During the often breathless give and take of real estate transactions, it is not uncommon for offers and counteroffers to be exchanged verbally or by telephone and far too often the buyer or seller finds that his or her broker or agent has made a commitment to a part of the transaction that the buyer or seller does not like. For example, the agent may agree to some financing or some repair that the seller may consider inappropriate or assumption of some repair obligation that the buyer considers excessive.
Can the agent bind the buyer or seller in such a way?
Usually not, as discussed below. But if the agent’s principal engages in certain later acts that “ratify” the commitment of the agent, then the principal may be bound. “Estoppel” may also bind the principal.
This article shall briefly describe the limits on the authority of the agent to act and the perils of ratification and estoppel faced by the principal of the agent. The reader should first review our article on Real Estate Transactions before reading further.
Agency and Principal:
One who is authorized to act for another and can bind that person is an “agent” of the person who is bound and the person who so authorizes the agent to act in this manner is the “principal.” Agency can be permanent or, more often, temporary for a particular transaction or a set period of time. Agency can be granted in writing or verbally and can even be implied by the acts of the principal. Typically, a real estate transaction has the broker or real estate agent granted written authority by the buyer or seller to negotiate and make offers on real property.
Anyone who has read the agreement that California law requires the real estate agent to utilize for residential agency is aware of the myriad restrictions imposed upon the agent under the law and contract. Most listing agreements simply grant the agent the right to list the property and negotiate, subject to final approval of the seller. Many buyers use an agent to locate and negotiate on property that they wish to buy, again maintaining the right for the final authority to approve any offer or counter offer made. In all these matters, the agency is subject to written authority granted to the agent by the principal (both buyer and seller) under the written agreement normally required by California law.
In such real estate transactions the agent is normally subject both under the agreement and the license law to conform to strict limitations on what can be said and what commitments can be made. The restrictions are less for commercial property transactions but many still apply.
Oral Agency in Real Estate Transactions
Agency law in general allows the creation of an agency relationship by an oral understanding of the parties or even if such agency relationship can be reasonably inferred by the actions of the principal.
However, real estate transactions must almost always be in writing under the Statute of Frauds requirement in California. See our article on Contracts. How does that effect oral granting of agency?
Under the “equal dignities rule” the statute of frauds is satisfied only if the agent’s authority to bind the principal to a land sale is evidenced by a writing signed by the principal. The principal’s oral authority to an agent is generally sufficient for any purpose except that an authority to enter into a contract required by law to be in writing can only be given by an instrument in writing. (Rutter, California Practice Guide, Real Property Transactions, Greenwood and Asimov, Execution by Agent, Section 4:269, p.4-61; Ulloa v. McMillin Real Estate & Mortg., Inc. (2007) 149 Cal.App.4th 333, 339 [57 Cal. Rptr. 3d 1, 5]; see Estate of Stephens (2002) 28 Cal.4th 665,672 [122 Cal.Rptr. 358, 362—where agent did not have written authority to execute deed as a principal’s agent, conveyance not authorized under Section 2309.]
A principal may “ratify” an agent’s act even if the original agency did not extend to such a commitment to the third party. For example, if I authorize my agent to only offer a certain type of financing, but my agent offers more and I do not protest and allow the deal to continue, that could be considered ratifying the act of the agent and thus binding me. Whether ratification occurs is normally a question of fact for the judge or jury.
However, as set forth in Rutter, California Practice Guide, Real Property Transactions, Greenwood and Asimov, Applicable to Ratification of Agent’s Invalid Act, Section 4:269.1-4:269.2, “[w]hile the principal’s ratification of the agent’s act may validate an agent’s unauthorized act, the “equal dignities” rule also applies to the ratification. A principal’s ratification of an agent’s act can be made only in the manner that would have been necessary to confer an original authority for the act ratified. (Civil Code 2310) Thus, just as an agent’s authority to execute a purchase/sale agreement must be in writing, so too must a principal’s ratification of an invalid execution by the agent. [Estate of Stephens, supra, 28 Cal.4th at 673, 122 Cal. Rptr.2d at 363—principal’s oral ratification of agent’s execution of deed ineffective;Behniwal v. Mix (2005) 133 Cal.App.4th 1027, 1039 [35 Cal.Rptr. 320, 329]
In short, if the original deal required a writing to be binding, I cannot ratify verbally the agent’s verbal commitment…my ratification would have to be in writing.
What Writing Required?
Documents of high levels of specificity, such as escrow instructions, have been held to ratify an agent’s acts in entering into a deal. (Behniwal v. Mix, supra 133 Cal.4th at 1039, 35 Cal. Rptr.3d at 329) A principal’s written ratification of an agent’s invalid execution of an agreement need not itself set forth the terms of the agreement. This is because the terms have been identified already, and the only outstanding issue is whether the principal’s acceptance of them can be ascertained from the ratification documents. (Behniwal v. Mix, supra 133 Cal.4th at 1040, 35 Cal. Rptr.3d at 329-330)
Thus, for example, the principal’s signature on disclosure documents executed in connection with a real property purchase and sale transaction (e.g., a natural hazard disclosure statement, or the notice of the availability of a statewide database showing the proximity of registered sex offenders effectively ratified the underlying purchase and sale agreement and, subsequently the transactions. (Behniwal v. Mix, supra, 133 Cal.4th at 1040-1042, 35 Cal. Rptr.3d at 329-331)”
While the general law is that representations that are made beyond the agent’s scope of authority do not bind the principal except for ratification (discussed above) in addition the principal may be bound by the doctrine of estoppel. (Grasslands Water Ass’n v. Lucky Leven Land & Cattle Co. (1952) 112 Cal.App.2d 776 [247 P.2d 380]) Estoppel is a doctrine that states that it would be unfair or unjust to allow a party to take advantage of the reasonable reliance of a third party by avoiding a commitment. Thus, if I advise you that you can paint the house and I will get X to compensate you, but I never did so, claiming that it was not my house and I was not serious, you can claim I am liable since you reasonably relied on my representation and I should be “estopped” from denying liability.
But, principles of estoppel may not be invoked to directly contravene statutory limits. (See Medina v. Board of Retirement, Los Angeles County Employees Retirement Assn. (2003) 112 Cal.App.4th 864 [5 Cal.Rptr. 3d 634] and Beynon v. Garden Grove Medical Group (1980) 100 Cal.App.3d 698 [161 Cal/ Rptr. 146]) The statute of frauds would almost certainly continue to be applied, though, again, the trier of fact would have to investigate the evidence.
Note that the principal finding him or herself bound by the unauthorized act of the agent may still have a cause of action against the agent for such activity even if ratification or estoppel ends up binding the principal.
But the lesson is that if your agent has apparently tried to bind you in an unauthorized manner, be sure to get full legal analysis of the situation to avoid the doctrines of estoppel and ratification which may still bind you to the deal…and be sure to consider carefully whether the Statute of Frauds would still grant you protection. In real estate transactions, you are probably, but not certainly, safe.