AUTHORITY OF AGENTS

AUTHORITY OF AGENTS

The authority of agents may be express (actually conferred) or may be apparent or implied (ostensibly
conferred). (Civil Code § 2315 and Lyne v. Bonner (1954) 129 Cal. App. 2d 743 and Walter v. Libby (1945)
72 Cal. App. 2d 138). An agent's authority is limited to that which has been actually or ostensibly conferred by
the principal. The Civil Code provides that every agent has authority to:

A. Do everything necessary, or proper or usual in the ordinary course of business, for effecting the purpose of
the agency; and

B. Make representations as to facts not including the terms of the agent’s authority, but upon which the agent's
right to use his or her authority depends, and truth of which cannot be determined by the use of reasonable
diligence on the part of the person to whom the representation is being made. (Civil Code § 2319).

The agent has such authority as the principal actually or ostensibly confers upon the agent (Civil Code § 2315).
Actual authority is that authority a principal intentionally confers upon the agent, or intentionally, or by want of
ordinary care, allows the agent to believe that he or she possesses (Civil Code § 2316). Ostensible authority is
that authority a principal intentionally, or by want of ordinary care, causes or allows third persons to believe that
the agent possesses. (Civil Code § 2317). Ostensible authority is sometimes referred to as apparent or implied
authority. This authority is distinguishable from express or actual authority which is created by an agreement
between the principal and agent which specifically identifies the activities which the agent is allowed to
undertake.

1. Express Authority

Express authority is created by the contract of the principal which completely and precisely delineates those
activities which the agent is authorized to undertake. For example, if the principal authorizes the agent to
acquire a particular single-family residence for the price of $100,000, the agent has express authority to do

precisely that and nothing else. The agent would not have express authority to purchase the house for $105,000
or to purchase a different house.

2. Implied Authority

Implied authority exists because it is often impractical or even impossible for the principal to specifically
delineate every aspect of the agent's authority. Implied authority may be derived from express authority and
exists to the extent that it is reasonably necessary to accomplish the overall objectives of the agency. In the
example given directly above, the agent had express authority to purchase a particular property at a special
price. The agent might have implied authority to set the time limits for performance of the agreement, receive
notifications from the seller, waive conditions in the agreement and possibly undertake efforts to obtain
financing for the benefit of the buyer.

Implied authority cannot conflict with expressed authority but it may exist where there is no relevant grant of
express authority. The determination of whether implied authority has been given usually involves determining
the custom and practice of the community, and whether the specific act was reasonably necessary for achieving
the objectives for which the agency relationship was created.

The real estate broker should carefully consider the exercise of implied authority when acting on behalf of
principals in real property or real property secured transactions. Real estate brokers are special agents whose
actions typically require ratification by their principals.

3. Apparent Authority

Apparent authority depends not upon the express or implied agreement between the principal and the agent, but
upon the reasonable expectations of third parties who have been led to believe that the agent is authorized to act
on behalf of the principal. Apparent authority is distinctly different from actual or express authority, and is
sometimes referred to as ostensible authority by estoppel. Ostensible authority by estoppel arises when the
principal, by words or conduct, leads a third party to believe that another person is his agent.

In other words, apparent or ostensible authority will arise and the principal will be estopped to deny the
existence of the agency, or the scope of the agent's authority when the principal's actions have created the
appearance of authority in the agent, and a third party reasonably relies to his detriment upon this authority.
The most common way in which questions concerning apparent authority arise is where the principal has placed
a limitation upon the normal and ordinary authority of the agent and fails to communicate this limitation to a
third party dealing with the agent. In most cases, the third party will not be bound by this special limitation.

4. Liability of Principal to Third Parties

The principal is liable to persons who have sustained injury through a reasonable and prudent reliance upon the
ostensible, whether implied or apparent, authority of an agent. The act of the agent can never alone establish
ostensible, whether implied or apparent authority, but silence upon the part of the principal who knows that an
agent is holding himself or herself out as vested with certain authority may give rise to liability of the principal.

