THE ESSENTIAL ELEMENTS OF ESTATE AGENCY Agency is a fiduciary…
Duties Of An Estate Agent & The Principal – Responsibilities
Duties of an Estate Agent
An estate agent represents the principal, and the principal can be either the property seller or buyer. Where the agent represents the seller, his core duty is to help the seller arrive at an appropriate and realistic price, discovering and disclosing facts that affect the seller and properly presenting the contracts that the seller signs. Also, it is required of the agent to make reasonable efforts to market the property, such as advertising and holding open houses, and help the seller evaluate the terms and conditions of offers to purchase. On the other hand, an agent who represents the buyer is expected to help the buyer locate suitable property and evaluate property values, property conditions, financing alternatives and offers and counter offers with the buyer’s interest in mind.
If an agent acts beyond the authority granted, the principal may sue for any damages incurred, or the principal may subsequently agree to be bound by the agent’s actions called ratification. Therefore, it is necessary to understand the duties of the agent to the principal to avoid argument and claims of damages.
An agent has certain duties imposed by common law or statutory law, whether universal, special or general. An agent’s fiduciary relationship with his or her principal is a relationship of utmost trust and confidence. The relationship created by agency carries with it certain fiduciary duties that the broker must fulfill at all times including; loyalty, honesty, obedience to instructions, properly accounting for money and property and avoiding negligence.
The duty of loyalty dictates that the estate agent must always put the principal’s interests first, above his or her own interests. The agent must act without self-interest. For example, where an agent is acting for a property owner for which he gets a commission for leasing an apartment, he or she cannot simply accept any tenant in order to get the fee. The agent must screen the prospective tenant carefully to make sure leasing to him or her would be in the best interest of the property owner.
If the third party (prospective lessees or buyer) is related to the agent, the agent should disclose his relationship with the prospective third party to the seller before the transaction occurs. Otherwise, the seller may be able to recover any commission paid plus the difference between the purchase price and the list price because the agent violated the duty of loyalty by not disclose the relationship with the purchaser to the seller.
The duty of honesty requires the agent to disclose to the principal any information that might influence the principal’s pricing and selling decisions. It is the agent’s duty to keep the principal informed of all facts or information that could affect a transaction.
Obedience to instructions
The agent has a duty to follow any special instruction of the principal. For example, the owner may not wish the property to be shown to prospects within certain hours or without prior notice. The agent may be held liable for any damages suffered by the principal resulting from failure to follow instructions. However, that obedience is not absolute. The agent may not obey instructions that are unlawful or unethical.
Properly Accounting for Money and Property
This requires the agent to accurately report on the status of all funds receive on behalf of or from the property owner (such funds are deposit into trust accounts or escrow accounts).It is illegal to commingle (mix) such monies with personal funds or to retain any interest such monies earn. Agents should open a separate account at a financial institution to be used exclusively as a depository for funds belong to clients.
The Duty to Avoid Negligence
Agents who do not make a reasonable to effort to properly represent the interests of the principal are negligent. In essence, a real estate agent is required to exercise the same degree of skill as other qualified agents would exercise. If negligence is proved, the agent is liable for any loss incurred by the principal.
Apart from the 5 duties mentioned above, brokers also have a fiduciary relationship with clients the principals and are obligated to give them loyalty and confidentially e.g. Agents working for the sellers should not reveal any other price or suggest a suitable initial offering price unless the seller has given those instructions. Brokers are advocates for their clients, and as such, owe them the highest degree of care, skill, and diligence. Everything estate agents know about the property that is material to the transaction must be revealed to their principals.
Breach of Fiduciary Duties
If the estate agents breach their fiduciary duties, they may be subject to a variety of penalties. Some of these penalties can be imposed regardless of whether the agent’s breach of duties caused the principal any actual harm. Penalties for breaching fiduciary duties may include: loss of the estate agent’s license or other disciplinary action by the governing body; adverse judgment in a civil suit; and rescission (voiding) of the transaction by court order.
Agent’s Duties to Principal Under Common Law
To Act in the Best Interest of the Principal
When an agent is appointed to facilitate or negotiate a transaction on behalf of the principal, the agent owes a duty to the principal to act in the principal’s best interests within the authority granted to the agent.
In practice, the duty to act in the best interests of the principal requires the agent to use his due diligence and skill to negotiate terms of a transaction on behalf of his principal with a third part to the greatest advantage of his principal in the circumstances.
No Conflict of Interest
An agent who has accepted an appointment to act for a principal (“A”) should not thereafter accept appointment to act for another principal (“B”) if the interests of principal B conflict with the interest of principal A. However, if the agent fully discloses to each principal the agent’s interest under the two appointments and the fact that he acts for both the vendor and purchaser in a sale and purchase property transaction must disclose the fact to both the vendor and the purchaser and obtain their consent for so acting.
