The agency relationship forms the foundation for nearly all real estate transactions, establishing the legal obligations between professionals and the people they serve. In this relationship, one party (the Agent) is authorized to act on behalf of another (the Principal). This structure defines who owes loyalty to whom and determines the scope of an agent’s responsibilities in buying and selling property. Understanding this legal hierarchy is necessary to define the sub-agency model, explain how it once functioned as a primary method of cooperation, and illustrate why it is rarely used in the modern market.
Defining the Agency Relationship
The fundamental legal relationship in real estate is created when a Principal delegates the right to act on their behalf to an Agent. The Principal is the client (typically the home seller or buyer), and the Agent is the licensed real estate broker or salesperson. This arrangement gives rise to a special relationship known as a fiduciary duty, which is the highest standard of care recognized by law.
The Agent is obligated to subordinate their own interests to those of the Principal, acting in the client’s best financial interests at all times. This fiduciary duty includes loyalty, confidentiality, and full disclosure. The Principal grants the Agent the authority to negotiate and solicit on their behalf, generally limiting the Agent to a special agency for a single transaction.
The Structure and Mechanics of Sub-Agency
A sub-agency relationship operates as an extension of the primary agency, effectively making the sub-agent an “agent of an agent.” This structure typically involves two different brokerages working on the same sale, where the cooperating broker works with the buyer but legally represents the seller. The chain of representation flows from the Seller, to the Listing Broker, and then to the Sub-Agent, who is delegated authority by the Listing Broker.
The Listing Broker extends an offer of sub-agency, often through the Multiple Listing Service (MLS), inviting other brokerages to find a buyer. When a cooperating broker accepts this offer by showing the property to an unrepresented buyer, they become the Sub-Agent, owing allegiance exclusively to the seller. This mechanism was a common way for a seller to gain broader exposure for their property.
Fiduciary Duties and Buyer Risk in Sub-Agency
The defining feature of sub-agency is that the sub-agent owes their entire fiduciary duty exclusively to the seller, even while interacting directly with the buyer. This means the sub-agent is bound by the duties of loyalty, confidentiality, obedience, and full disclosure to the seller. The sub-agent must prioritize the seller’s financial interests, striving to get the highest possible price and most favorable terms.
The buyer in this relationship is treated as a customer, not a client, receiving limited services and no formal representation. While the sub-agent must treat the buyer honestly and fairly, they are not obligated to negotiate on the buyer’s behalf or keep the buyer’s information confidential. This arrangement poses a significant risk for the buyer, who might inadvertently reveal confidential negotiating information, such as their maximum price. The sub-agent is then legally required to share this information with the seller, which weakens the buyer’s bargaining position.
Why Sub-Agency is Rare Today
The sub-agency model declined dramatically beginning in the 1990s due to a convergence of legal and consumer protection changes. The rise of the Buyer Agency concept allowed buyers to hire their own agents who would owe them full fiduciary duties, directly countering the seller-centric sub-agency model. This shift was driven by consumer movements demanding better representation and transparency in transactions.
States also began implementing mandatory agency disclosure laws, requiring agents to clearly explain who they represent early in the process. Furthermore, sub-agency created increased liability for the listing broker and seller, as they could be held responsible for the sub-agent’s mistakes or misrepresentations. Multiple Listing Service rules were consequently amended to allow for offers of compensation that did not automatically imply sub-agency, making buyer agency the new industry standard.
Key Differences from Other Agency Relationships
Sub-agency differs significantly from the more common agency models used today, primarily concerning allegiance and duty. In a Seller Agency relationship, the agent works exclusively for the seller, aiming for the highest price. Buyer Agency involves an agent working solely for the buyer, using their fiduciary duty to secure the lowest price and best terms for their client.
Dual Agency occurs when one agent or brokerage represents both the buyer and the seller in the same transaction. Unlike sub-agency, dual agency requires the informed written consent of both parties and limits the fiduciary duties owed to each client to avoid conflicting interests in negotiation. Sub-agency is distinct because the agent works with the buyer but represents the seller, a conflict absent in single-agency relationships.