For instance, when the principal executes and entrusts to the agent a negotiable or non-negotiable instrument
containing blanks and the agent fills them in, principal will be bound to third persons who rely upon the
instrument, even though the agent was not so authorized. The authority conferred upon an agent to fill in the
blanks of a negotiable or non-negotiable instrument does not extend to inserting the name of the other party to
the transaction without the knowledge, consent of and disclosure to the principal. For example, to form a
contract the name and identity of the lender must be known to the borrower when the borrower executes the
promissory note. (Civil Code § 1558, Jackson v. Grant (1989) 876 F2d, 764).

5. Emergency Broadens Authority

An agent has expanded authority in an emergency, including the power to disobey instructions where it is
clearly in the interests of the principal, and where there is no time to obtain instructions from the principal. An
example of this authority occurs in the relationship between a property manager and an owner when an
immediate repair or replacement is required to protect the property and to provide necessary services to the
tenant.

6. Restrictions on Authority

An agent who is given the power to sell and convey real property for a principal also possesses the power to
give the usual covenants of warranty unless there are express restrictions in this regard in the agent's agreement
with the principal. Also, an agent can never have authority, either actual or ostensible, to do an act which is
known or suspected by the person with whom the agent deals to be a fraud upon the principal. Unless
specifically authorized, an agent has no authority to act in the agent's own name except when it is in the usual
course of business for the agent to do so. (Civil Code § 2315 et seq.). Remember, a real estate broker acts as a
special agent with limited authority which generally does not include the power to act in the place instead of the
broker's principal.

An agency to sell the property does not carry with it the authority to modify or cancel the contract of sale after it
has been made. A limited agency as created between a seller and a real estate broker to sell the property
ordinarily empowers the real estate broker as a special agent to find or procure a buyer, but does not authorize
the agent to enter into a contract to convey title to the property on behalf of a principal. Unless otherwise
specified, the authority of a general agent to sell the property only permits a sale for cash, or its equivalency,
and the agent is not entitled to accept goods in payment.

An agent who has authority to collect money on behalf of his or her principal may endorse a negotiable
instrument received in payment only where the exercise of this power is necessary for the performance of the
agent's duty and where the principal has specifically granted the power to endorse the instrument. Where an
agent is expressly authorized to collect money, the agent may accept a valid check and the agent's receipt of the
check on behalf of the principal will be considered payment to the principal.

A real estate broker who negotiates a loan on behalf of a lender ordinarily has no authority to collect payments
from the borrower, except in those instances where the broker as a special agent of the lender has possession of
the security and the borrower has knowledge of this fact, or the broker has received written authority from or
has entered into a written servicing agreement with the principal delegating the collection of payments (and
generally other loan servicing functions) to the broker. The delegation to the broker of loan servicing functions
also occurs in the context of administration, management, and operation agreements as part of an investment
contract relationship established when issuing securities. (Securities and Exchange Comm. v. W. J. Howey Co.,
328 U.S. 293 (1946) and Securities and Exchange Comm. v. Glenn W. Turner Enterprises, Inc., et al., No. 72-
2544, 474 F.2d 476; 1973 U.S. App. LEXIS 11903; Fed. Sec. L. Rep. (CCH) P93,748). The borrower must
have actual notice of the existence of the servicing agreement and the authority of the real estate broker as the
special agent of the lender. (Business and Professions Code §§ 10233, 10233.2 and 10237 et. Seq. and Civil
Code § 2937).

7. Ratification of Unauthorized Acts

Occasionally, a person may act as agent without any authority to do so, or the agent may act beyond the scope
of the agent's authority. The alleged principal may not be bound by such acts. A principal may under certain
circumstances ratify the acts of the agent and thus become bound. Not only must the principal intend to ratify,
but:

a. The agent must have professed to act as a representative of the principal;

b. The principal must have been capable of authorizing the act both at the time of the act and at the time of
ratification (e.g. sometimes the promoters of a proposed corporation make contracts on its behalf, but the
corporation cannot ratify them - though it may achieve the same result by other means);

c. The principal must have knowledge of all the material facts (unless ratification is given with the intention
to ratify whatever the facts may be);

d. The principal must ratify the entire act of the agent, accepting the burdens with the benefits;

e. The principal must ratify before the third party withdraws.

(Civil Code §§ 2310 et seq.).

