5.2 Brokerage Relationships and Agency (National Concepts)

What Agency Is

Agency is the legal relationship in which one person, the agent, is authorized to act on behalf of and represent another, the principal, in dealings with third parties. In real estate, the broker is the agent and the client is the principal. The law of agency is a body of common-law (national) principles; individual states then modify it by statute — Florida, for example, replaced traditional common-law agency with statutory "brokerage relationships" (single agent and transaction broker), which a later Florida chapter covers.

How Agency Is Created

Agency can arise three ways:

• Express agreement — the parties expressly agree, orally or (preferably) in writing, as in a signed listing or buyer-broker agreement. This is the normal method.
• Ratification — the principal accepts the benefit of an act performed on their behalf that was not previously authorized, thereby approving it after the fact.
• Estoppel — the principal's words or conduct lead a third party to reasonably believe an agency exists, and the law prevents the principal from denying it.

Paying or promising a commission does not, by itself, create agency, and a customer cannot unilaterally create agency simply by assuming the licensee represents them. Authority may be actual (expressly or impliedly granted) or apparent (the principal causes a third party to believe authority exists).

Fiduciary Duties — OLD CAR

Once agency exists, the agent owes the principal fiduciary duties — the highest duties the law imposes, requiring the agent to place the principal's interests above all others, including the agent's own. The classic memory device is OLD CAR:

These duties run to the principal/client. A breach — for instance, disclosing the seller's bottom-line price to a buyer — exposes the agent to license discipline and civil liability. Note that confidentiality continues even after the transaction closes or the listing expires.

Clients, Customers, and Disclosure Obligations

Distinguishing whom the agent represents is heavily tested:

• A client (also called the principal) is the party the agent represents and to whom the agent owes the full OLD CAR fiduciary duties.
• A customer is a third party to the transaction the agent does not represent. The agent still owes a customer honesty, fair dealing, and disclosure of known material facts about the property — but not loyalty, confidentiality, or advocacy.

A material fact is any fact that could reasonably affect a buyer's decision or the property's value, such as a leaking roof or a defective foundation. Known latent (hidden) defects must be disclosed to customers; stigmatizing facts (a death on the property) are treated differently by state law. Agents must also disclose whom they represent so consumers are not misled — undisclosed dual representation is prohibited.

Subagency

Under traditional subagency, a cooperating broker who brought the buyer worked for the seller through the MLS, owing fiduciary duties to the seller, not the buyer. Because this surprised buyers, most markets shifted toward buyer-agency, and the National Association of REALTORS settlement (effective August 2024) further changed how buyer-broker compensation is negotiated and disclosed.

Types of Agency Relationships

National agency law recognizes several structures for representation:

1. Single agency — the brokerage represents only one party in a transaction (either the buyer or the seller, not both) and owes that client undivided fiduciary loyalty. This is the cleanest relationship because there is no conflict of interest.
2. Dual agency — one agent or one brokerage represents both the buyer and the seller in the same transaction. Because the agent cannot fully advocate for two opposing parties, fiduciary duties (especially loyalty, full disclosure, and confidentiality) are diluted: the dual agent typically owes both parties only limited duties such as accounting and confidentiality. Dual agency requires informed, written consent from both parties and is illegal in some states (e.g., it is prohibited in states like Florida, which uses the transaction-broker model instead).
3. Designated (appointed) agency — within a single brokerage, the broker appoints different licensees to represent the buyer and the seller individually as single agents. Each designated agent owes full OLD CAR duties to their own client, while the appointing broker becomes a neutral dual agent at the firm level. Designated agency preserves stronger representation than firm-wide dual agency.

Because Florida law does not permit traditional dual agency and instead defines statutory brokerage relationships — the single agent and the transaction broker — those Florida-specific roles are taught in a separate Florida chapter; this section covers the national common-law framework the exam tests first.