Formation Of A Real Estate Agency

An agent is any person who is appointed or authorized by a principal to act on his or her behalf. It must be noted that agency is one of the special type of contracts and thus, the rules application to the formation of a valid contract, are of necessity applicable to the agency relationship. Accordingly, the elements required under the law for the formation of a valid contract, are required in agency contracts as well. These elements are:

The parties must be capable of contracting and to give their consents sustainably at law
The objective of the contract must be sufficiently defined, possible and lawful
The contract must be made in the form prescribed by the law, if any

Therefore, the formation of a valid agency relationship requires the existence of certain essential elements. If these elements are not satisfied, the agency relationship becomes invalid. Accordingly, parties to the agency relationship must have the capacity to enter into the contract, their consent must be sustainable at law, the object of the contract of agency relationship must be sufficiently defined, possible and lawful, and finally the contract of agency must be made in a prescribed form if any.

An Agency relationship is created not only by a written contract as is generally presumed, but also in a number of other ways.

Examples of the ways in which an Agency relationship can arise include:

Agency by Appointment

An agency is created by express appointment when the principal appoints the agent by express agreement with the agent. This express agreement may be an oral or written agreement between the principal and the agent.
Contract law principles apply to an agency agreement. An agent may agree to act in consideration for a reward. On the other hand, an agency is gratuitous if the agent agrees to act for no consideration.

The general rule is that reaction may be created orally and there is no formally for the creation of agency by express agreement, except for one situation which is discussed below. This general rule applies even to cases of anointing agents for the signing of agreement for sale and purchase of immovable property, whether on behalf of the vendor or the purchaser.

The one exception is where an agent is appointed to execute a deed on behalf of the principle. In this case, the agent will be appointed by deed, which is called a power of attorney

Agency by Estoppel (implied Appointment)

Agency by estoppel arises when A makes a representation to a third party whether by words or conduct, that B is his agent, and subsequently that third party deals with B as A’s agent in reliance on such representation .A will not be permitted (is estopped)to deny existence of the agency if to do so would cause damage (usually financial loss)to that third party.
The person who makes such representation (’’A’’ in paragraph (a) above) is treated as having created an agency relationship between himself as the principal and the other person (’’B’’ in paragraph (a) above) as his agent, although there is in fact no agreement between the two parties (’’A’’ and ’’B’’ in paragraph (a) above) as to the creation of the agency relationship. Agency by estoppel is sometimes called implied appointment of agent.
In agency by estoppel ,the authority of the agent is described as only apparent or ostensible but not actual, as the principal has, in fact, not granted the agent such authority to act on the principal’s behalf
The extent of apparent or ostensible authority of the agent in an agency by estoppel depends largely upon the contents of the representation made by the principal to the third party who relies and acts on the representation. The principal is said to ’’hold out’’ a person as his agent with such authority as the principal may induce the third party to believe and is estopped from denying the existence of agency.

Agency by Ratification

Agency by ratification arises when a person (the principal) ratifies(that is, approves and adopts0 an act which has already been done in his name and on his behalf another person(the agent) who in fact, had no actual authority(whether express or implied0 to act on his (the principal’s) behalf when the act was done.

Ratification by itself only creates an agency relationship between the principal and the agent in respect of the act ratified by the principal, but not in respect of any other act, whether past or future

The person who ratifies an act of another person must have been in existence and have the legal capacity to carry out that act himself both at the time when the act was done and at the time of ratification. A person may lack legal capacity on grounds of bankruptcy, infancy or mental incapacity.

A valid ratification should fulfill the following conditions.

The person ratifying must have the person ability to do the act himself or is capable of performing juridical acts. In other words, the principal must be competent enough

The person for whom, the act was done must have been identified or the circumstances must have been such that he was capable of identification

The agent must profess to act as an agent on behalf of an identified principal. In other words, the person acting must have acted as agent for his principal.

The principal or person represented to be the principal must have been in existence as at the time the act was done and must have been competent to do or authorize the act done

The principal or person represented to be the principal must have had knowledge of the material facts of the transaction at the time he ratified.

The third party must not have cancelled the transaction

In addition to the above, the following can be established from ratification.

