Representation Agreement: What Is It?
A residential buyer/tenant representation agreement ("agreement") is an agreement by which a person (the "Buyer/Tenant") selects an agent to act on behalf of the Buyer/Tenant in buying or renting real estate. The classic example of a residential buyer representation arrangement is the real estate sales transaction. In that case, the agreement is between the real estate broker and the Buyer/Tenant. If a real estate broker representing the Buyer/Tenant finds residential property , he/she receives a pre-agreed upon commission from the seller’s broker upon the successful closing of the sale. Residential tenant representation agreements are used to represent non-owner renters in lease transactions.
The Buyer/Tenant may terminate this agreement at any time in writing. Conversely, the agreement will terminate when the Buyer/Tenant buys, leases or rents an approved property as described above or in the event of the Seller/Renter should default on his/her obligations towards the Buyer/Tenant to consummate the transaction, or fails to occupy the premises for reasons outside the parties control.
Main Components of a Representation Agreement
Like all contracts, Residential Buyer/Tenant Representation Agreements have common essential terms.
Agreement Between Parties
Like other agency agreements, this agreement sets forth that the broker-agent is the sole and binding agent for the buyer-tenant, and that the buyer-tenant is bound to work with the agent. The agreement should state that the buyer-tenant will look to the broker-agent for counsel and representation.
It often states that the buyer-tenant will not accept any compensation or rebate from any other real estate broker or agent, and will not give up his or her right to any brokerage fee or commission.
Agreement Length
Most Residential Buyer/Tenant Representation Agreements last anywhere between three months to one year, with a few lasting longer. An agreement that lasts a long time will likely dictate that the broker-agent must find the buyer-tenant a replacement, if the buyer-tenant is transferred or simply goes away. The absence of such a provision could hamper the buyer-tenant’s (and agent’s) ability to terminate the agreement.
Broker-Agent’s Duties to Buyer/Tenant
Almost all Residential Buyer/Tenant Representation Agreements require the broker-agent to treat the buyer-tenant with honesty and good faith, in that the broker-agent must disclose any facts materially affecting the value of the property that he or she has actually communicated to the buyer-tenant and that are not apparent to the buyer-tenant. This is a common agency duty of an agent to his or her principal.
It is extremely important that the agreement correctly describes the property and rental unit involved.
The agreement should also include terms requiring the broker-agent to provide equal services to the buyer-tenant that the broker-agent would provide to a seller or landlord of the property. It should only provide the broker-agent the right to the fee or commission if the broker-agent represents the buyer-tenant in the transaction.
This type of provision clarifies that the broker-agent provides the same services to the buyer-tenant as to a seller or landlord. These services include, but do not necessarily limit the following:
Often the standard of care provision is included to match the real estate license law in the state in which the transaction takes place.
The agreement will usually state that the broker-agent is not responsible for discovering structural, mechanical, or other defects in the property.
Almost all Residential Buyer/Tenant Representation Agreements include a termination provision that allows the buyer-tenant and broker-agent to terminate the agreement if the agency relationship is no longer feasible. Some agreements also include an early termination provision allowing either party to terminate the agreement upon completion of certain terms or appearances of certain conditions.
Pros for Buyers and Tenants
The advantages for buyers and tenants to have a representation agreement are many, and serve to make the process of purchasing or leasing property far more beneficial for them. When you have a representation agreement in place, you know for certain that your agent is working for you. There will never be a misunderstanding about whose interests your agent is looking out for. In many States, if you do not have a signed representation agreement with an agent, that agent is not looking out for you and may even be looking out for the other party to the real estate transaction. Clearly, this is a disadvantage you want to avoid when making one of the biggest purchases of your life or committing to a lease with a property owner or manager. You want representation that is solely in your interest in these situations, and otherwise, you could get hurt.