The agent’s duty to avoid conflict of interest applies equally to cases where the interest of the agent himself or that of his close relatives conflicts or potentially conflicts with his duties to the principal. However, if the agent fully discloses such interests to the principal and obtains the principal’s consent, the agent may still act for the principal. Failure to make full disclosure to the principal is a breach of the agent’s fiduciary duty and the agent is liable to account for any profit that the agent has made from such transaction in addition to other remedies available to the principal for the agent’s breach of duty. The following situations require more discussion:
Purchase or rent from principal – the general rule is that an agent cannot purchase or rent property from his principal without full disclosure of all the facts to the principal. The agent has to show:
How the terms and conditions of the sale or tenancy to the agent compare to a sale or tenancy to a third party in the market
He has to disclosed all the relevant facts to the principal before entering into any agreement with the principal; and
The principal has given his informed consent to such a transaction
Sale or rent to principal – similarly, an agent may not sell or let his own property to his principal without full and frank disclosure and the obtaining of his principal’s informed consent. The agent has also to show how the terms of the relevant transaction compare to similar transactions in the market
No Secret Profit
Common law requires that an agent should not make any profit or acquire any benefit in the course and in the matter of his agency without the knowledge and consent of his principal. Such profit, generally known as secret profit, is not restricted to money but may include anything of value, for example, an interest-free loan, a club membership, etc. An agent who has made secret profit is liable of the account to the principal for such profit in addition to any other remedies available to the principal for the agent’s breach of duty. The following situations are some examples of secret profit:
Use of Property
An agent who uses property entrusted to him by the principal to make a profit for himself and without the principal’s consent is in breach of his duty not to make secret profit. For example, if an agent is entrusted with the keys to a property by its owner for the purpose of listing while the owner is abroad, and the estate agent lets the property to a third party and receives and keeps the rent for himself without the consent of the owner, the estate agent will be, among other things, in breach of his duty not to make secret profit.
Use of Position
In some circumstances, an agent may obtain a benefit simply through his position as agent of the principal. For example, an agent appointed to purchase goods for his principal from a supplier obtains secret monetary benefit from the supplier for placing purchase orders with the supplier. Such an act by the agent will amount to making secret profit. Likewise, if a company director is entrusted with the task of negotiating a contract with a third party on behalf of the company (that is, as the company’s agent), the director cannot subsequently enter into that contract personally with that third party, even if the latter is willing to do so without the company’s consent. An agent who, without lawful authority or reasonable excuse, solicits or accepts any advantage in relation to his principal’s affairs or business in the course of his agency shall be guilty of an offense.
Use of Information or knowledge
An agent who acquires information or knowledge which he has been employed by the principal to collect or discover, or which he has otherwise acquired for the use of his principal should not make use of the same for his personal gain. For example, in the course of acting for a purchaser, an estate agent looks for a property for investment in a particular building specified by the principal and becomes aware of a property in that building which is being offered for sale at below the market price. If the estate agent makes use of this information, which he is appointed to obtain on behalf of the purchaser, and acquires that property himself without disclosing the same to the purchaser and makes a profit by reselling it, the estate agent will, among other things, be in breach of his fiduciary duty not to make secret profit.
(b) However, the duty not to make secret profit may be discharged if the agent makes full disclosure of all the relevant facts to the principal and the principal consents to the making and retention of such profit by the agent.
(c) An agent’s duty to account to his principal secret profits he had made in the course of the agency continues even after the agency relationship terminates.
Duty of Confidentiality
Owning to the fiduciary relationship between a principal and his agent, the agent shall not disclose any information concerning the principal or any confidential information entrusted to him by the principal to any third party without the principal’s consent.
Information concerning the principal may include his name, Hong Kong Identity card number, address, telephone number, etc.
Confidential information entrusted to an agent includes any information which is not readily available to the public. Information readily available to the public will usually include information which is kept at government departments and is open for inspection by the public, such as the Land registry, Companies registry and the Birth and Death Registry
Even if the agent has ceased to act for the principal, the agent should continue to keep confidential any information concerning the principal or any confidential information entrusted to him by the principal, unless the principal consents to disclosure or unless the information has ceased to be confidential
However, an agent has implied authority to disclose information concerning the principal if to do so is necessary for the agent to carry out the duties entrusted to him by the principal. For example, an estate agent may disclose to the appointed solicitors of the purchaser (the estate agent’s principal) such information relating to the purchase as will enable the solicitors to handle the transaction on behalf of the purchasers.