If an act that was not authorized is ratified, agency relationship will be created between the principal and the agent. The principal will enjoy the fruits of the contract and also incur losses or liabilities that may emerge from the representation.

Agency of Necessity

Agency of necessity arises when a person(“A”) is faced with an emergency in which the property of another person (“B”) is in imminent jeopardy and it becomes necessary, in order to preserve for A to act for and on behalf of “B”. In this case, “A” acts as an agent of necessity of “B”.

Agency of necessity arises only when it is practically impossible for the agent to communicate with the principal before the agent acts on behalf of the principal. (This would be difficult to establish with today’s advanced communication systems and is the reason why agency of necessity does not often arise in today’s business world.

Authority to act in case of emergencies cannot usually prevail over express instructions to the contrary given by the principal

Essential Elements of An Agency Agreement

The essential terms of an agency/listing agreement are:

The names of the parties
The identity of the property
The terms and conditions of the anticipated sales, lease or loan
The amount of commission or other compensation to be paid
The expiration date of the agency; and
Signatures of all parties concerned

In addition, agency agreement concerning owner occupied residential property must contain a statement acknowledging that commission amounts are negotiable and are not set by law. It is advisable for a real estate agent to include such a statement in all transactions where the estate agent is acting within the course and scope of the real estate license and is claiming, contracting for, or expecting compensation for his or her services.

Types of Listing/Agency Agreements

The type of listing/agency agreement and the terminology used to designate the form of listing varies somewhat among localities. The five kinds of listing agreements most commonly used are:

Open listing
Exclusive agency listing
Exclusive right to sell listing
Net listing and
Multiple listing, which is not a listing agreement. Rather, it is a mechanism and a medium through which information concerning listed properties is disseminated among a wide group of real estate agents and their salespersons and broker associates

Open Listing

An open listing is the most informal of the four principal kinds of listing agreements, and is distinguished by the fact that the owner retains the right to revoke the listing at any time, to sell the property him or herself, or to list the property with another broker. Open listing often generate questions regarding a real estate broker’s claim to a commission, because the sale of the property by either the owner or any subsequently hired agent will defeat the original broker’s right to a commission.

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Exclusive Agency

An exclusive agency is an agreement by which the owner agrees to employ a particular real estate agent and no other to solicit buyers, tenants /lessees, or lenders. Under an exclusive agency listing, the broker’s right to a commission is protected as against other estate agents for the duration of the listing agreement. However, under an exclusive agency agreement, the owner retains the right to sell, encumber or rent/lease the property on his or her own and, in the event, the owner can terminate the agency agreement and defeat the estate agent’s claim to a commission or other compensation.

Exclusive Right to Sell

The exclusive right to sell listing afford the real estate agent the greatest protection and makes him or her sole agent for the sale, renting or leasing, or encumbering of the property. Under such an agreement, the broker is entitled to a commission provided only that the property is sold, rented or leased, or encumbered during the listing period, regardless of who procures the buyer, the tenant/lessee, or lender.

In other words, under an exclusive right to sell agreement, the owner relinquishes both the right to list the property with other agents and the right to defeat the broker’s claim for a commission by selling, renting or leasing, or encumbering the property him or herself.

Net Listing

A net listing is one which contemplates the seller realizing a specific net price with the real estate agent’s commission consisting of any sum that is received in excess of the seller’s net proceeds.

For examples, if the seller enters into a net listing with a broker for a N5000,000 net price, the estate agent would receive no commission if the net proceeds of the sale are N500,000 or less. On the other hand, if the proceeds of the sale are N550,000 the estate agent is entitled to a commission of N50,000.

Multiple Listing

The multiple listing and the Multiple Listing Services (M.L.S) creates a means by which information concerning individual listings is distributed to all participants and subscribers of the service. For example, a seller lists property for sale with a broker. The estate agent then transmits a memorandum of the listing which includes information such as the type of property, its size, location, the listed price and other relevant information.

This memorandum is then transmitted to the M.L.S which in turn publishes, either in a booklet and/or computerized data sharing format, the information submitted by the original listing estate agent. Other estate agents throughout the region are thereby made aware of the existence of the listing and can contact the listing agent on behalf of prospective buyers for the property.

