Table of Contents
Administrative Rules Affecting Agency
Oregon Administrative Rule 863-015-0200 Agency Relationships. Click HERE for a full explanation of the rule.
Oregon Administrative Rule 863-015-0205 Disclosed Limited Agency. Click HERE for a full explanation of the rule.
Oregon Administrative Rule 863-015-0210 Disclosed Limited Agency Agreement. Click HERE for a full explanation of the rule.
Oregon Administrative Rule 863-015-0215 Initial Agency Disclosure Pamphlet. Click HERE for a full explanation of the rule.
Oregon Administrative Rule 863-015-0220 Written Company Policy. Click HERE for a full explanation of the rule.
return to top Explanation of Administrative Rules Involved
OAR 863-015-0200 defines and fleshes out by administrative rule the types of agency relationships allowed by statute. The rule makes it clear that an agency relationship can be created by agreement or conduct. Disclosed limited agency and designated agency relationships are defined in the rule more closely than in ORS 696.815, but no new obligations are imposed. The rule is strictly definitional as far as agency relationships are concerned. The rule also contains the full text of the Final Agency Disclosure form required by statute. Agency disclosure requirements are discussed in detail in the Agency Disclosure section of this topic
OAR 863-015-0205 is the administrative rule that controls disclosed limited agency relationships. Under the statute, such relationships can be established only by written agreement. Disclosed limited agency agreements must meet all of the requirements of OAR 863-015-210.
OAR 863-015-0205 allows for designated agency and even, under subsection (5), for true single agency relationships within the same company. The key to designated agency and in-company single agency is the control of confidential information. OAR 863-015-205(4) demands that principal brokers have “established procedures to assure that a licensee who represents one client will not have access to and will not obtain confidential information concerning another client involved in the same transaction.” For in-company single agency to work, the principal broker must also have divided supervision and control agreements in place so there is no overlapping supervision of both the listing and selling licensees.
OAR 863-015-210 contains the administrative rule requirements for disclosed limited agency agreements. The required contents of such agreements are contained in the first two subsections of the rule. Subsection (3) of the rule sets out a statutorily sufficient form for disclosed limited agency agreements. The form is not “required” by the rule, but the rule does make it clear that use of the statutory form is evidence of having complied with the requirements of the rule. Not surprisingly, the statutory form is universally used in Oregon real estate. Click Here for a detailed discussion of Disclosed Limited Agency.
OAR 863-015-0215 is the administrative rule that sets out the requirements for the statutorily required Initial Agency Disclosure Pamphlet. Agency disclosure is peculiar to real estate and its form and substance is controlled by the Real Estate Agency. Agency disclosure is discussed in detail in the Agency Disclosure section of this topic. Click Here for a copy of the Initial Agency Disclosure Pamphlet.
OAR 863-015-0220 is the last of the administrative rules dealing with agency relationships. Under the rule, “each real estate business shall develop and maintain a written company policy that sets forth the types of relationships real estate licensees associated with the business may establish” It is in these policies that the principal broker must detail what agency relationships the broker’s agents will be allowed to form and how the broker will comply with the agency relationships set forth in OAR 863-015-0200. Chief among the required policies are those that will ensure protection of confidential information. Agents should be aware of the policies adopted by their company under these rules because the policies can affect the kinds of agency relationships the agent is allowed to form.
return to top The Law of Agency
Agency relationships are the backbone of the real estate business. Real estate license law in most states assumes such relationships. Those same license laws define the duties involved in agency relationships. Indeed, agency relationships are so central to the practice of real estate that real estate licensees call themselves real estate “agents.”
Notwithstanding the critical role of agency relationships in the practice of real estate, the law of agency is poorly understood by most real estate licensees. As a result, the industry is rife with myths about agency and agency relationships. The whole thing can seem quite scary and complex. Yet, the law of agency is simple law.
“Agency,” according to legal dictionaries, is “the fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Typical of legalese, the definition doesn’t seem too helpful. If, however, you read the definition carefully, you’ll see it contains some very important concepts.
First, agency relationships require “consent,” not an “agreement.” The relationship “results” from the “manifestation” of this consent. What is consented to is for one person “to act” on behalf of another. That is, one person consents to another acting on his behalf and the other acts according to that consent. All that is needed is for one person to consent and the other act on it. This seemingly asymmetrical feature of the law of agency can cause real estate agents serious grief.
If you think in terms of “manifesting consent” and “acting,” you can see how easy it is to create an agency relationship. An agency relationship can be formed without the principal and the agent even discussing the matter. All that is necessary is for the principal to manifest consent for the agent to act on the principal’s behalf and for the agent to do something on the principal’s behalf. It is so easy to create an agency relationship during a real estate transaction that real estate education often discusses “accidental” agency.
There is, of course, no such thing as an “accidental” agency. People don’t consent to accidents. It is more accurate to talk about an “unintended” agency relationship. The lack of intention is typically on the agent’s side. Because all that is needed to raise an agency relationship question is evidence that one person (the agent) took some action consistent with acting on behalf of another (the principal) and the principal took advantage of that action, such relationships can exist without the agent intending the relationship. The problem, of course, is that an agent who thinks they have only a customer is unlikely to meet the duties owed to a client.
Think about an agent who represents only the seller showing property to buyers, writing offers for them and then helping them perform the contract. On whose behalf is the agent acting? Is the agent acting for the seller, for the buyer or for both? The answer, if there is nothing in writing, depends upon conduct. Without something in writing, deciding whether there is or isn’t an agency relationship can become a “liars contest.” It is this simple truth that caused the real estate industry to lobby agency disclosure laws into existence in all fifty states. A complete discussion of agency disclosure can be found in the Agency Disclosure section of this topic.
Notwithstanding agency disclosure statutes, the ease with which agency relationships can be created continues to cause dysfunction and paranoia in the industry. One place this dysfunction and paranoia manifests itself is on the selling side of transactions. Because selling side agency relationships are typically established without benefit of a service agreement or other writing, there is a great deal of confusion around when a selling side agency relationship begins. The lack of written understanding also leaves open to debate exactly what services the agent has undertaken to provide to the buyer and how long the agency relationship lasts.
