Laws of Agency
Understand fiduciary duties, agency relationships, disclosure obligations, and how agency is created and terminated.
1. What Is an Agency Relationship?
An agency relationship is a legal relationship in which one person (the agent) is authorized to represent and act on behalf of another person (the principal) in business dealings with third parties. In real estate, the agent is typically a licensed broker or salesperson, and the principal is the buyer or seller. Agency is a fiduciary relationship — the agent owes the principal the highest duties of loyalty and care recognized by law.
Agency can be created in several ways: by express agreement (written or oral listing/buyer agency contract), by implication (conduct of the parties suggests an agency relationship), by ratification (principal accepts the unauthorized acts of the agent after the fact), or by estoppel (principal's actions lead a third party to reasonably believe someone is their agent). On the exam, express written agreement is the most commonly tested form of agency creation.
2. The Six Fiduciary Duties
An agent owes the principal six core fiduciary duties. The acronym OLD CAR helps memorize them:
| Duty | Description | Exam Significance |
|---|---|---|
| Obedience | Agent must follow all lawful instructions of the principal | Agent must obey — but not illegal instructions |
| Loyalty | Agent must act solely in the principal's best interest; no self-dealing or conflicts | Highest duty; cannot profit secretly |
| Disclosure | Agent must inform principal of all material facts affecting the transaction | Includes all offers, buyer's financial ability, market conditions |
| Confidentiality | Agent must keep principal's confidential information private — even after agency ends | Survives termination of agency |
| Accounting | Agent must account for all money and property entrusted to them | Commingling client funds is a violation |
| Reasonable Care | Agent must exercise competence, diligence, and skill expected of a real estate professional | Standard: what a reasonable agent would do |
Memorize the acronym OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable care. Questions often ask which duty was violated in a given scenario. If an agent secretly buys a client's property through a straw buyer and resells it at a profit — that's a violation of Loyalty and Disclosure.
3. Types of Agency Relationships
Seller Agency (Listing Agent): The agent represents the seller. The listing agreement establishes this relationship. The agent owes all six fiduciary duties exclusively to the seller. Common types include exclusive right to sell (agent earns commission regardless of who finds the buyer), exclusive agency (agent earns commission unless seller finds the buyer themselves), and open listing (only the agent who procures the buyer gets paid).
Buyer Agency: The agent represents the buyer. A buyer agency agreement creates this relationship. The agent owes fiduciary duties to the buyer and must negotiate the best possible price and terms for the buyer. An agent working with a buyer without a written agreement is typically a transaction broker or subagent of the seller, not the buyer's agent.
Dual Agency: Occurs when an agent represents both the buyer and seller in the same transaction (or two agents from the same brokerage represent opposite sides). Dual agency is legal in most states but requires written, informed consent from both parties. In dual agency, the agent becomes a neutral facilitator and cannot advocate for either party — the duty of full disclosure is limited, as confidential information cannot be shared between parties.
Designated Agency: Some states allow a brokerage to designate one agent to represent the seller and another agent to represent the buyer within the same firm. With proper disclosure and consent, each agent owes full fiduciary duties to their respective client. This avoids the conflicts inherent in dual agency.
Subagency: When a listing agent offers cooperation (and typically compensation) to other brokers who bring a buyer, those cooperating brokers are subagents of the seller — not the buyer's agents — unless a buyer agency agreement exists. This is a heavily tested concept.
4. Agency Disclosure Requirements
Most states require agents to provide a written agency disclosure form to consumers at the first substantive contact. This form explains whom the agent represents and the duties owed. The purpose is to prevent the assumption that a real estate agent automatically represents the person they're speaking with.
On the exam, remember: an agent showing a property to an unrepresented buyer must disclose whom they represent (typically the seller). Failing to disclose agency status can result in license suspension, fines, and civil liability. Disclosure requirements vary by state, but the national portion tests the general principle that consumers must be informed of agency relationships before substantive discussions about a specific property.
Many test-takers assume that any agent who shows a buyer properties automatically represents that buyer. This is incorrect. Unless there is a written buyer agency agreement, the showing agent is typically a subagent of the seller or a transaction broker. The seller pays the commission — but that does not create an agency relationship with the buyer.
5. Termination of Agency
Agency relationships may be terminated by several events. Performance or fulfillment of the purpose (the property sells or the buyer purchases) ends the agency. Expiration of the listing or buyer agency agreement ends it. Mutual agreement between principal and agent can terminate it early. Revocation by the principal (the seller cancels the listing) or renunciation by the agent (the agent withdraws) also terminates agency, though either party may be liable for breach of contract.
Agency also terminates automatically upon death or incapacity of either principal or agent, destruction of the subject property, or bankruptcy of the principal. The filing of a lis pendens (notice of pending lawsuit) does not terminate agency. Once agency ends, the duty of confidentiality continues indefinitely — the agent can never disclose the principal's confidential information.
📖 Key Terms
- Fiduciary — A person in a position of trust and confidence
- Principal — The person who hires the agent (client)
- Agent — Person authorized to act on behalf of the principal
- Dual Agency — Representing both buyer and seller in one transaction
- Designated Agency — Two agents in same firm each represent opposing parties
- Subagent — Agent of the listing broker, not the buyer
- Exclusive Right to Sell — Listing where agent earns commission regardless of who finds buyer
- Loyalty — Fiduciary duty to act solely in client's best interest
- Confidentiality — Duty to keep client secrets, surviving termination
- Ratification — Principal's after-the-fact approval of unauthorized acts
- Estoppel — Agency created by principal's misleading conduct
- Puffing — Exaggerated statements of opinion (permitted, not fraud)
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