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Agency Law: The Good, The Bad and The What-Could-Be-Better

This is the second article in a three-part series considering industry evolutions related to the Washington State Agency Law.  (The law, RCW 18.86, is actually entitled “Real Estate Brokerage Relationships” but is commonly referred to as the Agency Law.)  The first article discussed the changing industry environment that is being pushed by legal, regulatory, market and other conditions.  This article will take a closer look at our state’s existing Agency Law and discuss what it does well and where it needs to evolve in light of industry pressures.

The Agency Law, enacted in 1997, was itself a response to evolving practices.  Prior to enactment of the Agency Law, the real estate industry, both in Washington and nationally, typically created agency relationships between sellers and listing firms with the listing firm then extending an offer of sub-agency to any real estate firm that brought a buyer for seller’s property.  With that, both the listing broker and the broker who brought the buyer represented the seller.  Said differently, regardless of the fact that a broker may have worked exclusively with a buyer, that broker represented the seller and did not represent the buyer.  This agency relationship was borne out of the fact that sellers almost always paid compensation to both firms while buyers almost never paid any direct compensation to a broker.  Agency and compensation were incorrectly lumped together and thus, the industry practice demanded that all brokers represent the seller even though that flew in the face of common sense.

The Agency Law was a reactionary recognition that brokers who work exclusively with buyers align with the buyer’s interests.  It was intellectually dishonest and a farce, in practice, to tell sellers that they benefitted from the representation of every broker in the transaction while buyer was left to fend for buyer’s own interests.  In reality, brokers who worked with buyers commonly advocated for buyer’s interests, even if those interests were contrary to seller’s interests.  The simplest example of this is that the broker who had been working with buyer would typically present buyer’s offer to seller and attempt to persuade seller to accept the offer, even if buyer’s offer price was below the list price.  If the presenting broker were truly representing seller, that broker could not have advocated for a reduced price on buyer’s behalf.

Consequently, in 1997, Washington law caught up with industry practices.  The beauty of the Agency Law was in part, its simplicity.  It captured actual practices and made the law consistent with those practices.  For example, the Agency Law recognizes that compensation does not equate to agency and provides specifically that a broker may represent one party while taking compensation from the other.  That mirrors the industry practice of sellers paying compensation to a listing firm that extends an offer of compensation to the cooperating firm/member of the MLS.  The cooperating member, who brings a ready, willing and able buyer, typically represents the buyer but nevertheless receives compensation through the listing firm’s sharing of compensation paid by the seller.  In fact, the Agency Law took this principle further and established that a broker is not required to show seller’s property if there is no written agreement for compensation to the broker who sells the property.  As a reflection of practices current to the time, the Agency Law allows the industry to ignore the seller who chooses not to compensate a buyer’s broker.