Agency relationships, until very recently, have not been as big a problem on the listing side. All that has changed with the advent of what are called “limited service listings.” Limited service listings are listings in which the listing broker limits the services they will provide to the seller. Often, the services offered the seller is nothing more than filing the listing with the MLS. This manner of doing business leaves the seller more or less unrepresented. Buyer’s agents dealing with unrepresented sellers then have to worry about forming unintended agency relationships with the seller. Click HERE for information on dealing with unrepresented sellers.
If you think about it, you will see that much of the confusion surrounding agency relationships is generated because of the ambiguity surrounding the establishment and scope of agency relationships. Establishing and terminating agency relationships and controlling their scope have not been a priority in the industry, historically. The rise of buyer agency, and now limited service listings, is putting pressure on real estate professionals to better understand agency relationships. That understanding begins with establishing and terminating agency relationships.
return to top Establishing and Terminating Agency Relationships
Creating Listing Side Relationships
Because the listing side agency relationship is created in a written contract, it is easy to determine when the agency relationship begins. It begins on the effective date of the listing contract. When marketing or MLS filing is to be delayed under the listing agreement, it is wise to add a clause that makes clear that all other terms of the listing are to be in force on the effective date of the listing. In this way, arguments can be avoided if a buyer emerges prior to the marketing or MLS filing date.
Notwithstanding the certainty created by using a written agreement on the listing side, there is one situation that can cause confusion of agency duties when listing property. That situation arises when the seller discloses confidential information to the agent during the listing presentation but, for whatever reason, does not then list the property. Although it would seem the agent has no duty to protect the confidences if the seller does not enter into a listing agreement, courts do not look at the situation that way. Instead, courts conclude that a limited agency relationship created by conduct existed for the purpose of the listing presentation. It follows that information exchanged during the presentation is confidential even if the seller does not continue the relationship by entering into a listing agreement.
return to top Terminating Listing Side Relationships
An agency relationship lasts for a stated term, for a reasonable time in the circumstances if no term is stated, until the object of the agency is accomplished or otherwise ceases to exist, or until terminated by the parties. On the listing side, the term of the agency is stated - it’s the term of the listing. If the property sells before the listing “expires” (or the house burns down), the agency will end because the object of the agency is accomplished (or rendered impossible). That leaves only “terminated by the parties” to cause trouble on the listing side.
Agency relationships are just that: relationships. Although agency relationships can be established by contract, the relationship itself is not a contract. This is where the difference between agreement and consent comes in. One person cannot force another to consent. It follows that either party to an agency relationship can terminate the agency relationship unilaterally at any time by simply withdrawing the consent to act.
The ability to terminate an agency relationship unilaterally does not mean there may not be legal consequences, contractual or otherwise, for ending the relationship. In real estate, such consequences often become an issue when the seller wants to terminate the listing before it expires. The seller’s right to terminate the listing agreement as a contract is not the same as their right to terminate the agency relationship by withdrawing consent. The agency relationship itself will end the moment the seller withdraws their consent to act on their behalf, but doing so, depending on the circumstances, may also breach the listing agreement.
Real estate agents often confuse termination of the agency relationship with performance or breach of the listing contract. There are usually provisions in the listing agreement about damages if the seller breaches the agreement by withdrawing consent to act as the seller’s agent. Breach of contract issues, however, have nothing to do with whether or not the broker can continue to act on the seller’s behalf to market the property. An agent cannot continue to represent a seller without the seller’s consent even if withdrawing that consent breaches the listing agreement and entitles the broker to damages.
The breach of contract issues created when a seller terminates a listing before the expiration date can be very complex legally. Click HERE for a legal analysis of these issues in Oregon. What is not complex is the effect of the seller’s withdrawal of consent to act on their behalf. Without that consent, the agent can no longer market the property or hold themselves out as the seller’s agent. Attempts to force the seller to continue the agency once the seller gives notice of termination of the agency relationship are common in the industry but very dangerous legally.
Brokers will sometimes try to force the seller to allow them to continue with the agency relationship by threatening the seller with the liquidated damages clause in listing agreements. Such clauses often purport to entitle the listing broker to a full commission if the seller terminates the listing. Whatever the enforceability of such clauses, the use of them to threaten clients raises serious agency duty issues. The problem with threatening your own client is that if you are successful they remain your client. If they remain your client, you have an obligation not to threaten them, especially if the threat involves the agent making statements about the client’s legal rights.
Because of the problems associated with trying to force a seller to continue a listing against their will, some brokers attempt to avoid dealing with “termination” of the listing altogether. Rather than terminate the listing, they merely “withdraw” it from the MLS by having the seller sign a listing withdrawal form. If the distinction between termination and withdrawal is not carefully explained, most sellers will assume the listing is being terminated when they sign the withdrawal form. If the seller does not understand fully what is actually going on, this manner of doing business places the broker’s interest in direct conflict with their client’s, can involve misrepresenting the seller’s options and harms the seller by continuing the listing (and agency relationship) while seriously diminishing exposure to the market.
Bluffing a seller (even innocently) into continuing a listing is asking for trouble. That trouble often starts when the seller approaches another broker and tries to list the property. Simply put, trying to hold onto a listing in the face of a seller’s desire to terminate is a poor business practice. When a client seller wants out of a listing agreement, the real issue is damage to the broker. And it is by focusing on damages that the broker can determine their best course of action.
Damages in listing termination cases depend mostly on how long the listing has been active, the broker’s expenses in marketing the property and the likelihood of a sale during the remaining listing period. A seller who terminates a listing near its end, trying to avoid a commission on a likely sale, is not the same as a seller who terminates because there have been no offers for months is not the same as a seller who terminates within a week of creating the listing because they want to stay in the house and care for their sick spouse. Each of these situations is different. Unfortunately, the liquidated damage clause found in most listing contracts treat each of these situations exactly the same by demanding the full commission as damages.
