Limiting a Firm’s Exposure When an Affiliated Agent Has a Side Business

QUESTION: An agent affiliated with my firm received a complaint that was filed with the North Carolina Real Estate Commission regarding a property management issue. My firm only handles sales transactions, and this particular agent does property management on the side under his own firm. The Commission asked for a response from both my firm and the agent, because the tenant stated that my firm had been involved. We were able to show the Commission that my firm had no interaction with the tenant, but it got me thinking, should I do something to make sure our firm does not get entangled with an agent’s side business?

ANSWER: There are several things you can do to mitigate your firm’s exposure caused by an affiliated agent’s actions outside your firm. Specifically, you could limit your agent’s actual and apparent authority. Actual authority is the authority that the agent reasonably thinks he possesses, conferred either intentionally or by want of ordinary care by the principal. Apparent authority is the authority that the principal: (1) has held the agent out as possessing; or (2) permitted the agent to represent that he possesses. Under apparent authority, the principal’s liability for an agent’s action is determined by what authority a person in the exercise of reasonable care was justified in believing the agent possessed.

In this case, your agent has actual authority to represent the firm in its representation of buyers and sellers. He does not have actual authority to bind your firm to an agency agreement with a landlord. However, even though the agent does not have actual authority to bind your firm to a landlord, the agent may have apparent authority. This is because the agent is affiliated with your firm. That affiliation could, in some circumstances, make a landlord believe that your agent is authorized to sign a property management agreement with your firm, even if your firm doesn’t practice property management.

You were fortunate here to be able to show that your firm was not involved with the complaining tenant. To better protect your firm going forward, you might consider doing several things. First, a well-drawn independent contractor agreement will, among other things, require your agent to: (1) take active measures to clearly disclose in their side business materials that your firm is not involved; (2) safeguard your firm’s confidential business information; and (3) require the agent to reimburse the firm and hold the firm harmless should the firm be named in a lawsuit or Commission complaint related to the agent’s side business. Second, you should review your agent’s side business documents to make sure they have clearly disclosed that your firm is not associated with the side business’s activities.