An agency relationship is created where one person, known as the principal, asks another person, known as the agent, to act for and on behalf of the principal. In real estate transactions, agency relationships are created when buyers or sellers ask Realtors to act on their behalf in real estate transactions.

Consequences of agency relationship

As a matter of law, an agent who represents a principal owes that principal the highest duty of "utmost good faith"; the agent must represent the principal’s best interest at all times. The agent owes his principal a fiduciary duty of confidentiality, honesty, disclosure, obedience and accounting to the principal.

Agency in real estate transactions

In most cases, there are two parties to a real estate transaction; a seller who owns a property and who wants to sell it, and a buyer who wants to purchase a property. The job of Realtors is to bring together willing sellers and willing buyers in a successful real estate transaction.

Toronto Real Estate Board

The Toronto Real Estate Board is an association of Realtors. The Board operates an MLS System; this system is computerized so that sellers through their agent (known as a Listing Brokerage), can make known the fact to other Realtors that a particular property is for sale. By placing a property on the MLS, the Listing Brokerage (agent for the seller) lets it be known to every other Realtor that they can be a “Co-operating Broker”.

Agency relationship between seller and listing broker

The seller and the Listing Brokerage will enter into a listing agreement (exclusive or MLS) whereby the agency of the Listing Brokerage is confirmed, and the seller agrees to compensate the Listing Broker for its efforts. This compensation is usually called commission, and usually takes the form of a fee or payment from the seller of the real property upon successful completion of the real estate transaction. By placing a property on the MLS, the Listing Broker, offers to share the commission with a Co-operating Broker who brings a successful offer to the seller.

Purchasers and their representatives

Just as with the seller, the buyer of real estate will often engage a Realtor in connection with a real estate transaction. However it is important to understand that by contacting a Realtor, it does not necessarily mean that the buyer has established an agency relationship with that Realtor. There are several usual types of relationship which may exist between a buyer and Realtor (the Co-operating Broker) in a real estate transaction;
·  Sub-agent of the Seller
·  Buyer Representation with the Listing Brokerage compensated by the Buyer
·  Buyer Representation with the Listing Brokerage compensated by the Seller

These are the usual forms of agency relationships; this not to say there may not be others.

Buyer as a customer

Where a Realtor is acting as sub-agent of the seller, it is important for buyers to realize that the Realtor is technically an agent of the seller so that fiduciary duties are owed by the Realtor to the Seller. However, the buyer can expect the Realtor to disclose all pertinent information about a property, not to misrepresent any facts, and to honestly answer all questions about the property. This has been a usual form of relationship for many years in the real estate industry. Today the Realtor will request the Buyer customer to sign a Buyer Customer Agreement to ensure that the parties are clear on the duties owed to each other.

Buyer as a client

When a Realtor acts as Buyer Brokerage (whether paid by the buyer directly or through the Listing Brokerage), the buyer can expect the Realtor to act in the buyer’s interest alone as there is no sub-agency relationship with the seller. In the case of Buyer Representation, the relationship is typically established by a Buyer Representation Agreement, and the Realtor is clearly the agent of the buyer exclusively.

Multiple Representation

It may be, that on a particular transaction involving real estate, both the seller and the buyer are represented by the same firm. This is known as Multiple Representation.

In Multiple Representation, there is effectively only one agent, or Firm, in a situation where there are two principals. In this case, duties to principals can become conflicting given that one agent is acting for more than one principal

New clauses in both the Listing and Buyer Representation agreements clearly outline the limitations necessary to permit Multiple Representation to take place. In short, both the Seller and Buyer agree that the Realtor is not to reveal facts to either side which may negatively affect their position in the transaction.(i.e how much the seller will sell for or how much a buyer is willing to pay)

Disclosure of relationship

Disclosure begins at the very outset of the relationship with a Realtor. You will be asked to read a brochure called “Working with a Realtor” and acknowledge in writing that you have understood the contents. You will also be asked to clearly direct the Realtor on how to treat your relationship. Will you be a client or a customer? This acknowledgement is not a contract!  There are disclosure statements in the listing agreement, commission agreement, buyer representation agreement and buyer customer agreement. There is a separate disclosure (Confirmation of Co-operation and Representation) sign by all parties prior to an offer is discussed and yet again within the Agreement of Purchase and Sale.

Payment of commissions

Where a Co-operating Broker acts as a sub-agent of the seller, the Realtor will be paid through the Listing Broker and the buyer will not have to pay anything directly to the Realtor. However, where the buyer enters directly into a Buyer Representation or Buyer Customer Agreement with a Realtor, the buyer will either compensate the Realtor directly, or direct that the Realtor is to be compensated through the Listing Broker.

Conclusion

Once you have read this information, you are ready as a seller to sign a Listing Agreement or as a buyer to enter into a Buyer Representation Agreement or direct your Realtor that you wish to be a customer instead. In those cases you will be asked to sign a Commission Agreement or a Buyer Customer Agreement.

It is required by The Canadian Real Estate Association for a Realtor, The Ontario Real Estate Association and The Real Estate and Business Brokers Act 2002 to seek written disclosure and direction as to the nature of the agency relationship at the earliest practical opportunity and certainly prior to any Agreement of Purchase and Sale.

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