I am excited to begin my weekly email on legal issues that affect our industry. This being my first email, allow me to take a moment to introduce myself and explain my purpose for writing. I am a real property attorney. I am also a licensed real estate salesperson. As a real estate attorney, I often find myself in situations where I must weigh the long and complex history of real property law (which dates back to rulings from the 1600 British Empire) with the realities of 2010 American business.

The purpose of my weekly email is to simply explain general legal principles and report legal happenings. From time to time, I will list those seminars and meetings being offered in the upcoming week that I feel are particularly important. I will also choose a topic of legal significance and explain it in detail, so that each member of the Intero team is equipped to explain it to customers and competitors alike.

Creation of an Agency in CA
For my first update, I thought I would simply reaffirm a basic California rule about agency – no written contract is necessary to create an agency relationship. Certainly, having a written contract is always good practice, especially when it comes time to request commissions. However, an agency relationship falls outside the statute of frauds, and is created once it is reasonably relied on by the fiduciary. This means that we must be careful when approaching prospective buyers and sellers, as they have legal rights once they start to depend on our representations, advice, and actions as professionals in real estate. We may owe a client services and fiduciary duties even if the client has not signed our documents.

Creation of agency by oral agreement
Agency may be created by oral agreement without any writing to evidence the relationship. An oral agreement authorizing someone to act as an agent and procure a buyer, under which the agent receives confidential information about the property, is sufficient to create a fiduciary relationship. The agency may be recognized by a court in equity (meaning fairness) and fiduciary duties may be imposed on the agent, even though there is no written instrument under the statute of frauds for the recovery of compensation by the agent.

Factors to consider when determining whether you owe duties as an agent
Various factors are considered in determining whether an agency has been created, but the court decisions have not been consistent on the importance of these factors. Depending on the context of the issue, one factor may be more important than another. The various factors include the right of the principle to control the activities of the agent, the agent’s right to exercise discretion, and the payment of compensation for services. But the primary test is always the original intention of the parties.

Principle’s right to control
California courts have held that the material question is whether the principle ever reasonably exercised a right to control the agent. Basically, by having the agent work for the principle under the principle’s direction, the agent is in fact consenting to a relationship – even if the principle never really promises to pay anything.

By traditional principles of agency, control is the decisive factor for the creation of an agency. It is essentially the factor that differentiates an employee from an Independent Contractor. For example, salespersons are independent contractors in a real estate brokerage, because the broker exercises little control over the salesperson’s day to day activities. However, a salesperson is an “agent” to the fiduciary, because the fiduciary directs the agent at all points and retains final say.

Agent’s power to show discretion
The next factor is the agent’s power to show some level of discretion. This is because there are other, agency-like legal relationships that do not constitute legal agency. An intermediary who does not exercise at least some discretion is more a middleman or finder who owes no fiduciary duties. This does not mean that the agent must have final say on any part of the transaction. Instead, this means that there must be some parts of the service where the agent’s discretion will be valuable and reasonably relied on by the principle.

Payment of Compensation
Finally, courts will look for some agreement about compensation. However, this part is never essential in California real estate situations. This is because courts have found that compensation alone is never determinative of anything. For instance, a person may receive compensation (like a referral fee) without ever owing or delivering a fiduciary duty. Also, where lack of compensation may be evidence that a broker has no agency relationship with a client, it is possible that a non-broker would work for a client as the client’s fiduciary without ever expecting payment directly from the client. For instance, what if the broker was paying the salesperson directly? Thus, a salesperson may be a client’s fiduciary even if the client is not paying the salesperson.

To sum up, it is common to help a client and not get paid. Deals fall through. Things happen. That’s real estate. But the first time you do something that hurts a client, you will get sued. So never expect that a potential client is no client at all. Whenever you approach someone as a potential client, realize that the moment they depend on you, you MUST do right by them. Don’t do favors without a signature. And if you do offer help or guidance without an agreement, follow through like a professional. Always consider whether the client had any control, whether you used professional discretion to affect the client, and/or consider whether you ever reasonably expected some form of compensation. Your reputation and your wallet are at stake.