


Agency Relationships Explained (The Toronto Real Estate Board)

CONTENTS
What is an agency relationship?
Consequences of agency relationship
Agency in real estate transactions
Toronto Real Estate Board
Agency relationship between vendor and listing broker
Purchasers and their representatives
Dual agency
Disclosure of relationship
Commissions and payment of commissions
Conclusion

WHAT IS AN AGENCY RELATIONSHIP?

An agency relationship is created where one person, known as the principal, asks another person, known as the agent, to act for and on behalf of the principal. The principal will define the nature and extent of the agency relationship; in other words, what the agent is being asked to do. In real estate transactions, agency relationships are created when vendors or purchasers ask REALTORS to act on their behalf in real estate transactions.

CONSEQUENCES OF AGENCY RELATIONSHIP

As a matter of law, an agent who represents a principal owes that principal the highest duty of "utmost good faith"; the agent must represent the principal's best interest at all times. The agent owes his principal a duty of confidentiality regarding information about the principal.

AGENCY IN REAL ESTATE TRANSACTIONS

In most cases, there are two parties to a real estate transaction; a vendor who owns a property and who wants to sell it, and a purchaser who wants to buy a property.

The job of REALTORS is to bring together willing vendors and willing purchasers in successful real estate transactions.

TORONTO REAL ESTATE BOARD

The Toronto Real Estate Board is an association of REALTORS. The Toronto Real Estate Board operates an MLS (Multiple Listing Service) system; this System is a mechanism whereby vendors, through their agent (known as a Listing Broker), can make known the fact to other REALTORS that a particular is for sale. By placing a property on the MLS system, the Listing Broker (agent of the vendor) lets it be known to every other REALTOR that they can be a "Co-operating Broker".

AGENCY RELATIONSHIP BETWEEN VENDOR AND LISTING BROKER

As noted, a vendor usually engages a REALTOR to act on its behalf in the sale of a property; this REALTOR is known as the Listing Broker. The vendor and The Listing Broker will enter into an MLS Listing Agreement whereby the agency of the Listing Broker is confirmed, and the vendor agrees to compensate the Listing Broker for its efforts. This compensation is usually called commission, and usually takes the form of a fee or payment from the vendor of the real property upon successful of the real estate transaction. By placing a property on the MLS System, the Listing Broker, in its offer to all other Co-operating Brokers to bring a purchaser, offers to share the commission the Listing Broker is being paid by the vendor.

Thus, for a vendor, the key to the MLS System is that the vendor's agent, being the Listing Broker, has placed the vendor's property on the MLS system and so made an invitation to all Co-operating Brokers to bring a purchaser's offer acceptable to the vendor, and thereby become entitled to a potrion of the commission which the vendor has agreed to pay.

PURCHASERS AND THEIR REPRESENTATIVES

Just as with the vendor, the puchaser of real estate will often engage a REALTOR in connection with a real estate transaction. However it is important to understand that by contacting a REALTOR, it does not necessarily mean that the purchaser has established an agency relationship with that REALTOR. There are several usual types of relationship which may exist between a purchaser and REALTOR (the "Co-operating Broker") in a real estate transaction;

* sub-agent of vendor;
* Buyer Broker, to be compensated by purchaser;
* Buyer Broker, to be compensated through Listing Broker.

These are the usual forms of agency relationship; this is not to say there may not be others.

Where a REALTOR is acting as sub-agent of the vendor, it is important for purchasers to realize that the REALTOR is technically an agent of the vendor so that duties are owed by the REALTOR to that vendor. However, the purchaser can expect the REALTOR to disclose all pertinent information about a property, not to misrepresent any facts, and to honestly answer all questions about the property. This has been a usual form of relationship for many years in the real estate industry.

When a REALTOR acts as Buyer Broker (whether paid by the purchaser directly or through the Listing Broker), the purchaser can expect the REALTOR to act in the purchaser's interest alone as there is no sub-agency relationship with the vendor. In the case of buyer brokerage, the relationship is typically established by a Purchaser's Agency Agreement, and the REALTOR is clearly only the agent of the purchaser.

DUAL AGENCY

It may be on a particular transaction involving real estate that both the vendor and purchaser are represented by the same Firm. This is known as dual agency.

In dual agency, there is effectively only one agent, or Firm, in a situation where there are two principals. In this case, duties to principals can become conflicting given that one agent is acting for more than one principal.

When REALTORS seek a Listing Agreement from a vendor, or REALTORS seek confirmation of agency relationships from a purchaser, it will be normal for the REALTOR to ask the party signing the agreement to acknowledge that dual agency may occur, and that conflicts and duty of confidentiality are waived.

DISCLOSURE OF RELATIONSHIP

At the earliest practical point in time, in an offer regarding real property, and from time to time if the agency relationship changes, REALTORS are required to disclose to other REALTORS the nature of their agency relationship.

COMMISSIONS AND PAYMENT OF COMMISSIONS

As noted, by placing a property on the MLS System, the Listing Broker (agent of the vendor) lets it be known to every REALTOR the offer to become a Co-operating Broker, and that the Listing Broker is offering to share the commission that the vendor has agreed to pay the Listing Broker. Where a Co-operating Broker acts as a sub-agent of the vendor, the REALTOR will be paid through the Listing Broker and the purchaser will not have to pay anything directly to the REALTOR. However, where the purchaser enters into a Purchaser's Agency Agreement with a REALTOR as a Buyer Broker (the REALTOR is only agent of the purchaser), the purchaser will either compensate the REALTOR directly, or direct that the REALTOR is to be compensated through the Listing Broker.

CONCLUSION

It is up to all vendors and purchasers to discuss openly and freely with REALTORS agency, agency relationships, the type of agency relationship desired and the best approach to compensation for REALTORS. All REALTORS are dedicated to acting for vendors and purchasers, and the efficient working of organized real estate. All REALTORS are ready and able at all times to answer all questions and inquiries.

Once you have read this brochure, you are then ready as a vendor or a purchaser to discuss with your REALTOR the next step; as a vendor, the MLS Listing Agreement, or as a purchaser, the Purchaser Agency Consent.


Randi Randi Emmott, Sales Representative
RE/MAX Premier Inc.
Tel: (416) 987-8000
Fax: (905) 856-1687
Toll Free: 1-888-700-8067
E-Mail: remmott@remax.net