With such an agreement, you know that your agent will approach the transaction the way their job description entails: as your advocate. They will get paid a commission so any efforts required on their part to find properties, negotiate the best price and terms, and see the deal through to conclusion are compensated by a commission out of the totally purchase price for a new home or the total rent paid in the case of leasing property. It is incentivizing for the agent because they know you are going to close on your lease or purchase of a property. And, they are more likely to stay in contact with you about other properties that may be available in the future, keeping you in the loop and closing the gap between the old house you’re leaving and the one you’re moving into. Be sure to ask your agent if there are costs to start your agent representation.
Duties of Real Estate Agents
I. 17-4.1 – Duties of a Licensee and Obligations Under the Rules
(a) A licensee is obligated to treat all parties honestly and in good faith. This includes informing all parties of material facts related to the transaction of which the licensee has actual knowledge. This does not prevent an agent from acting in the best interest of his or her own client, but the licensee must maintain civil and professional behavior when dealing with other licensed personnel or the public in general.
(b) A licensee has a duty to properly supervise his or her agents. This does not relieve the designated broker of licensing responsibility for that agent, however. Each sponsor shall ensure that the sponsor’s agents are adequately supervised.
(c) Any licensee owed fiduciary duties, as a matter of law, shall continue to owe those duties after the contract term.
(d) It is unlawful for a licensee to do the following in a real estate transaction:
(i) Engage in self-dealing, whereby they act in crisis of their responsibilities.
(ii) Make remittances, where appropriate, of such funds to the parties to whom those funds belong.
(iii) Offer an inducement to anyone without knowledge of the principal involved.
(iv) Neglect a request for information, by failing to act upon it or respond to it.
(v) Suggest that a party to a transaction is not represented by the legal profession.
(vi) Regulate the relationship between the parties, whereby a licensee seeks an advantage for himself or herself, while giving the illusion of representing other parties.
In addition to these general duties, a licensee is required to handle some specific duties, such as the handling of funds, the handling of client information, and the distribution of information relevant to the transaction. Without getting too deep into the specific information, licensees are also required to, where appropriate, advice all parties of the scope of their representation.
II. 17.56 – Real Estate Licensee Duties to the Board and the Public
The "agent" will be honest and diligent in their duties, and will not deceive or mislead any parties involved in the transaction. The "agent" will be competent to address the issues at hand, or will seek out such assistance from other qualified persons. The "agent" should fully disclose the material facts about the transaction to potential clients. The "agent" will only engage their services as part of a written contract establishing that relationship, inclusive of their experience, continuing education, and regular updating of their skills. The "agent" will not discriminate in employment or advertisement. This means, for example, that the agent will not show property to the best of his or her ability, regardless of race, color, place of origin, religion, sex, marital status, disability or handicap, familial status, country of origin, or sexual preference. ("Family status" means that reference to children. This includes single people with one child, and married couples with one child).
III. 17.18.1.a – Indicates to Client. If your relationship with your client is defined through a closed client list, then the client should refer only those persons to you with whom they are in contact… If however your client cannot provide the name of each person with whom they have personally done business, the client may only need to adhere to the specific duties as listed in the contractual agreement.
IV. 17.18.1.b – Cash Account Not to Be Commingled. Funds held by the licensee for clients or customers are not to be commingled with any other funds. This means that it is necessary to keep your funds separated from the funds you are holding for a client.
V. 17.18.1.c – Unless Otherwise Agreed. Unless the contract states otherwise, it is assumed that the agent of whichever party is the one solely responsible for the correct application of all fees associated with the purchase.
VI. 17.18.1.d – Confidentiality. Without the consent of your client, you may not disclose, without a legal right to disclose, the following information: specific motivations for selling or buying, the fact that a seller is willing to accept a discount, specific price terms, other confidential information, unless it was known prior to an agreement being made.
VII. 17.18.1.e – Unless Otherwise Agreed. Unless otherwise agreed, you must maintain the confidentiality of your client whether or not a contract is made.
VIII. 17.18.1.f – Unless Otherwise Agreed. Unless otherwise agreed upon, the undertakings and confidentiality listed in Evidence 17.18 may stay in effect until the sale, closing, and complete execution of contract.
