An agency relationship can be defined as a relationship in which one person, the agent, is granted the authority to represent and act for another person, the principal, in dealings with others. There are two key parties to an agency relationship: the agent and the principal. An agent is a person authorized to act on behalf of another person; that person is called the principal. When acting on behalf of the principal in dealing with third parties, the agent is essentially making a promise or guarantee to those third parties that the agent has the appropriate authority from their principal to act. This is known as the warranty of authority. Ideally, the agency relationship is created by a written contract where the authority of the agent is clearly laid out.
Generally speaking, an agent has the power to bind (or commit) the principal to do certain things. For example, if the agent is empowered to sign a contract with a third party on behalf of the principal, the parties to the contract will be the principal and the third party. The agent is not a party to the contract (and will not have any rights or obligations under the contract). This is a very important concept to keep in mind. The authorities to bind another person to certain things, represent another person in dealings with others, and act on behalf of another person in dealings with others are powerful rights that the law takes seriously.
When providing real estate services, the nature of the relationship that is created between the buyer/tenant or seller/landlord and the brokerage, including its related licensees, is important. The relationship may be either a sole agency, dual agency in very limited circumstances, or no agency relationship. These distinctions are important for both the brokerage (and its related licensees) and the buyer/tenant or the seller/landlord to consider, since the nature of the relationship that is established, whether sole agency, dual agency in very limited circumstances, or no agency, determines the duties and obligations of the brokerage and its related licensees, as well as the level of assistance and representation that the party will receive. Regardless of the type of relationship that has been established, under section 3-4 of the Rules, licensees must act honestly and with reasonable care and skill whenever they are providing real estate services.
