This is the best class available for students who really want to understand the real estate laws in Washington. The RCW's and the WAC's are the laws and rules used to govern the real estate activities of licensees.
This is ideal for students who want to master the state law portion of the managing broker exam.
Real estate educators admit that they cannot teach you “experience' and sometimes question whether they can endow you with better “judgement' or a better “ethic'. Included in this package is how to you prepare, and problem solving. Study only the law's that apply to the state managing broker exam. Don't forget to join the conference call with our instructor to help you pass your exam.
That's a mouthful, so first let's define what an agent is. When a person acts on behalf of another, that person is known as an agent. The agent, in our case a real estate broker, is acting on behalf of a client. The other party in the relationship is the client. The client who has an agent acting on their behalf is known as a principal. A principal is also referred to as a client, which means there is an agency relationship. On the other hand, the term customer is a relationship where one person is assisting another and is usually not an agency relationship.
Agency doesn't just apply to clients and brokers, it also exists between the broker and their firm. The agency relationship between the firm and the affiliated licensee carries responsibilities for both the designated broker and the licensee. An affiliated licensee is another term for a broker or managing broker working for a brokerage firm. Licensees are considered subagents for their designated broker. A subagent is an agent of another agent, such as a real estate broker is a subagent of the real estate firm or designated broker, who is the agent of a client. The licensee is referred to as having a subagency relationship with the brokerage firm and is considered to be a general agent.
Importance of Agency Relationships
The following are some basic reasons why real estate professionals should have a clear understanding of agency relationships:
Agency laws deal with the legal rights of the public in dealing with brokers.
Washington state has very specific laws and statutes regarding the responsibilities and duties of real estate licensees when they enter into an agency relationship. These laws are strictly enforcedI3/4 penalties and fines can be imposed.
These laws often define the duties of a licensee, the duration of an agency relationship, how notices should be handled, vicarious liability and dual agency. They also define the duties that a broker has to their principal.
Mastering the laws relating to the agency can reduce misunderstandings and litigation, especially in the areas of commissions through something called procuring cause, conflicts of interest and representation.
Creation and Termination of Agency in Real Estate
Let’s look at some ways in which agencies might be formed.
Express agency is created by either an oral or a written agreement between the principal and the broker. It indicates their express intent for this representational status. In real estate, an agency is normally created by either a written listing agreement or purchase and sale agreement, both of which include contractual language to create agency representation. There is also a specific contract for buyers to create an agency relationship, known as the buyer agency agreement.
An agency relationship, that is created after the fact when the principal agrees to be bound by the actions of another person who was acting without authority, is known as an agency by ratification and is a type of express agency.
It is also possible to create an agency relationship by the actions of the parties, known as implied agency. If a real estate broker takes on responsibilities with a buyer that are normally those of a broker but hasn't signed a buyer agency agreement, he/she may still be considered an agent via implied buyer agency. By the same token, if the customer asks the broker for advice or actions that are normally part of an agency relationship, then an implied agency could be created. An implied seller agency can also be created through the actions of a seller and broker.
Let’s look at an example of the implied agency.
Jose asks Pete to draw up a purchase and sale agreement and represent him on a property that Jose is interested in purchasing. Pete attempts to draw up the contract, which is an implied agency.
Agency by Estoppel
An agency relationship created by the actions, behaviour or statements of the principal and/or the broker upon which a third party relies is the agency by estoppel. An agency relationship can exist even without a written contract because of the appearance of the agency relationship. If another party was led to believe by the actions of the agent and the principal that an agency relationship existed, it creates agency by estoppel. The principal would be estopped (prohibited) from denying the agency if the third party had relied on the statements or actions of the agent.
A broker may have apparent authority if a reasonable person would believe the agent had authority to act on behalf of the principal, making the agent an apparent agent (also known as an ostensible agent). In the case of apparent authority, the principal must take some action or make a purposeful exclusion to create apparent authority. If a broker acts on their own to deceive a third party that an agency relationship exists without the knowledge of the principal than the principal isn’t bound by the actions of the broker. An example of apparent authority would be a broker acting as the principal’s agent in their presence, and the principal not saying anything to clarify to the third party that they are not their agent.
Actual authority is different because it is expressly given to the agent either orally or in writing. Actual authority can be broad or specific, depending on the granting of authority by the principal. It is also known as express authority.