IX. 17.18.1.g – Unless Otherwise Agreed. Unless otherwise agreed, the undertakings, and confidentiality listed in Evidence 17.18 may stay in effect past the buyer’s signature, and the undertaking may even apply to the actions of other licensed agents.
XI. 17.18.1.i – Unless Otherwise Agreed. Unless otherwise agreed to by contract, the agreement is terminated if any of the following events occur:
XII. 17.18.1.j – Unless Otherwise Agreed. Unless otherwise agreed, the duties and confidences listed in Evidence 17.18 may not be assigned to other licensees.
XIII. 17.18.1.k – The Agreement of Any Contract Needed. Unless otherwise agreed, the duties and confidences listed in Evidence 17.18 may be passed on to the new agent, or the obligations may be passed to the new agent if a contract is settled.
Signing and Negotiating Representation Agreement
As with most legal agreements, a representation agreement should be carefully negotiated so that the agreement fairly reflects your expectations and protects your rights. You should consult with your own real estate lawyer in the event of a major transaction, or even a series of smaller transactions. A lawyer can ensure that your agreement is appropriate for the deal(s) you wish to accomplish and can help you close the loopholes and eliminate the ambiguities that can create problems in the future.
Parties should consider:
- how long the relationship will last;
- how commission is calculated;
- who pays the commissions and when;
- what happens to any commission payable if (i) the owner sells the property to a third party, or (ii) the property is listed with another agent;
- who is responsible for incurring costs (i.e . expenses) on behalf of the parties; and
- how the agreement can be cancelled.
Sellers should be particularly careful to ensure that the exclusivity period provides sufficient time to market their property so that the representative is motivated to effectively market the property. The seller should be prepared to both specify and tolerate an exclusive period of several months and be prepared to pay a commission should a buyer enter into a binding purchase agreement during the exclusive period, even if the seller cancels the agreement.
Buyers should ensure that a cancellation clause can be added to the agreement thereafter, or can be removed from the agreement immediately, as they are negotiating with sales representatives at the outset. Before signing an agreement, consider how the buyer can retain the benefits of the deal while limiting the risks associated with the agreement.
Common Mistakes and How to Prevent Them
Like any contract, it’s important that the parties fully understand what they’re getting into. Unfortunately, for a variety of reasons, that doesn’t always happen.
Items Left Blank or Unanswered. Sometimes, people enter into agreements without thinking through the full implications. For example, you might forget to include a start time, a termination date or a specific commission amount. Or you might leave blanks in the seller representation one of the spots where you need to identify the seller/tenant. If you forget to include things like the duration of the agreement, you’ve invited trouble for the future. You might not be able to agree on a renewal date, or one of the parties might try to terminate without giving proper notice. So the lesson here is to spell out everything you can in as much detail as possible. Think about all the ways you might be surprised or disappointed by the terms of your agreement. Putting it in writing ensures that all parties are aware of their obligations.
It’s also important to make sure that you don’t overlook boilerplate language. Specific provisions may seem unnecessary because of prior dealings you’ve had, or you may decide you don’t need them because you’re working with a friend. But the truth is that boilerplate clauses protect you and help you to avoid misunderstandings. Having certain provisions in place will ensure you that you’re backstopped against situations you may not have foreseen. It will also make future dealings that much smoother. You want to build continuity into your business practices, and including boilerplate language is one of the easiest ways to do that.
Certain Issues Aren’t Covered. Representations and warranties are meant to cover a range of problems. Let’s say that you’re selling your home and discover that the roof has developed a leak. You fix the problem, but forget to tell your agent. Your buyer ends up buying the house unaware of the issue. This may not be your intention, but it does expose you to legal liability. The solution here, of course, is to disclose any issues upfront. But how can you be sure that you’ve covered everything? That’s why it’s important to discuss your situation with an attorney who can identify any infractions you may have missed. They will not only spot the missing items, but will draft a comprehensive list of the buyer’s rights. By spelling everything out in advance, you can avoid potential disputes down the road.