Once ratified the legal consequences are the same as though the act had been originally authorized. Generally
an act may be ratified by any words or conduct showing an intention upon the part of the principal to adopt the
agent's act as the principal's own. Acquiescence or acceptance of benefits by the principal must be with full
knowledge of the facts, unless made with the intention to ratify whatever the facts may be.

Where the principal's ignorance of the fact arises from the principal's own failure to investigate, and the
circumstances are such as to put a reasonable person on inquiry, the principal may be held to have ratified the
act in spite of lack of full knowledge. A ratification can be made only in the manner that would have been
necessary to create the original authority for the act ratified. Accordingly, in real property dealings, the
ratification must be generally in writing. (Civil Code § 2310 et seq.).

8. Duty to Ascertain Scope of Agent's Authority

No liability is incurred by the principal for acts of the agent beyond the scope of the agent's actual or ostensible
authority. A third party who deals with an agent and knows of the agency is under a duty to ascertain its
purpose and scope. If the agent acts beyond the agent's actual authority and the conduct of the principal has not
been such as to give the agent ostensible authority to do the act, the third party cannot hold the principal liable
for such acts. (La Malfa v. Piomobo Bros. (1945) 70 Cal.App.2d 840, 844-845 citing Ernst v. Stearle, 218 Cal.
233, 240):

"A third person, such as appellant, is not compelled to deal with an agent, but if he does so, he must take the
risk. He takes the risk not only of ascertaining whether the person with whom he is dealing is the agent, but
also of ascertaining the scope of his powers. The rule is cogently stated in 1 Mechem on Agency, second
edition, section 743, page 527, as follows: 'An assumption of authority to act as agent for another of itself
challenges inquiry. Like a railroad crossing, it should be in itself a sign of danger and suggest the duty to "stop,
look and listen." It is therefore declared to be a fundamental rule, never to be lost sight of and not easily to be
overestimated, that persons dealing with an assumed agent whether the assumed agency be a general or special
one, are bound at their peril, if they would hold the principal, to ascertain not only the fact of the agency but the
nature and extent of the authority, and in case either is controverted, the burden of proof is upon them to
establish it.’ "

9. Power of Attorney

A power of attorney is a written instrument giving authority to an agent. The agent acting under such a grant of
authority is generally called an "attorney in fact". A special power of attorney authorizes the attorney in fact to
do certain prescribed acts on behalf of the principal. Under a general power of attorney, the agent may transact
all of the business of the principal. Powers of attorney are strictly construed and ordinarily where an authority
is given partly in general and partly in specific terms, the general authority is limited to acts necessary to
accomplish the specific purposes set forth.

Real Estate brokers should not be given powers of attorney in the same matter for which the broker is acting
within the course and scope of the real estate license as a compensated agent. It is a legal maxim that one
should not exercise a power of attorney to one's own economic advantage or benefit.

10. Authority to Receive Deposits

The general rule is that when the scope of authority of a real estate broker has been limited to producing a buyer
ready, able and willing to purchase the property upon terms prescribed by the broker's principal, the broker has
no authority to accept a deposit from the buyer. Even when an agent has express authority to negotiate a sale of
real property, this does not give him or her implied or ostensible authority to collect the purchase price. When

an agent does so, the agent is acting as the agent for the buyer and not the seller. Consequently any
misappropriation of these funds by the broker would result in loss to the buyer and not the seller.

This general rule of law does not apply, however, where the broker actually had authority to receive a deposit
on behalf of the seller. Virtually all listing agreement forms in use today give express authority to the broker to
accept an earnest money deposit on behalf of the seller. The authority granted a listing broker also applies to
any subagents of the seller. The authority, however, would not apply to a broker who is acting only as an agent
of the buyer.

In those cases where a down payment has been paid to the broker and not deposited in escrow, title to such
payment vests in the seller when the seller accepts the purchase contract. Further, where an agreement for sale
of real property provides that a deposit with the broker is to become a part of the down payment when the seller
puts in escrow a deed evidencing good title, the deposit becomes the seller's property when the deed is put in
escrow. Thereafter, the broker cannot, except at the broker's own risk, return the deposit to the buyer.
Similarly, money received by the seller's agent under a deposit receipt with a valid liquidated damages clause is
generally (in the case of the buyer's breach) not recoverable by the buyer. (Civil Code §§ 1057.3 and 1671).