Termination of the Agency Relationship
The agency relationships start at the time that the broker begins to provide real estate brokerage services to a principal and continues until:
Completion of performance by the broker
Expiration of the term agreed upon by the parties
Termination of the relationship by mutual agreement of the parties
Termination of the relationship by notice from either party to the other
Death, incapacity, or bankruptcy of either the agent or principal
The property is destroyed
If termination occurs before the expiration of an agency contract the party who was discharged their duties may be able to sue for breach of contract. The breach is most often resolved not through performance (forcing the other party to complete the contractual duties), but through the payment of monetary damages.
A broker owes no further duty after termination of the agency relationship, other than the duties of accounting for all monies and property received during the relationship and not disclosing confidential information. This means you must keep your files so you have a record of all accounting during the relationship and your confidentiality requirement never expires.
Types of Agency
There are three types of agents:
A universal agent is granted the power to handle all of the affairs of the principal. The best example of this would be a broker who represents a professional athlete and has the permission to handle all of the athlete’s affairs (which would include such things as finances, purchasing real property, negotiating contracts, negotiating compensation for promotional advertisements, etc.) The universal broker has the broadest range of authority to represent their client.
A general agent has the authority to represent many of the affairs of the principal, but not all of them. The relationship between the brokerage firm and their affiliated licensee is the best example of this general agency. The licensee has the authority to act for the brokerage firm in many aspects such as, obtaining listings, completing contracts for the purchase of a property, providing real estate information to the public, providing leasing or rental services, and handling earnest monies.
A special agent usually has the authority to represent their client in only one “specific” area. The best example of this would be a licensee who has taken a listing for a seller. The licensee has the authority to represent the client for just a specific parcel of property. A special agent has authority that is limited to working on behalf of their client. A broker is essentially a special agent since they act only within the bounds of a specific transaction or to accomplish a specific goal (finding and purchasing a home).
A principal is not liable for an act, error, or omission by an agent or subagent of the principal arising out of an agency relationship. The principal can be liable if the court determines that it is highly probable that the claimant would be unable to enforce a judgment against the agent or subagent and the principal participated in or authorized the act, error, or omissionI3/4 or the principal benefited from the act, error, or omission. What is intended with vicarious liability is a principal has limited liability for the acts of an agent on their behalf unless the principal participated in the act. The other portion of this is that the principal can be liable if they benefited from an illegal act and the other party would be unable to receive compensation from the agent.
In addition to the limitation of liability of a principal when an agent is acting on their behalf, a licensee also has some protection regarding subagents (agent of an agent). A broker is not liable for an act, error, or omission of a subagent unless that broker participated in or authorized the act, error or omission. A very important note regarding the limitation of liability of a broker and their subagent is it does not limit the liability of a firm for an act, error, or omission by a broker affiliated with the firm. The firm still maintains responsibility for the brokers under their supervision.
The concept of imputed knowledge says that a person should know what another knows because of their relationship. Impute means to assign knowledge by inference from the knowledge of another. In an agency context, this would mean that a principal would or should know what the agent who is working on their behalf knows and vice versa. In Washington state law it is expressly written that this does not exist in a real estate agency relationship. A principal is not liable for what they do not know but is known to the agent as well as the other way around.
Requirements of Agency
Fiduciary Relationship Prior to 1996, in Washington State, real estate brokers when acting as agents on behalf of a principal were bound by a fiduciary relationship. A fiduciary relationship is when the principal places trust and confidence in the agent acting on their behalf and grants broad responsibilities to the agent. In 1996, Washington State passed a law outlining agency relationships and their limitations in real estate. Because it is a written law, the responsibilities are known as statutory responsibilities. The change was designed to be more specific to real estate brokerages. The change is written in RCW 18.86.110.
"The duties under this chapter are statutory duties and not fiduciary duties. This chapter supersedes the fiduciary duties of an agent to a principal under the common law. The common law continues to apply to the parties in all other respects. This chapter does not affect the duties of a broker while engaging in the authorized or unauthorized practice of law as determined by the courts of this state."
Next, let's go through the statutory responsibilities (laws) that govern the real estate brokerage in Washington State.
Duties of a Broker to all Parties
In Washington, regardless of whether a broker is an agent, the broker owes to all parties they provide real estate brokerage services with the following duties:
To exercise reasonable skill and care.
To deal honestly and in good faith.
To present all written communications to and from either party.
To disclose all existing material facts.
To account in a timely manner for all money and property.
To provide a pamphlet on the law of real estate agencies.
Disclose who the broker represents.
Reasonable Skill and Care
Reasonable skill and care indicate the obligation of the broker to perform their duties as an agent with the competence expected of someone in the real estate brokerage profession. This also means they must perform their duties with reasonable caution (care). The broker cannot claim to have exercised reasonable skill and care if they are doing something that a real estate broker would not do given the skills and qualifications of a real estate broker.