When faced with a listing termination issue, the broker should first look at the situation, not the termination clause of the listing contract. Is the issue seller greed? Is it changed seller circumstances? Is it dissatisfaction with service? If the issue is greed, a hard line and a demand for a full commission might be the best course of action. If changed circumstances, a no cost release might preserve the business relationship so that when circumstances change again, the listing might come back. If the issue is services, an honest assessment of the seller’s perspective is in order. It is only after that honest assessment that the broker can begin to consider negotiating a settlement with the seller. It is in these negotiations over the cost to the broker that the liquidated damage clause in the contract becomes important.
return to top Creating Selling Side Relationships
Although buyer agency by written agreement is becoming more prevalent in the industry, the majority of agency relationships with buyers still do not involve written agreements. Instead, the buyer and the agent simply start interacting and at some point during that interaction an agency relationship is created. This manner of doing business makes it very difficult to determine exactly when a selling side agency relationship is established.
Unless there is a writing, figuring out when a business relationship becomes an agency relationship involves determining when consent was given and acted upon. That is, at what point the principal (here the buyer) manifested consent for the agent to act on their behalf and the agent consented by acting on that manifestation. Establishing an agency relationship by conduct instead of contract means depending on who says and does what, when. It is for this reason that the establishment of buyer agency relationships remains a matter of confusion in the industry.
Fortunately, when exactly an agency relationship is established on the selling side rarely matters. First, without it in writing, the relationship is not exclusive - hence the old industry saying: “nobody owns a buyer.” By the time a buyer identifies a particular property and attempts to purchase it, there is (unless there is something in writing to the contrary) no doubt the agent “working with” the buyer has established an agency relationship. Until the buyer identifies property and decides to purchase, nothing likely has happened to cause the buyer, or the agent, serious damage. Thus, the lack of certainty as to when an agency relationship begins on the selling side causes few, if any, real problems.
return to top Terminating Selling Side Relationships
Equally confusing on the selling side is termination of agency relationships. Like any agency relationship, a selling side agency relationship lasts for a stated term, for a reasonable time in the circumstances if no term is stated, until the object of the agency is accomplished or otherwise ceases to exist, or until terminated by the parties. In the typical selling side situation where there is no agreement between the agent and the buyer, there is no stated term and it is very hard to say how long a buyer who hasn’t found anything is still “in the market.”
The lack of formality on the selling side makes it difficult, absent completion of the object or termination by the parties, to say how long a selling side agency relationship exists. This uncertainty is, however, tempered by the fact that buyer agency relationships created only by conduct are non-exclusive. This non-exclusivity, coupled with ORS 696.810(4), means it is not a breach of the duty of loyalty to show property to competing buyers.
Non-exclusivity and ORS 696.810(4) are no help, however, when it comes time to write offers for competing buyers. Two buyers competing for the same property means disclosed limited agency rules kick in. Disclosed limited agency disclosure and consent rules make representing two buyers for one property difficult and unusual. A complete discussion of disclosed limited agency can be found in the Agency Disclosure section of this topic
One place where termination of a buyer agency relationship can become an issue is when the agent wants to purchase property that might be of interest to their buyer client. Before purchasing a property of potential interest to a buyer client, an agent must offer the property to the client. This is a function of the duty of loyalty. An agent who represents buyers must, therefore, consider their current list of clients before purchasing property for themselves.
Any uncertainty over who is still a client should be resolved in the client’s favor. That means that prior to purchasing property themselves, buyer agents should determine the property does not meet existing clients’ needs, offer the property to the clients first or terminate the conflicting agency relationships. Of these choices, offering the property to existing clients is the safest if there is doubt about the client’s real estate needs.
Determining what might meet a buyer client’s needs means having a good idea of those needs. If the buyer is looking for an executive home with three baths and five bedrooms and is willing to pay a half a million dollars for it, you don’t have to offer them the little fixer upper you found for yourself over on the “wrong” side of town. If you have clients actively looking for inexpensive property on that side of town, it would be foolish to buy the property without making them aware of it. In between these extremes lie all the rest of your clients. When self-interest is involved, it is wise to err on the side of clients.
Terminating an agency relationship on the selling side does not usually raise the same breach of contract issues as on the listing side. A non-exclusive agency relationship that exists without a contract is pretty much the same as “at will” employment as far as termination is concerned: either party can terminate at any time for any reason or for no reason at all. All that is required is notice to the other party. Although the notice need not be in writing and can even be implied from the circumstances, written notice is always preferable - especially in cases where agent self-interest may be an issue.
return to top Scope of Agency Relationships
The ease with which agency relationships can be created raises more problems than just unintended relationships. Because the agency relationship can be implied from conduct alone, the “scope” of the relationship is often left undefined. The scope of an agency relationship is its range of operation or purpose. The scope of an agency relationship is determined by what the parties intend the agent to accomplish. It is the scope of the relationship that establishes the agent’s authority and obligations to the principal.
Because of its sales origin, the real estate industry has, until recently, paid little attention to the scope of agency relationships. For almost a century, the industry operated by “listing” the seller’s property and then “working with” unrepresented buyers to get the seller’s property sold. The only agency relationship intended was that between broker and seller.
The scope of a sales relationship with a seller is pretty simple: market the property to find a buyer ready, willing and able to purchase. Not only was the scope of the sales relationship pretty simple, but it was spelled out in a written listing agreement. Thus, historically, there was little need to worry about the scope of agency relationships. All this is changing.
The advent of buyer agency in the late 1980s placed new emphasis on the scope of agency relationships. For the most part, buyer agency relationships arise by conduct and, therefore, are not defined by written agreement. At the same time, a buyer’s needs are both greater than and less defined than a seller’s. A seller has only one piece of property to sell. The object of the relationship is, therefore, very narrow. Not so with buyers.