Duty to use Care and Skill
Common law requires an agent to act with due care and skill in performing his duties. Agents who fail to meet his standard are prima facie negligence
Generally speaking, an agent in a certain profession, trade or calling who performs his duty with the degree of care and skill expected of reasonable, average members of the relevant profession, trade or calling meets the requisite standard.
Duty to Account
An agent who receives any property for his principal or from his principal is bound to keep such property separate from his own and he is to be treated as a trustee of such property.
For the reason stated in sub-paragraph (a), an agent has a duty to keep proper accounts of the property received by him in the course of the agency and to render such account to the principal on request.
Even after the agency relationship has ceased, the agent’s duty to account to the principal may continue. Hence, the agent is obliged to return to his principal all documents and property, by the agent on the instruction and at the expense of the principal
Duty not to Delegate
The general rule is that an agent may not delegate his authority or duty in whole or in part except with the authority and consent of the principal
Owing to the fact that an agency agreement is privy to the principal and the agent and that authority is normally given to the agent personally, on account of his trustworthiness, skill or experience, the agent is under a duty to the principal not to delegate his duties under the agency agreement to another person, but to exercise the authority in person. Hence, an agent has normally no implied authority to employ deputies or sub-agents to carry out his duties.
Where an agent is not authorised to delegate, the act of a “sub-agent” appointed by the agent will not be binding on the principal. The agent who so delegates his authority is also in breach of the duty not to delegate and is liable to compensate for any loss which the principal may suffer in consequence of the agent’s failure to exercise his authority in person.
Duty of Obedience
Generally, agents are under a duty to obey the lawful and reasonable instructions of the principal. Where the principal’s instructions are clear, the agent does not normally have any discretion and must follow those instructions, unless an agent is a professional and the principal relies on the agent to exercise his professional skill and discretion in accomplishing the tasks he has been appointed to accomplish.
However, if the principal’s instructions are ambiguous or if the agent is not certain as to their meanings, the agent should clarify such instructions with the principal before acting.
Traditional Duties of Agent to the Client and Customer
Traditionally, property owners who want to sell normally employ the services of real estate agents. In that role, the practitioner’s objective is to obtain the best possible price and terms for the seller from a buyer. On the other hand, buyers traditionally have been in the role of customers, not clients. Brokers work with but do not represent customers.
It is true that the agents should take all their responsibilities to their principals. Otherwise, fiduciary relationship between the principal and agent may be broken and so the right of the agent cannot be taken. For example, as the agent has a fiduciary duty to his principal to disclose all information in the agent’s possession relevant to the subject matter of the agency, a judge would decide against the award of a commission to a broker who had failed to tell the seller (principal) that he has represented the buyer too in the transaction.
An agency is the creation of a contract entered into by mutual consent between a principal and an agent. By agency, a principal grants authority to an agent to act on behalf of and under the control of the principal. The relation between a principal and an agent’s actions bind the principal. The law of agency thus governs the legal relationship in which an agent deals with a third party for his/her principal.
An agent owes certain duties towards his/her principal and a principal owes certain duties towards his/her agent. The scope of an agent’s duty to the principal is determined by:
The terms of the agreement between the parties and
Extent of the authority conferred and the obligations of loyalty to the interest of the principal
An agent’s primary duties are: act on behalf of and be subject to the control of the principal; act within the scope of authority or power delegated by the principal, discharge his/her duties with appropriate care and diligence, avoid conflict between his/her personal interests; not to acquire any material benefit from a third party in connection with transactions conducted or through the use of his/her positions as an agent; to act with the care, competence, and diligence normally exercised by agents in similar circumstances; to take action only within the scope of the his/her actual authority; to comply with all lawful instructions received from the principal and persons designated by the principal concerning agent’s actions on behalf of the principal and to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise.
An agent is liable to a principal when he/she acts without actual authority, but with apparent authority.
In most instances, an estate agent in Nigeria serves as an agent for the seller as well as the prospective purchaser in a property transaction. During the conveyance process, estate agents carryout a number of tasks in relation to their clients (i.e the seller and purchaser) as set out below:
Seek out properties for sale and establish connections with sellers who agree to list their properties through the agent’s firms;
Advertise sellers properties including their key features such as description of the property, floor area and asking price
Verify or find out the salient features and ownership status of the properties through preliminary on-the-spot surveys and counter-checking at the Land Registry.