The rationale behind this rule is that money received by a broker as agent or subagent for the seller belongs to
the seller when the offer has been accepted. The broker may not return the funds to the buyer without the
consent of the seller.

11. Checks

In those cases where an earnest money deposit has been paid to the broker with written instructions to hold and
not negotiate the check until acceptance of the offer, the buyer's instructions should be followed. But the seller
must be informed in writing that the buyer's check is being held and not negotiated. This disclosure should be
given to the seller no later than the actual presentation of the offer to the seller, and the notice must be
acknowledged by the seller prior to or concurrent with the seller's acceptance of the offer. (Business and
Professions Code § 10176(a)).

It is acceptable practice to include the disclosure as a term and condition of the offer. During the time between
the receipt of the check by the broker and the acceptance of the purchase offer by the seller, the broker must
enter the fact of receipt of the check into the broker's trust fund records and hold the check in a safe place. (10
CCR, Chapter 6, §§ 2831 and 2832).

Although there may be a custom in real estate transactions for a broker to accept a check or promissory note
instead of cash as an earnest money deposit, the existence of such a custom does not justify the acceptance of
such instruments, unless there is full disclosure to the seller. While checks have been universally accepted as
the equivalency of money in business transactions, promissory notes are not. The maker of a check represents
that sufficient funds are in the bank account upon which the check has been drawn, and the failure to have such
money may be a crime. The maker of a note does not represent that he or she has sufficient money to pay the
sums owing (pursuant to the terms of the note) at the time of its original execution and delivery, and the maker's
failure to pay the note when it is due is generally not a crime.

California Law has held that a post-dated check may be considered the equivalent of a promissory note.
Therefore, a broker should not accept a post-dated check from a buyer since this may result in
mischaracterization of the form of earnest money deposit without adequate disclosure to the seller. As our
society moves towards more electronic or wire transfer of funds, other forms of earnest money deposits may
well be used in real property transactions. Full and complete disclosure to the seller is required of the form, the
amount, and disposition of the earnest money deposit.

12. Promissory Notes

A real estate broker, like a trustee, has an affirmative duty to disclose all material facts which might influence a
principal's decision. Thus the broker who impliedly represents to a principal that the broker has received cash
from a purchaser as an earnest money deposit (when in fact the broker has accepted a non-negotiable
promissory note) has violated the Real Estate Law. The use of promissory notes as earnest money deposits
should be reviewed, in advance, by the real estate broker's legal counsel.

13. Escrow Depository

In those cases where an earnest money deposit has been paid by the buyer directly into a neutral escrow under
typical escrow instructions which provide for the exchange of money and a deed on stipulated conditions, the
buyer is said to have conditionally delivered the money to the escrow holder. Escrow is defined to mean any
transaction wherein one person, for the purpose of effecting the sale, transfer, encumbering, or leasing of real or
personal property to another person, delivers a written instrument, money, evidence of title, or other thing of
value to a third person to be held by such person until a happening of a specified event or a performance of a
prescribed condition, when it is then to be delivered to a grantee, grantor, promisee, promisor, obligee, obligor,
bailee, bailor, or any agent thereof. (Financial Code § 17003 and Civil Code § 1057).

While it may be argued that the buyer retains title to the money until the conditions imposed by the buyer have
been performed, the escrow holder upon receipt of written escrow instructions from the seller will generally not
return the earnest money deposit to the buyer without the concurrence of the seller. It is the obligation of the
buyer and seller to insure that all funds deposited with the escrow holder are returned to the person who
deposited the funds or who otherwise are entitled to the money if the purchase agreement is not completed and
the escrow is not timely closed.

The failure to execute any required documents to cause the funds to be returned, unless said funds are being
held to resolve a good faith dispute, may result in damages being imposed up to $1000 plus reasonable
attorney's fees. (Civil Code § 1057.3). Should the buyer and seller be unable to mutually resolve any disputes
regarding the return of earnest money deposits, the escrow holder will generally file an interpleader action
seeking declaratory relief from a court of competent jurisdiction. The cost of such action will typically be
deducted from the earnest money deposits.