Buyers are fundamentally shoppers. They are going to exchange something of known value (money) for something of unknown value (a used house). Not only is the condition of the house unknown at the time of offer but so are offsite conditions that can affect value. This greatly increases the buyer’s risk in the transaction which, depending on the scope of the agency relationship, greatly increases their agent’s risk.
A good way to think about the scope of buyer representation is to ask yourself exactly what a buyer agent is supposed to do for the buyer. Does a buyer’s agent just have to find the buyer property to look at? Or does the agent have to make sure the property found is really suitable to the buyer’s needs, free of defects and worth the price paid? Your answer is probably somewhere between these extremes, but where?
When nothing is said between buyer and agent about the scope of the relationship, it is very likely the buyer will believe the agent is “guaranteeing” satisfaction. At the same time, the agent is likely to believe they are merely showing property. This mismatch of expectations, coupled with the ambiguity created by not defining the scope of the relationship, is what drives liability risk on the selling side of transactions.
There are two simple solutions to the scope of agency problem inherent in buyer agency. One is the growing use in the industry of buyer service agreements. Written service agreements between buyers and agents are helpful in a number of regards, but none so much as in defining the scope of the relationship. A buyer’s agent can use the written service agreement to both explain and limit the services they will provide. In this way, they can control the scope of the relationship and with it their risk. Click HERE for a copy of a sample buyer service agreement.
The second way in which a buyer’s agent can control the scope of their agency relationship with the buyer is to use what is called a “client engagement letter.” Because agency relationships do not require agreement, it is not necessary to have a service agreement or contract to define the scope of the relationship. All that is necessary is for one party to define the services offered and the other party to consent to those services.
Defining the scope of agency relationship is simply a matter of the agent telling the client what services will and won’t be provided and the client continuing the relationship. It is here that the “act and consent” basis of agency relationships can work to the agent’s advantage. See the Establishing and Terminating Agency Relationships section of the topic for a complete discussion of the “act and consent” issue. To capitalize on that advantage, it is only necessary to develop a letter that defines the services offered and send it to each client as soon as an agency relationship has been established.
Client engagement letters are routinely used by other service professionals like lawyers, accountants and tax professionals. Such professionals use engagement letters to confirm the agency relationship by welcoming the principal as a client and informing the client about the nature of the professional’s services. The nature of the service includes spelling out the professional’s authority to act on behalf of the client, the services the professional will and will not provide, and any specific responsibilities the client will have during the relationship.
Engagement letters do not create agency relationships. The relationship is created by the acts of the agent and the consent of the principal. What an engagement letter does is acknowledge the relationship and, in doing so, defines it. An engagement letter works to protect buyer agents by preventing the client from later claiming the agent was responsible for seeing to that no harm whatever came to the buyer as the result of the transaction. Click HERE for a copy of a sample client engagement letter.
Something similar to an engagement letter can also be used to deal with limited service listings. A limited service listing is any listing in which the listing broker limits the services they will provide to the seller. At the extreme, this can mean limiting the service the listing broker will provide the seller to nothing more than putting the property in the MLS. Such listings are often called “MLS-only” listings.
MLS-only and other limited service listings work because under the common law the agent and the principal are free to define the scope of their relationship. If the agent and principal agree that the agent’s only obligation will be to place the property in the MLS, the scope of their agency relationship is limited to that act. Although all the fiduciary duties of an agent attach to the agent, they apply only to those acts the agent and principal have agreed will be the agent’s responsibility.
The ability to limit the scope of agency relationships on the listing side is causing considerable consternation in the real estate industry. Some buyer agents do not like working with a seller who is not represented by an agent because they believe it increases their own work and liability risk. Click HERE for a detailed explanation of the issue and potential solutions, including sample clauses and letters. Some brokers see limited service brokerage as a threat to their “full service” brokerage business models. Great turmoil in the industry has resulted. Click HERE for a detailed white paper on the subject.
Notwithstanding the turmoil the ability to control the scope of agency relationships has recently created on the listing side, scope is a critical component of the law of agency. As a general rule, the greater the scope of the agent’s obligations to the principal the greater the agent’s potential liability. That makes controlling the scope of the relationship an important risk management issue. So important, in fact, that in addition to using written agency agreements or client engagement letters, the industry has begun to talk about developing industry-wide standards of practice.
Industry standards, whether self-adopted or imposed by government, are used in many professions. Most real estate licensees are familiar with USPAP, the Uniform Standards of Professional Appraisal Practice. Engineers and architects have industry-wide standards imposed by their professional associations. Home inspectors in Oregon have adopted professional standards and gotten the Construction Contractors Board to adopt them as administrative rules. Click HERE for a copy of the inspection standards found in OAR 812-008-0080.
Whether imposed as industry standards by a professional organization or by governmental action, standards of practice define the minimum scope of relationships in the industry. Industry standards can increase or limit scope of agency relationships in the same way a contract between agent and principal can. Standards of practice, like the scope of an agency relationship, are not the same as agency duties.
Agency duties, like all legal duties, attach to relationships. That means whether the duty arises or not depends on the legal relationship of the parties involved. Here, that relationship is agent/principal. But that does not mean individuals cannot structure the scope of their relationships to limits the universe of things to which the duties will apply.
Think of defining the scope of an agency relationship, or industry standards of practice, like a housekeeper telling a homeowner they do not do windows. That agreement regarding windows limits the scope of the housekeeper’s work. If the housekeeper limits the scope of their work, dirty windows in the home will not be the fault of the housekeeper even if a housekeeper had the legal duty to keep things clean and shiny. The “clean and shiny” legal duty simply would not attach to windows.