Explain to clients the range of services provided by the agencies’
Present information of the property to prospective purchasers and answer their enquires
Discuss with and understand the needs of prospective purchasers and introduce a short-list of suitable properties to the letter
Make appointments with sellers for inspection of the properties, accompany prospective purchasers to inspect the properties and request them to sign inspection forms after explain the terms therein
Mediate in the negotiation process between sellers and prospective purchasers with a view of facilitating transactions between them;
Arrange sellers and purchasers to sign proforma property sale/purchase agreement (SPA) after filling in details such as the agreed transaction prices, dates of signing the formal Agreement for Sale and Purchase, accessories like furniture and appliances to be assigned with the property, etc.
Settle or follow up disputes arising from revocation of PSPAs according to the terms set out therein
Facilitate clients in passing, e.g. by fax, the PSPA to their solicitors; and
Follow up miscellaneous requests and queries of purchasers and sellers until acquisition of legal title to property and occupation by the purchaser.
Duties of Principal to Agent
An agent is liable to indemnify a principal for loss or damage resulting from his/her act.
A principal owes certain contractual duties to his/her agent. Correlative with the duties of an agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent include:
To compensate the agent as agreed; and
To indemnify and protect the agent against claim; liabilities, and expenses incurred in discharging the duties assigned by the principal.
Because of the fiduciary relationship, a principal owes his/her agent a duty of good fair dealing. However, a principal can be relieved of contractual obligations by an agent’s prior breach of contract.
A principal has a duty to act in accordance with the express and implied term of any contract between a principal and an agent.
When an agent acts within the scope of actual authority, the principal is liable to indemnify the agent for payments made during the course of the relationship irrespective of whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.
Agent’s Rights Against Principal Under Common Law
Right to Remuneration
Under common law, an agent is only entitle to remuneration for his services as an agent if the terms of the agency agreement so provides.
Where the agency agreement does not expressly provide for payment of remuneration to the agent, and there is a dispute between the principal and agent as to the right to claim any remuneration and the amount and terms of payment of such remuneration, the court may have to determine if, on the facts of the case, there are any implied terms in respect of the same in the agency agreement.
In deciding whether there are any implied terms in respect of any matters in an agency agreement, the court will have regard to all the circumstances of the case, such as the nature and length of the services provided by the agent, the express terms of the agency agreement, the customs and practices of the profession or trade of the agent, any previous course of dealings between the principal and the agent, etc.
In the business world, if services are rendered by the agent and accepted by the principal, there is often an implied term that the agent may be entitled to reasonable remuneration for such services rendered, even if there is no express agreement for the payment of remuneration
Where it is expressly provided the remuneration is payable upon the happening of an event (for example, on successful completion of a transaction), the agent is not entitled to claim the remuneration until the event has actually occurred. And if the event specified does not occur, the agent will not be entitled to claim any remuneration even if he has spent time and effort in trying to bring about the event.
Subject to any special terms in the agency agreement, where the remuneration of an agent is a commission on a transaction to be brought about by the agent, the agent is not entitled to such commission unless his services are the effective cause of the transaction being brought about. The real question is whether the agent’s action and services actually and directly bring about the contractual relation between the principal and the third party. The agent’s action and services must not have been merely incidental.
Right to Reimbursement and Indemnity
Generally, an agent has a right to be reimbursed by his principal for all expenses and to be indemnified against all losses and liabilities incurred by him in the performance of his duties to the principal.
When an agent carries out his duties according to the principal’s instructions and in the course of which he incurs expenses, he is normally entitled to reimbursement by the principal of such expenses, as long as they are reasonable. Expenses may include items such as traveling expenses, photocopying charges, fees for registration of documents payable to government departments, etc.
An agent may not have a right to reimbursement or indemnity in the following circumstances;
If the act of the agent is unauthorized and the same is not subsequently ratified by the principal
If the agent is negligent or otherwise in breach of his duties under the agency agreement; or
If the act carried out by the agent is unlawful
Right of Lien
Subject to any statutory provisions to the contrary, an agent who is in lawful possession of goods or chattels belonging to his principal has a right to retain possession of them until payment by the principal of the agreed remuneration or reimbursement of the agent’s reasonable expenses. This is generally known as right of lien.
The right of the lien exists only if the goods or chattels have been lawfully obtained by the agent in the course of the agency and that such goods or chattels have not been delivered to the agent with express directions, or for a special purpose, inconsistent with the right of lien. So, for example, if a piece of equipment is delivered to the agent by the principal with the express instruction to the agent to deliver the same to a third party, the agent is not entitled to claim a lien on the equipment.
The right of lien is normally restricted to a right of possession of the goods or chattels. It confers no right on the agent to sell, charge or otherwise dispose of the same.
The right of lien may also be exercised by an agent in respect of products produced or documents prepared by the agent on the instruction of the principal.