The Risk of the Pocket Listing
It’s not unusual in the field of commercial real estate for agents to be carrying around a few pocket listings.
These are listings that aren’t quite listings.
We all know that there are:
- exclusive listings, and
- MLS listings.
These listings are documented by way of a standard listing agreement. The "exclusive box" is checked, and the principal (seller) appoints the agent.
It’s then up to the agent to market the property in the way they see fit. Presumably, some kind of a plan was agreed to in advance.
These listings follow the same format except for the fact that the "MLS box" will be checked. The marketing plan here is that the property will be advertised through the MLS network.
One of the requirements is the inclusion of a good deal of information and data about the property. The other participating brokerages require enough information so as to allow them to prepare an Offer on the property.
Naturally, that takes some time, so often an exclusive listing will be taken in advance, just to get the ball rolling. Nevertheless, in both cases the standard Form OREA Listing agreement has been signed. This is an agency appointment and both statutory and fiduciary duties will follow.
These listings are a little different. In fact, they are not really listings at all. The seller has confided in the agent that the property could be available for a certain price upon certain terms. The arrangement is verbal. There is no actual listing agreement signed. There is no data sheet. There is no investigation, determination and verification of the material facts. This lack of detail, this lack of information places the real estate practitioner at risk.
This information is strictly confidential.
The seller doesn’t want to see his property advertised anywhere. If it’s a business, news of a pending sale, could destroy the business.
So, we have a peculiar arrangement here. The property is “kind of”, “sort of” available. There’s no listing and no data sheet.
In ordinary contract law, the agent (A) brings the third party (T) into a contractual relationship with the principal (P).
So, P contracts with T.
P is liable to T.
T is liable to P.
They can each sue one another.
A is NOT responsible for the contract.
Unfortunately, this is not quite the case with the pocket listing. Strictly speaking, P does not exist. The agent is an agent without a principal. That’s permissible in law, but there are consequences.
Here, A contracts with T.
A is liable to T.
T is liable to A.
They can each sue one another.
P is NOT responsible for the contract.
Now, we come to the switch. P decides to adopt and ratify the agreement. At this point we go back to the usual arrangement.
However, there are some potential problems. Assuming that the contract was completed successfully, there are no problems.
With substantial problems, T now wants to sue. But, for a very substantial period of time, A was without a principal, and in law that means that A was the principal.
Let's assume that the owner indicated that the building was "solidly built". The agent passes this information along to the potential purchaser, believing it to be true. You can anticipate the rest of this story. The purchaser closes the deal and discovers that this information was untrue.
The agent may be exposed to liability both for professional negligence, and breach of contract. At the time the representation was made, the agent had no principal. An agent without a principal assumes personal liability.
It may be relatively easy to prove breach of contract. The building was not "solidly built". It may be much more difficult to prove professional negligence. Insurance is available to protect an agent against professional negligence but not contractual dealings.
Liability here, would fall under contract. This is very risky because there’s no insurance coverage.
There are ways to protect the agent in these circumstances, it will just require some paperwork.
Brian Madigan LL.B., Broker