The distinction between agency duties and the scope of an agency is very poorly understood in the real estate industry. The industry has been slow to adopt industry-wide Standards of Practice. It has been equally slow to use private agreements to limit the scope of agency relationships with buyers. Things, however, are starting to change. Whatever the standards of practice or scope of agency changes coming, it will remain important to understand the agency duties the law imposes on all agency relationships whatever their scope.
return to top Understanding Agency Duties
Common Law Fiduciary Duties
Because the agent in an agency relationship is acting on behalf of another person, the law has long imposed legal duties on agents. These duties result from the fact that in an agency relationship the principal must trust and rely on the agent to accomplish the object of the relationship. Relationships involving trust and reliance are considered “fiduciary” relationships.
The common law imposes six legal duties on fiduciaries. They are the duties of loyalty, obedience, disclosure, confidentiality, diligence, and accounting. With the exception of the duties of confidentiality and diligence, fiduciary duties are fairly easy to understand.
Loyalty
Loyalty means the agent must put the client’s interests before anyone else’s, including their own. It would be disloyal, for instance, for a buyer’s agent to purchase property of interest to the client for themselves without first finding out if the client wanted the property. Loyalty can also become an issue if an agent is receiving a bonus or fee sufficiently different from that the client would expect or is typical in the situation.
In such cases, doubt can be raised about whether the agent’s conduct in the transaction was driven by their duty to the client or their own interest in the bonus or fee. It is not that the agent is receiving a fee or commission. There is nothing disloyal or wrong about an agent receiving a fee or commission. Rather, it is that the fee or commission is unusual enough to cast doubt on whether it, instead of client needs, motivated the agent’s actions. As with any conflict of interest calling into question the agent’s loyalty, disclosure of the conflict is the appropriate course of action for the agent.
Obedience
Obedience means doing what the principal asks. The duty of obedience does not, however, require doing things that are illegal, unethical or in conflict with other legal duties. The client’s instruction to the agent must be lawful instructions. That is, they must be instructions to do what the law allows done. In dual agency situations, obedience can cause problems. That is why disclosed limited and designated agency statutes have provisions that forbid agents involved in such relationships from taking actions that are harmful or detrimental to either party.
Disclosure
The duty of disclosure means telling the principal everything of importance the agent knows or learns about the object of the relationship. Normally, the object of the relationship is buying or selling property. The agent must tell their principal everything they know that may be of importance or even of interest to the client in making the decision to buy or sell.
The agency duty of disclosure to one’s own client is much broader than the duty to disclose latent material facts. This can cause confusion for agents. For instance, Oregon law declares certain things, like a death on the property, not to be material in a real estate transaction. Click Here for a copy of the statute. An agent with such information could not hide the information from their own client and would still have to disclosure it if it was apparent the information was important to their client.
Disclosure to the client is the only way an agent can deal with conflict of interest situations. Not only must an agent disclose such situations to the client but the disclosure must be a full and fair disclosure in language the client can understand. The duty to fully and fairly disclose can create very difficult situations for agents. Of these difficult situations, none is more potentially difficult than buying your own listing.
Purchasing your own listing creates a conflict of interest because, as the buyer, the agent’s interests are directly opposed to the seller’s. The safest and simplest way to resolve this conflict is to dissolve the agency relationship and advise the seller to seek representation elsewhere. Although safe and simple, this is almost never done in real life. It is not done because agents believe they must continue to represent the seller in order to get a commission and they want the commission to help fund the purchase.
Unfortunately for agents, the duty of full and fair disclosure can make it very difficult for a listing agent who wants to purchase their client’s property to continue to represent the seller. Because the agent will be on both sides of the deal, an agent purchasing their client’s property can continue to represent the seller only if the seller agrees to the dual representation after full disclosure. The disclosure, to be considered full and fair, would have to include the fact that no commission would be due the agent if the seller refused to allow the dual agency. It is for that reason that negotiating the price directly, based on the anticipated commission savings from dissolving the agency relationship, is a much better approach than trying to continue the relationship and taking the commission.
Confidentiality
The duty of confidentiality can be a little confusing. Confidentiality means not telling other people things your principal doesn’t want disclosed or that would be harmful to the principal if disclosed. Obviously, the duty of confidentiality can conflict with the duty of honesty and disclosure. Fortunately, the duty of confidentiality does not require the agent to be dishonest or unethical in order to protect their client.
In Oregon, “confidential information” is defined by statute ORS 696.800(3). Confidentiality is a specific statutory duty in Oregon and is discussed at length in the Statutory Agency Duties section of this topic. The common law idea of confidentiality is basically the same as in the statute in that it simply requires the agent to hold in confidence any information entrusted to the agent by the principal, unless the law requires it disclosed or client wants it disclosed.
Diligence
Like the duty of confidentiality, the duty of diligence can be confusing. Diligence means the attention and care legally expected or required of a person. What is legally expected of a real estate licensee is that they have the attention and skill of the average real estate licensee. This self-referential standard feels mushy, and in many ways it is, but that is no accident. Measuring diligence by reference to peers creates a dynamic standard of care in an industry.
As circumstances in the industry change, so does the standard of care. Until well into the 1980’s no one thought anything of a buried heating oil tank. Today, an agent, whether representing a seller or a buyer, would hardly be considered diligent if they ignored the existence of such a tank. The same is true of man-made siding, mold and any number of other issues. Diligence doesn’t require a person to be a good real estate agent but it does require that they not be a bad one.
The duty of diligence is arguably the most important of the common law duties. A lack of due diligence is another way of saying “negligent.” Negligence is important because an agent can be negligent both in what they do and what they don’t do. Failing to understand a transaction document can be negligent. Failing to read that same document can be negligent and, depending on the circumstances, it may even be negligent not to know there ought to be such a document. It is this last, or negligence by omission, aspect of the duty of diligence that makes it so dangerous.
Negligence by omission is easily confused with misrepresentation by omission. Indeed, the two legal theories overlap because each is based on the idea of not knowing what one should know. This overlap has caused the industry to focus on disclosure as a means to control risk. Unfortunately, disclosures do not help when the claim is a lack of diligence rather than misrepresentation.