Judgment is a large part of the real estate profession. Reasonable skill and care are not intended to mean that the broker cannot exercise judgment, only they must not be negligent and irresponsible. For example, if a broker makes a judgment by giving an opinion of value on a property to be $550,000 and the property sells for $575,000 this would not violate the duty of reasonable skill and care. The opinion of value is within the bounds of the broker’s duty and could be made by a number of qualified real estate professionals. If however, a broker urges a seller to enter into a contract for a property that should be worth $550,000 and the contract offer is for $275,000 this would not be an example of exercising reasonable skill and care.
Deal Honestly and in Good Faith
Dealing honestly is easy enough. If you deal honestly while acting on behalf of a principal you’re halfway there. Dealing honestly doesn’t imply that you mustn’t give opinions, but you cannot misrepresent facts. The other part of this requires that an agent operates in good faith, which means being open, fair and sincere. An agent cannot be duplicitous or deceitful. Having an ulterior motive that is not known to the principal would be an example of violating this principle. This duty applies to all parties in a transaction, not just the principal the agent represents.
To present all written offers, written notices and other written communications to and from either party in a timely manner regardless of whether the property is subject to an existing contract for sale or the buyer is already a party to an existing contract to purchase. The long and short of this duty is that you need to make sure as a broker, that all written information is quickly given and presented to your client. There's no situation where you can hold an offer so another can get signed. Hardest is the obligation to remember you need to present all communications and offers from any party even if you have a transaction that is under contract. As a broker keeping the files and communications relating to a transaction is critical, this is an important practice to demonstrate that you have fulfilled your duty to present all communications, in case you are ever questioned about a transaction. Noting the time and date you received each communication is extremely helpful if there are questions. Email is especially helpful since the timestamp is included.
Disclosure of Facts
To disclose all existing material facts known by the broker and not apparent or readily ascertainable to a partyI3/4 nor be construed to imply any duty to investigate matters that the broker has not agreed to investigate. A material fact is anything that if it were known, may result in a different decision. While this is rather broad, it is best to consider anything affecting the value of the real property as a material fact. What this means is, if as a broker you have knowledge of a fact pertaining to the property it needs to be disclosed to every party involved. Even a broker who represents the seller must disclose material facts to a buyer regardless if it is detrimental to the seller. This means that if there was a leak in the bathroom that was covered with drywall and not visible, the broker would be required to disclose that information to the buyer. This situation is an example of what is called a latent defect. Latent defects are issues with the property that are not discoverable by the standard inspection.
One type of disclosure that comes up is stigmatized property. A stigmatized property has had a bad event occur there, such as a drug deal, crime, or suicide. Negative events are not by their nature physical defects and therefore don't constitute material facts. A stigmatized property doesn't need to be disclosed during the sale of the property.
Account for all Money and Property
To account in a timely manner for all money and property received from or on behalf of either party. This particularly applies to the earnest money. Earnest money has strict rules regarding its handling. Rules are in place in order to ensure proper accounting. The accounting for all money and property also means that the broker must establish a chain of custody over a client's property or money. A chain of custody is an accounting that keeps a record of who has money or property at any given time. So if a broker receives money at 9:00 a.m. on a Monday and delivers the earnest money to the party set forth in the agreement at 1:00 p.m. on Monday, they will need to keep proper accounting of who had possession of the money, dates and time. When a buyer presents an earnest money check or cash to a real estate broker there are strict trust and legal requirements that control how the funds will be handled.
Provide Agency Pamphlet
Brokers should provide a pamphlet explaining the law of real estate agency to all parties to whom the broker renders real estate brokerage services, before the party signs an agency agreement with the broker, signs an offer in a real estate transaction handled by the broker, consents to dual agency, or waives any rights, whichever occurs earliest. The Multiple Listing Service that you belong to in Washington state will have many preprinted forms that you will use to write transactions, and one of the forms they provide is a pamphlet on the law of real estate agencies. The pamphlet lays out the items that must be communicated to the broker’s clients as required by Washington State law. A good rule of thumb is to give the pamphlet to any clients the first time you meet with them. Be sure to do so even if the client has worked with another broker and received a pamphlet from them.
Brokers should disclose in writing to all parties he/she provides real estate brokerage services before the party signs an offer in a real estate transaction handled by the broker, whether the broker represents the buyer, the seller, both parties, or neither party. The disclosure must be in a separate paragraph entitled "Agency Disclosure" in the agreement between the buyer and seller or in a separate document entitled "Agency Disclosure." This requirement is intended to clearly establish who is representing whom. There are times when this is particularly important, for example, when a listing broker writes up a transaction for a buyer on the property and is not going to be a dual agent (representing both parties). The buyer would need to know they are not being represented in the transaction.