When the buyer and seller have each fully performed under an agreement (all conditions of escrow have been
satisfied or waived), the escrow holder becomes the agent of the seller as to the purchase money and the agent
of the buyer as to the deed. The escrow holder thereupon delivers the money to the seller and the deed to the
buyer.

14. Commingling and Conversion

Commingling occurs when real estate licensees deposit money belonging to another or others into a bank
account owned or controlled by the licensee that is other than a properly constructed trust account.
Commingling can also occur when real estate licensees join or integrate the property belonging to another or
others with property of the licensee in an unauthorized manner and in violation of applicable law. Depending
upon the facts, joining or integrating the money or property belonging to another or others with the money or
the property of the licensee may be characterized as conversion.

The real estate licensee who is guilty of commingling and/or conversion creates a risk of the funds or the
property of the client/principal being included in an attachment for personal or business claims against the
licensee. (Business and Professions Code § 10176(e)). Hence, the Real Estate Law requires real estate brokers
to place all funds received on behalf of clients/principals in an authorized trust bank account no later than three
business days following the receipt of the funds by the broker or the broker’s salespersons or broker associates.

Alternatively, the real estate broker may place the client’s/principal’s funds with a “neutral” escrow depository
(e.g., a title company or licensed public escrow), or the broker may promptly deliver the funds to the
client/principal who is entitled to receive them. Trust bank accounts of real estate brokers must be established
and maintained in compliance with the Real Estate Law and are not available to real estate salespersons. A
salesperson or a broker associate must immediately deliver all client/principal funds to the broker, or deliver the
funds as instructed by the broker for whom the salesperson or broker associate acts as an agent. (Business and
Professions Code §§ 10145 and 10146 and 10 CCR, Chapter 6, § 2830.1 et seq.).

Real estate brokers are required to keep separate records for each beneficiary or transaction, accounting for the
funds of the client/principal that are deposited into the trust bank account. These separate records are to include
information sufficient to identify the beneficiaries, the transactions, and the parties to the transactions, as
required pursuant to 10 CCR, Chapter 6, § 2831.1.

Maintaining proper trust account records is essential for the protection of the public. For example, FDIC
insurance coverage available per bank account is extended to each beneficiary identified separately in the
broker’s trust bank account records. Accordingly, a beneficiary whose trust assets, trust liabilities, and net trust
balances are properly maintained on a daily basis as part of the separate records of the broker’s trust bank
account (whether manually or through software) will be separately recognized by the FDIC under their
insurance coverage. Should the bank depository become insolvent or be subject to a regulatory enforcement
action, separate FDIC insurance coverage for each beneficiary is extremely important

A real estate broker is authorized to deposit into the broker’s trust account certain defined funds belonging to
the broker without being in violation of Business and Professions Code 10176(e). These funds of the broker
include an amount not to exceed $200, to pay service charges or fees levied or assessed against the trust account
by the bank or financial institution with which the trust account is maintained. The broker also may deposit
funds into the trust bank account that belong in part to the broker’s client/principal and in part to the broker
when it is not reasonably practical to separate such funds. The client/principal funds that may be maintained in
the same trust bank account with the funds of the broker must be received in connection with debt service on
mortgage loans co-owned by the broker and the client/principal, or the funds may represent the proceeds of
rental income from a property co-owned by the broker and the client/principal.

Certain predicates apply to this exemption from the definition of commingling, including that the funds
belonging to the broker are to be disbursed no later than twenty-five days after their deposit, provided no
dispute exists between the broker and the broker’s client/principal as to the broker’s portion of the funds. Other
predicates apply before the broker may rely on this limited exemption. (10 CCR, Chapter 6, § 2835).

If the broker fails to comply with the Real Estate Law regarding the handling of trust funds, the broker is
subject to disciplinary action by the Commissioner and may be subject to criminal action for conversion of
funds belonging to the public. It is recommended real estate brokers consult with legal counsel and with a
certified public accountant before establishing trust fund handling, trust bank account procedures, or when
proposing to join or integrate the money or property of the client/principal with the money or property of the
licensee.