Diligence requires the application of training and intelligence to specific circumstances. It is for this reason that general disclosures of potential problems are ineffective when the claim is lack of diligence. Take, for example, the problem of mold. Disclosing that mold can be a serious problem in housing does not excuse the agent who misses or ignores “red flags” like odors or stains that indicate there may be mold in a particular property. In fact, quite the opposite is true.
Accounting
The duty of accounting requires the agent to account to the principal for any and all money or property of the principal’s coming into the agent’s hands. Accounting is rarely an issue unless money has been misappropriated. Misappropriation of a client’s money is a very serious breach of agency duty that can result in loss of license and even criminal sanctions.
Typically, the only client funds entrusted to real estate agents is the earnest money. Earnest money accounting and handling is separately regulated by statute and administrative rule in Oregon. Click Here for a detailed discussion of earnest money. Other than earnest money, the duty of accounting causes few problems in real estate as long as the agent is very careful to document any monies of the client that flow through their hands.
return to top Statutory Agency Duties
In Oregon, as is now the case in many other states, the duties a real estate licensee owes buyers or sellers are set out in statute. For the most part these “plain language” statutory duties parallel the common law fiduciary duties. Like most but certainly not all states, Oregon real estate law assumes the relationship between real estate licensees and their clients will be an agency relationship. Thus, statutory law now controls both whether there is an agency relationship and the duties owed in that relationship.
ORS 696.800 through ORS 696.880 are the Oregon license laws provision that deal with agency. ORS 696.810 concerns itself with buyer agency. ORS 696.815 covers representation of both the buyer and the seller. Seller representation under ORS 696.805 is mandatory for any agent acting under a listing agreement. Representation of buyers, or representation of both in the same transaction, is permissive.
return to top Duties to All Parties
Although there are three types of agency relationships set out in Oregon statute, there is really only one basic set of agency duties. Whether representing a seller or a buyer or both, real estate licensees in Oregon owe everyone involved in the transaction (the seller, other principals and the principals’ agents) three legal duties. They are: (1) To deal honestly and in good faith; (2) To present all written offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase; and (3) To disclose material facts known by the seller’s agent and not apparent or readily ascertainable to a party.
These three general duties apply without regard to the agency relationships. Although the duties are “affirmative” in the sense that they mandatory, they are not “fiduciary” duties like those that apply between agent and principal under the common law. Because they apply to all parties regardless of representation, it is critical to understand these general license law duties.
return to top Duty to Deal Honestly and in Good Faith
The duty to “deal” honestly and in good faith establishes a duty of personal integrity during transactions. “Honesty” is pretty simple: you can’t lie to clients and customers during real estate transactions. “Good faith” is more complicated. Good faith, according to Black’s Law Dictionary, “encompasses an honest belief, the absence of malice and the absence of a design to defraud or to seek an unconscionable advantage.”
In Oregon, “good faith” is required in the performance of all contracts. A court faced with interpreting the statutory duty of a real estate licensee to deal honestly and in good faith would, no doubt, turn to contract case law imposing the common law duty of good faith in the performance of contracts. That means understanding good faith in the performance of contracts.
Contractual “good faith” isn’t just about honesty. Certainly, honest people are more likely to act in good faith and lying is certainly one way to act in bad faith. But contractual good faith is really about acting in a way that gives effect to the reasonable expectations of the parties to the transaction. To act with good faith you must understand the reasonable contractual expectations of the other party and give those expectations effect.
Good faith is a hard one for people and not just real estate licensees. Let me give you an example. A struggling flower grower quits paying its hothouse gas bill. Six months later, the gas company starts trying to collect its $50,000 bill. The grower tells the gas company they’ll have to wait because the flower growing business is cyclical and flower growers make most of their money right before Valentine’s Day. They are trying, says the grower, to get a second mortgage on their land so they can pay their debts and make it to Valentine’s Day.
Notwithstanding, or maybe because of, the grower’s explanation, the gas company files a lien on the grower’s property for the $50,000. They then send the grower a letter saying they will remove the lien and continue the supply contract only if the grower pays them $100,000. The grower doesn’t have the $100,000 and can’t get a loan because of the lien, so they go out of business. The grower then sues the gas company for breach of the duty of good faith in performance of the supply contract - and wins.
What the court determined in the flower grower case was that the gas company’s letter demanding twice the money due was an “excessive demand” intended to force the grower out of business by making his performance of the supply contract impossible. This result startles people, especially real estate licensees.
There is a sort of “all is fair in love, war and real estate contracts” belief that is alive and well in the industry. Think about all the stories you hear about cute ways to get a client out of a contract. Most of these stories involve clients telling agents I want out for reason X and the agent telling the client OK but let’s tell them Y. That is transactional bad faith.
Agents who get into this sort of thing often feel stuck between their duty to protect the client and their duty to deal honestly and in good faith with the other party. How can this sort of thing be resolved? An agent can’t just tell the other side the client’s real motive. Nor can they lie to the other side about motive. So how do you handle the duty of good faith and honesty?
Good faith and honesty are a lot easier for a real estate agent to deal with when they will realize they have a business problem, not a legal problem. Tell the client that terminating contracts is a serious legal matter beyond your expertise. Tell them they may want to consult an attorney before deciding. But if they decide that is what the want to do, you can send the other side a document stating their decision in their own words. You need to explain to your client that your duty of honesty to all parties will prevent you from lying on their behalf. (It is not a lie to send the letter because that is for good or ill what they want to do.) Then do a follow up letter to the client that says this is what you instructed me to do.
return to top Duty to Present All Written Offers
The general duty to present all offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase is an artifact of the sales industry. The presentation duty is really just an application of the duty of honesty that says an agent cannot hide documents or communications from the parties to a transaction even if the agent would rather the parties didn’t know about the document or communication.