Not a Required Duty
Unless otherwise agreed, a broker owes no duty to conduct an independent inspection of the property or to conduct an independent investigation of either party's financial condition and owes no duty to independently verify the accuracy or completeness of any statement made by either party or by any source reasonably believed by the broker to be reliable. This provides brokers with a limit to the amount of knowledge they should have about a property. What would happen without this exception is the broker would essentially have no limit to the amount of knowledge they should have about a property.
Agency Duties Owed to Clients
When a broker is acting on behalf of a buyer, seller, or acting as a dual agent, the broker owes additional duties to their clients (principals). They are in addition to duties we just discussed that are owed to all parties. They are:
To be loyal means, taking no action that is adverse or detrimental to the client's interest in a transaction.
Conflicts of Interest
To timely disclose any conflicts of interest.
To advise the client(s) seek expert advice on matters relating to the transaction that are beyond the agent's expertise. This is an important duty to uphold and one mentioned many times in state law and is a common legal issue. A broker should never operate outside their area of expertise. This includes appraisal, law, home inspections, mortgages etc. There are even times when another broker should be brought in for assistance to ensure as an agent you provide expert advice to clients (short sales, dual agency, property management). Protecting the public from poor representation is the crux of license law and agency law. Therefore, brokers must take care to refer clients when appropriate or seek assistance.
Not to disclose any confidential information from or about the client(s), except under subpoena or court order, even after termination of the agency relationship. The duration of the confidentiality owed to the principal by a real estate broker does not have an expiration, it lasts forever.
Example: '‹The listing broker knows that the lowest amount that the seller would be willing to accept is $729,000 for their home. During an open house, a potential buyer visits and asks the listing broker, "What is the lowest price that the seller will take for this home?" The broker replies that he represents the seller and that the person visiting the house should make a solid offer. This is a great example of effective representation and an example of confidentiality and acting in the best interest of a client.
Confidential information '‹means information from or concerning a principal of a broker that:
a- Was acquired by the broker during the course of an agency relationship with the principalI3/4
a- The principal reasonably expects to be kept confidentialI3/4
a- The principal has not disclosed or authorized to be disclosed to third partiesI3/4
a- If disclosed, would operate to the detriment of the principalI3/4 and
a- The principal personally would not be obligated to disclose to the other party.
Exceptions and Allowable Actions
The following are exceptions and allowable actions for a broker who is representing the seller (seller agency).
a- A broker that is a seller's agent is not obligated to seek additional offers to purchase the property while the property is subject to an existing contract for sale.
a- The showing of properties not owned by the seller to prospective buyers or the listing of competing properties for sale by a seller's agent does not breach the duty of loyalty to the seller or create a conflict of interest.
a- The representation of more than one seller by different brokers within the same firm with transactions from the same buyer does not breach the duty of loyalty to the sellers or create a conflict of interest.
The following are exceptions and allowable actions for a broker who is representing the buyer (buyer agency).
a- The representation of more than one buyer by different brokers with the same firm and involving the same property does not breach the duty of loyalty to the buyer or create a conflict of interest.
a- A buyer's agent is not obligated to seek additional properties to purchase while the buyer is a party to an existing contract to purchase or show properties where there is no written agreement to pay compensation to the buyer's agent.
a- The showing of property that a buyer is interested in to other prospective buyers by a buyer's agent does not breach the duty of loyalty to the buyer or create a conflict of interest.
Note: All of the listed exceptions and allowable actions for both the buyer and seller apply to a broker acting as a dual agent.
The real estate agency pamphlet which is required to be given to all parties who receive real estate brokerage services will contain the laws that explicitly codify everything we have just discussed under the requirements of agency. It is important not only for you as a broker to be able to follow these laws, to have a thorough understanding of the laws, but also because you will most likely be answering questions from clients who will want to know the meaning of certain provisions in the law of agency pamphlet. The purpose of giving all clients the pamphlet and the clear disclosure of representation (who represents who) is aimed at transparency and clarity. The laws are designed to make the real estate profession and its required duties less esoteric and more public.
A broker can be sued by a client for breaching a duty they are required to perform under agency law. They will also be subject to discipline by the department of licensing if they are found to have breached their duties as an agent. The department of licensing doesn't need the client to sue or the court to rule in favor of the client in order to discipline the broker who breached their duties.