Principal-agent guidelines: Pick wisely when selecting your agent

Imagine that you want to sell your land and ask an acquaintance to find a buyer. Now assume that you want $200,000 for the land but your acquaintance signs a contract on your behalf with a buyer for $150,000. Are you stuck with the contract? Maybe.

To understand why, let’s start with everyone’s favorite topic: definitions. In our example, you are the principal and the acquaintance is your agent. You, as principal, have the legal power to do or decide something (here, to sell the land). Meanwhile, the acquaintance, as agent, has whatever authority you granted to them (here, to find a buyer).

But figuring out how much authority an agent has is not a matter of mathematical precision. That is because an agent has three sources of power: express, implied, and apparent.

Express authority is easy enough. It includes anything that the principal said the agent could do. Implied authority is broader. It includes any act reasonably necessary to fulfill the agent’s express authority. And apparent authority is broader still. It covers any act done by an agent while dealing with a third party— assuming that the agent appears to be acting on the principal’s behalf. In these cases, the agent may bind the principal even if the agent exceeded his authority.

In wielding this authority, an agent has many duties to the principal. Some of the key ones are: Obeying the principal’s instructions; acting competently and carefully; not disclosing confidential information; and, above all, pursuing the principal’s best interest—including when that interest conflicts with the agent’s interest.

Revisiting our opening example: Why might the landowner have to honor the $150,000 sale price? Because the agent may have had apparent authority when the contract was signed.

Now let’s sprinkle in some new facts: Assume that the acquaintance signed the contract because the buyer gave him a secret commission of $30,000. Did the acquaintance violate his duties as an agent? Of course. The acquaintance ignored the landowner’s instructions to line his pockets at the expense of the landowner’s interest.

If the landowner discovers the side deal, what can he do? Several things. For one, he can report the situation to the police because the agent has committed a crime. For another, he can file a lawsuit seeking the $30,000.

Unfortunately, proving a side deal existed is easier said than done. There’s seldom a paper trail, and the acquaintance and buyer are unlikely to admit that something shady took place. And even if you can prove a side deal happened, in many situations, it’s frequently hard to collect the debt.

What’s a person to do? Three things: Pick trustworthy people, monitor them regularly, and give them no more authority than necessary. In short, follow the adage that an ounce of prevention is worth a pound of cure.

Take our land-transaction example. Was it smart for the landowner to use an acquaintance? It depends. What’s the acquaintance’s reputation? And how much does the acquaintance know about real estate? Too often landowners depend on unreliable people who have little-to-no experience with real estate.

But selling land is a big deal. For many people, it is the largest transaction they will ever do. If you are going to work with someone, make sure the person has an excellent reputation and significant real-estate experience. This is no time to cut corners.

This guideline extends to family too. Some family members don’t know anything about real estate. Some cut secret deals or take the money and run. Either version could mess up the biggest deal of your life. So, choose wisely.

Another way to reduce your risk is to monitor your agent. Ask them questions, and encourage them to send you regular emails updating you of what is happening with the deal.

Finally, put the agent’s authority in writing. If you want to be casual about this, an email will do. If you want to do a better job, put it in a signed letter. And if you want to do it right, put it into a signed and notarized power of attorney—and then record it at the Recorder’s Office. This is no time to cut corners.

What should the email, letter, or power of attorney say? If you are selling the property, it should list your name, a brief description of the property (such as the size and location), and the precise things the agent may do on your behalf like negotiating the sale, signing the transfer documents, accepting the money, and so on. If the agent can approve the sale, spell out key terms in advance like minimum price. If the agent can receive the money, make sure the agent is receiving a check payable to you, not them.

If you are buying the property, the key terms and concerns look similar except that you may want to give the agent authority to work with CUC about transferring water and power from the previous owner to yourself.

In both cases, state an expiration date for the agent’s authority. Generally, the expiration date should be for between six months and two years, but no more.

To sum up the column: Agents can be useful but they can also get you in trouble, so pick competent, trustworthy people, and then say what they can (and cannot do) for you in writing. Doing so sets clear expectations and limits the damage a wayward agent can do.

(Jordan Sundel, Special to the Saipan Tribune)
Jordan Sundell is a lawyer primarily practicing business and real-estate law. He formerly worked for the CNMI Supreme Court and Bridge Capital and is now general counsel for several real-estate companies, including Joint Marketing. His columns—focused mainly on real estate and small business—are published every other Tuesday.