The presentation of offers duty is largely an artifact of the sales industry origin of the industry. In those days, listing agents tried to get their unrepresented buyer’s offer in front of the seller before a subagent of the seller in another company could get their unrepresented buyer’s offer in front of the seller. The advent of buyer agency has greatly reduced, but not eliminated, the need for this specific duty. About the only place presentation becomes an issue any more is in multiple offer situations. Click HERE for a detailed explanation of multiple offer situations.
return to top Duty to Disclose Material Facts
All real estate licensees have a general duty to disclose material facts known by the agent and not apparent or readily ascertainable to a party. This duty applies to both the listing agent and the selling agent. The duty is not the same as the affirmative duty of disclosure because it applies to all parties, not just to the client. Because it applies to all parties, the duty is limited in scope of the disclosure of known material facts not apparent or readily ascertainable by others.
The duty to disclose material facts comes into play on the listing side mostly in disclosure of material defects in the property. The duty to disclose material defects in property has long been an issue in the industry. Although it unfortunately happens, it is very rare that an agent will deliberately try to hide a material defect they know about. Most lawsuits against agents for failure to disclose material defects are based not on the claim that the agent failed to disclose known defects but that the agent was negligent in not knowing of the defect.
The classic failure to discover defects case is Easton v. Strassburger, a 1984 California case. In Easton, a California court found the listing agent had a duty to disclose facts materially affecting the value or desirability of the property which through reasonable diligence should have been known. According to the court, there was substantial evidence to support the finding that the listing agent was negligent because a number of red flags indicated problems with the property. The court held the problems, which involved earth movement, were within the knowledge a typical real estate licensee familiar with property in the area.
The Easton duty to discover material defects does not require listing agents to inspect the property they list. Rather, the standard is really one of diligence. The listing agent must use the care of an ordinary real estate licensee when looking at or showing the property they list. The agent cannot ignore red flags that would be obvious to the average real estate licensee. Click HERE for a copy of the Easton case.
On the selling side, disclosure of material defects rarely comes up because buyers are rarely as defective as houses. In fact, about the only way a buyer can be defective is to not have the financial wherewithal to perform as agreed. This comes up in two important places in a real estate transaction: redemption of earnest money and credit worthiness. A buyer’s agent must disclose to the other side any knowledge that their client does not intend to, or cannot, redeem earnest money due under the contract. A buyer’s agent also cannot hide from the seller the buyer’s financial inability to perform the contract.
The statutory duties a real estate licensee owes to their own client mirrors common law fiduciary duties. The common law duties of loyalty, obedience, disclosure, confidentiality, diligence, and accounting are included among the statutory duties owed a client. There is no practical difference as far as a licensee’s obligations are concerned between those duties and their common law counterparts. Click Here for a detailed explanation of common law fiduciary duties. These affirmative statutory duties to clients may not be waived by the agent or the client. There are, however, several statutory duties which have no common law counterpart.
Under Oregon statutory law, agents have a duty to advise their client to seek expert advice on matters related to the transaction that are beyond the agent’s expertise. This affirmative duty is the flip side of a provision of Oregon agency law that says agents have no duty to investigate matters that are outside the scope of the real estate licensee’s expertise unless the licensee or the licensee’s agent agrees in writing to investigate a matter. Taken together, these two duties mean that, while an agent need not themselves investigate matters that are beyond the expertise of a real estate licensee, they may have a duty to advise the client to have another professional look into the matter. So, for instance, an agent would not have to investigate an encroachment onto a property but might, depending on the circumstances, have a duty to tell their client they need to consult with an attorney about the encroachment.
Another place where statutory duties do not exactly mirror common law agency duties is in marketing property under contract or finding additional properties for a buyer under contract. Unless agreed otherwise in writing, an agent must make a continuous, good faith effort to find a buyer for their seller or property for their buyer. Agents are not required, however, to seek additional offers to purchase or find additional properties once their client has entered into a contract for sale. The agent and principal may agree to seek additional offers or property but they are not required to do so as a matter of agency duty.
Oregon statutory agency duties clarify the common law by expressly allowing the seller’s agent to show properties owned by another seller to a prospective buyer. Similarly, a listing agent can list competing properties for sale without breaching any affirmative duty to the seller. The same rules apply to buyer agents who can show properties one buyer client is interested in to another buyer client.
return to top Understanding Agency Disclosure
In Oregon, agency disclosure was first adopted in 1993. The law demanded that real estate agents personally provide the buyer and seller in a real estate transaction with a statutory initial agency disclosure form. Agents were required to get the buyer and seller to acknowledge receipt of the disclosure. The statutory form, which was to be given at “first substantive contact” with the buyer or seller set out the duties of “buyers’ agents” and “seller’s agents” as well as agents “acting for both the buyer and the seller.” A “final agency acknowledgement” stating the agency relationships at the time of offer was also required under the law.
Under the 1993 law, buyers and sellers were asked to sign a statement saying they had received the disclosure and understood agency relationships in real estate, including the then common practice that all agents represent the seller. The form, however, went on to ask the person signing it to declare their relationship with the agent presenting the form. The form also contained what was called a “limited authorization regarding in-company sales.” It was these latter two provisions that proved to be the downfall of the agency disclosure form.
Initial Agency Disclosure
Problems with dual agency and consumer confusion resulted in a complete overhaul of agency disclosure laws in 2002. The new agency disclosure law distinguishes between disclosure of agency relationships and their formation. Under the new law, real estate licensees must give consumers who may be seeking representation from a real estate licensee (any real estate licensee, not just the particular agent involved) a pamphlet that explains agency relationships and the duties of an agent. This new disclosure requirement is so simple, it has caused some confusion.
After years of forcing consumers to sign something as soon as they talk to a real estate licensee, it has proved hard for agents to simply hand out something. There is, however, now no requirement whatever that agents document giving consumers the Initial Agency Disclosure Pamphlet. Nevertheless, companies have developed a variety of policies regarding consumer acknowledgment of delivery of the pamphlet. Agents should, of course, follow their company policies.