When this is done, it is common that the listing estate agent will split any commission received with the broker who procures the buyer for the property. The broker who cooperates with the listing estate agent to procure a buyer is known as the selling estate agent. The selling estate agent may be acting as a sub-agent of the seller, an agent of the listing estate agent, or may be performing as the exclusive agent of the buyer.


In a typical real property transaction, it is common for the listing estate agent to seek the cooperation of other real estate agents to carry out the purpose and objective of the agency. A principal may expressly authorize his or her agent to appoint a sub-agent and thereby establish a new contractual and fiduciary relationship directly between the principal and the sub-agent. Under such an appointment, the sub-agent represents the principal in the same manner as the listing estate agent.

When the listing estate agent appoints another estate agent to cooperate, without the express or implied authority of the principal, the cooperating estate agent becomes the subject or agent of the listing estate agent and not the sub-agent of the principal.

Real property or real property secured transactions typically involve cooperation between and among more than one estate agent. The legal principles which govern the field of sub-agency are particularly complex. This is due, at least in part, to the different relationships which exist between the estate agents and the principals to the transaction when seeking to carry out the purposes of the agency.

A critical element in determining the relationships between and among the parties is whether the principal has agreed to allow the listing estate agent to delegate some portion of his or her authority to another. The typical listing agreement between the principal and the real estate agent provides that the listing broker may cooperate and share commissions with other estate agents to carry out the purpose and scope of the agency.

When another agent is appointed by the listing estate agent with the express or implied authority of the principal, the second estate agent becomes the subagent of the principal. On the other hand, where the listing estate agent appoints another estate agent without the consent of the principal, the second estate agent becomes the agent of the listing estate agent.

The rule of sub-agency has been criticized for a number of reasons and has periodically led to ridiculous results. For example, in one case, the cooperating estate agent made certain misrepresentations about the property to a prospective buyer. Since the listing estate agent had express authority under the exclusive listing agreement to engage the services of the cooperating estate agent, the court held that the listing and cooperating estate agent where jointly acting as the agents of the seller.

Therefore, the seller was self liable to the buyer for the fraudulent misrepresentations of the cooperating estate agent, even though it was established that the seller did not even know of the cooperating estate agent’s participation in the transaction.

The acts, errors and/or omissions (negligence) of a cooperating broker who is the authorized sub-agent of the seller may be imputed to the seller.

While a listing broker may offer to share compensation without creating an agency relationship between the seller and the cooperating brokers, the cooperating broker’s right to compensation remains what unclear under existing law.

There are many other examples such delegation of duty. Unless the delegation is specifically forbidden by the principal, the general rule is that an agent may delegate certain of the agent’s powers to others. The powers which may be delegated by the agent to others are generally limited to the following:

When the act is purely mechanical
When it is such as the agent cannot do alone and the sub-agent can lawfully perform
When it is the usage of the place to delegate such powers, or when the principal authorizes the delegation or
When such delegation is specially authorized by the principal

When delegating power to another, the agent must exercise care in delegating the authority and in choosing and appointing the delegatee. Although an agent may not be authorized to assign a duty of performance to another, the agent may nevertheless be authorized to delegate the actual performance of such duty to other, and thereby discharge the duty through the performance of the delegate.

Most agency agreements do not require the personal performance of the original agent, although the original agent will typically remain liable for the details delegated to and executed by others.

Dual Agency

Dual agency arises where the listing estate agent who is the actual agent of the seller becomes the actual agent, or ostensible or implied agent of the buyer. The real estate agent, who has entered into a listing agreement with a seller, establishes an actual agency relationship with the buyer as the result of the estate agent accepting the responsibilities to act on behalf of the buyer to locate a property.

For instance, a listing estate agent who meets a prospective buyer at the seller’s open house, and who later undertakes with the buyer’s consent to help the buyer find a home which is the buyer, notwithstanding the fact that no written formal agreement exists between them.

In any dual agreement situation, the estate agent owes fiduciary duties to both of the principals to the real property or real property secured transaction. Dual agents face a particular difficulty with the elements of fiduciary duty which involve loyalty and confidentiality.