Legal Responsibility and Consequences
The legal implications for the purchaser of a representation agreement may be significant. This is particularly so if the purchaser does not understand that they are binding themselves to a contract with the real estate brokerage that the purchaser already agreed to be represented by in writing. I find that many purchasers are either unaware of this contract or simply do not understand whether they have, or have not, entered into a written contract with a sold-on-the-spot real estate agent on behalf of a real estate brokerage.
If you commit to being represented by a real estate brokerage as a purchaser and then later attempt to deal directly with the agent’s client, or work with some other real estate agent or brokerage that was not mentioned in the agreement you entered into upon your client representation, then you could be subject to a claim for compensatory damages for the commission payable to the original brokerage firm. The amount claimed would be based on the percentage amount of the commission with addition liability for disbursements, interest and HST.
If you simply go to the residential sale representative’s car and return the representation agreement you might find that the sale representative will be quite upset with you. They probably will have paid for the cost of running around to find you when the message they were given on their phone was that you had ended up at another brokerage and the original offered brokerage was no longer wanted, but they had no specific details. If you return the paperwork, it is quite likely that the original brokerage firm will forgive you; however, in my opinion, it has always been better to keep the document because the agent can keep you informed about potential properties, and subsequent price reductions for the properties that you were originally interested in, or he can just inform you that the property is no longer available.
Purchasers should keep in mind that the representation agreement has an expiry date. It is either with respect to a certain property or a period of time has been agreed to. If you do not obtain the property then it is quite possible that the representatives from the original brokerage firm will not consider it a breach of your contract.
If you are the seller, you should be aware that the full service representation agreement with the listed brokerage that you have signed gives the buyer a minimum timeline, possibly to obtain and review a Market Opinion of Value, or other document, which is required under the agreement, before they can make an informed offer on what you are prepared to sell. Any attempts to pressure the buyer in a way that forces them to make an offer sooner than they feel comfortable doing could make it difficult to enforce the agreement and to recover from the buyer.
Representation Agreement FAQs
Q: What services do you provide under the residential buyer/tenant representation agreement?
A: We are your advocate and representative in your housing purchase or rental. This means that we will help you to identify the most appropriate housing choice considering both your accommodation needs and your budget. We negotiate on your behalf, provide recommendation and referrals for loan, title and inspection services, counsel you regarding contingencies, and address any and all legal issues that arise from the transaction.
Q: Why should I pay a retainer to use your services?
A: The retainer is an "up front" fee that allows you to hire us with the peace of mind that you have retained the services of legal counsel. We will immediately start shopping for your home or apartment. We can attend showings with you and answer all of your questions about the process. It is a commitment to a professional working relationship. It also allows us to prepare customized residential real estate transactional documents ahead of time so that if a great opportunity arises, you can take immediate advantage of it.
Q: How much is the retainer, and how does it work?
A: The amount of the retainer will depend on the scope and extent of the real estate transaction you are involved in, and the level of service needed and desired. We first meet for a legal consultation where we discuss the contract(s) for our services . The contract is signed, and you pay the retainer to our attorney trust account. After that, our attorneys will base all invoices for work completed until the retainer is exhausted. You always maintain control of the financial aspect of your legal services.
Q: Do I have to sign a contract with you?
A: Yes: the contract is the best way we know of so that a mutual understanding between the lawyer and the client can be reached as to what services will be provided, what you will pay, and who is responsible for performing these services.
Q: Can you represent me in both the sale or purchase of a home and the rental of an apartment at the same time?
A: Unfortunately, we cannot participate in the dual representation of the sale and purchase of real estate because there can be a conflict-of-interest between the two buyers and sellers. We are available to represent the sale and purchase of real property, OR the rental of residential property, but not both of these activities together.
Q: Do you just do real estate contracts, or do you do other contracts as well?
A: We primarily draft and negotiate residential real estate contracts. However, if there is a provision in a contract you need modified, or reworded, or removed entirely — we can do so. We also will negotiate with landlords and tenants when problems arise between them. We can recommend contract language for any type of agreement, or can advise you regarding a contract that you are presented with by a third party.