Final Agency Acknowledgment
Like the old agency disclosure law, the new law requires clients to acknowledge actual agency relationships at the time an offer is written. This final agency acknowledgement form is typically incorporated into the sale agreement form. In cases where the final agency acknowledgement form is not incorporated into the sale form, it can be attached to the contract for sale as an addendum. Whatever the means of delivery, the content of the final agency acknowledgement is established by law.
The final agency acknowledgement form used in Oregon assumes that not later than the time of offer, real estate licensees will have formed one of the three types of agency relationships authorized in Oregon licensing statutes. That is, the form assumes the agents will represent either the seller or the buyer or both and asks the agent to mark the check box appropriate to the agency relationship they have established. This checkbox manner of agency acknowledgement can be confusing to clients and agents alike.
The final agency acknowledgment form adopts industry jargon by asking for the “selling licensee” the “selling firm” and the “listing licensee” and the “listing firm.” The “selling licensee” must then declare whether they represent the buyer exclusively, the seller exclusively or both buyer and seller as a “disclosed limited agent.” The “listing licensee” is given only the choice of representing the seller exclusively or both the buyer and seller as a disclosed limited agent.
That selling licensees have more representation options than listing licensees makes little sense unless you know something of the history of agency relationships in real estate. When agency disclosure was introduced in 1993, it was common practice in the industry for all agents to work for the seller. Agents in offices other than the listing agent’s were considered “subagents” of the listing firm. It was, therefore, possible for both the “selling firm” and the “listing firm” to represent the seller exclusively. The practice of sub-agency has now all but disappeared but not its vestiges.
The final agency acknowledgement form is most easily used when there are two different agents from two different firms, with one agent representing the seller as the “listing licensee” and the other representing the buyer as the “selling licensee.” In such a transaction, it will be clear the buyer has their own agent, the seller theirs and that each agent represents their party exclusively. Dual agency situations in which one of more agents from the same firm represents both buyer and seller are less straight forward thanks to the advent of “disclosed limited agency.”
Disclosed Limited Agency
“Disclosed limited agency” is just another name for dual agency. It is defined in Oregon law as: “a real property transaction in which the representation of the buyer and the seller or two buyers occurs within the same real estate business.” Clearly, dual agency in Oregon continues to be company-based. Disclosed limited agency agreements and administrative rules, however, have significantly changed the old “in-company” sales model still practiced in most states.
The “in-company” sales model in use in Oregon until 2002, and still in use in most states, handles the potential conflicts of dual agency by making all the company’s licensees agents of all the company’s clients. In that way, it is thought, all agents could have access to listing files and still represent buyers because their ability to use information gleaned from listing files to the advantage of their buyer clients would be limited by their also being agents of the seller. All that was required to make this system work was a set of rules about what information a dual agent could and couldn’t disclose and some way for the client to “agree” to an “in-company” sale.
Because the in-company sale model depended on creating dual agency relationships for all agents as soon as any agent took a listing or started working with a buyer, it was necessary to get client approval before actually entering into an agency relationship. This was accomplished by making an “in-company” disclosure part of the initial agency disclosure. However, because the initial agency disclosure was to be given before there was an actual agency relationship, the wording of the in-company disclosure was somewhat awkward. The form asked the prospective client to give “limited authorization” for an agent they “may” hire to act as a dual agent if a situation involving dual agency were to “arise” in the future.
It wasn’t long before lawyers working for disappointed buyers were able to exploit the awkwardness of the in-company form. Arguing the form did not contain clear consent to a dual agency relationship after full disclosure to the client of the consequences of giving such consent; lawyers were able to successfully attack the legal sufficiency of in-company forms. This lead to a general rethinking of dual agency in real estate and the rise of disclosed limited agency relationships.
Disclosed limited agency is dual agency. The law of agency allows dual agency only with the written consent of the principal given after receiving full disclosure by the agent. What courts want to see is that the principal understood the consequences of what they were agreeing to before they gave their consent. So, what are the consequences of dual agency to the principal?
If you look at agency duties, you will quickly see that dual agency creates a very serious loyalty and confidentiality problem. Other duties, like diligence, can be more difficult with clients on both sides of a transaction, but there is simply no way to be loyal to parties with conflicting interests and there is no way to hide information from yourself. The consequences of dual agency are attenuated loyalty and lack of confidentiality. With this in mind, it is much easier to understand disclosed limited agency.
Disclosed limited agency, because it involves dual agency, can be done only by written agreement. In that agreement, the agent must disclose the consequences of dual agency to the principal and obtain the principal’s agreement to the relationship. In Oregon, this is accomplished by having both clients sign a statutory Disclosed Limited Agency Agreement form. Although identical in structure, there are separate statutory forms for sellers and buyers.
Like any agreement, the first thing a Disclosed Limited Agency Agreement does is identify the parties to the agreement. When it comes to disclosed limited agency, those parties are the agent, the principal and the agent’s principal broker. You can think of disclosed limited agency as involving a triangle. Real estate agents conduct their activities on behalf of their principal broker. The listing or selling agent acts as the principal broker’s subagent to provide services to the company’s client. It is this triangular relationship that makes disclosed limited agency possible.
When two different licensees working for the same principal broker get involved in a transaction with one representing the seller and one the buyer, the principal broker is a dual agent. That is the case because the services provided each client is being provided on the principal broker’s behalf. The individual listing and selling agents, however, have personally only established an agency relationship with one of the parties to the transaction. Disclosed limited agency allows those individual agents who have worked only with one party to continue to represent just that party. It is the principal broker alone who is the dual agent.
The full disclosure part of disclosed limited agency is accomplished in Oregon by incorporating the statutory Initial Agency Disclosure into the Disclosed Limited Agency Agreement. The Initial Agency Disclosure explains representation of more than one party to a transaction, including the role of the principal broker and the loyalty and confidentiality limitation involved in dual agency. Once the disclosure is made, the parties give their permission for the individual agents to continue to represent only the party with whom they already have a relationship while the principal broker represents both parties as a dual agent.
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