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Agency and legal liability.

One of the most important functions within a management firm is control. Control is the monitoring and supervising of staff's activities to insure that policies and procedures are being properly initiated. The process of control consists of a series of checks and balances. It is through control that a property management company protects its clients' investment and contributes to its enhanced value.

A parallel to the control within the departments of a management business is the legal concept of principal and agent and the responsibilities and liabilities that arise from this relationship. Here too, the owner's actions should work as a check and balance with the actions of the manager on the owner's behalf. In both the management company and the agency relationship, problems arise when this system of checks and balances fails.

The following case study involves an actual decision by a state district court pertaining to the liability of a property management firm for work performed on behalf of tenants and owners. The results of this case should be carefully studied by property managers.

The situation

A property manager was acting as a negotiator between a prospective tenant and a general partner representing the owners of a shopping center. After some negotiation, the parties reached verbal agreement on the terms and conditions of the lease for a particular space at the center. The property manager prepared the written lease agreement and sent it to each party to review and sign.

During this time, the property manager surrendered the keys to the vacant suite to the prospective tenant firm. The prospective lessee needed entry into the suite to allow various vendors to measure and prepare bids for the conversion of the space to a nightclub. However, within a four-week period, the agreement collapsed, and no lease was signed.

During the same period, but without the knowledge of the property manager, the prospective lessee had authorized work to be completed on a security and fire alarm system for the space.

The space was not inspected during the period, and it was not until a bill collector showed up demanding payment for the work that anyone at the management company knew that a security and fire alarm system had been installed in the vacant space.

The case

The outcome of this situation was a suit by the security company against both the prospective lessee and the management company to recover the cost of the equipment and the installation.

The prospective lessee, jack Poster, representing himself as an agent for the management company, had agreed to purchase two double emergency lights for $270.64. The lights were delivered to Poster, who acknowledged receipt by signing the invoice, "J. Poster." The invoice called for payment in 10 days, but at no time did Poster inform the management company of this transaction, and neither Poster nor the management company paid for the lights.

Approximately one month later, Poster, now in default on the first invoice, once again represented himself as acting for the management company. He ordered a fire alarm system from the same company. The installation was completed three days later at a total cost of $1,500. Once again, Poster signed the invoice with his own name, gave no indication on the invoice that he was an agent for the management company, and did not inform the management company of the purchase.

At no time did the security company made any effort to confirm Poster's authority by contacting the management company. Nor did the security company attempt to bill the management company directly. The security company had never done business with either Poster or the management company before.

Despite the lack of any tangible proof of an agency relationship, Jack Poster maintained at the trial that he had acted as an agent under the authority of the management company. The management company denied this relationship. However, the lower court ruled that Poster was acting as an agent and rendered a judgement against the management company for $1,770.64 in costs, plus $5,000 in attorneys' fees.

The appeal

The management company appealed the ruling to the appellate court in the Eighth Judicial District. The.,two primary arguments on appeal were:

* There were insufficient facts to justify the lower court's finding that Jack Poster was acting as an express or actual agent of the management company.

* The security company was negligent in failing to determine whether or not an agency relationship existed between the parties.

In reversing the decision of the lower court, the appellate court recognized the rule of law that an agency relationship or the extent of one's authority as an agent cannot be proved simply by the statements by the agent. Thus, Poster's word alone that he was an agent was not enough to prove that he was. Citing the case of Bank of America v. Barnett (348 P.2nd 296, Arizona 1960), the court stated that an agent's authority may not be shown "merely by proving that he acted as an agent."

The court also recognized Restatement Second, Agency [section] 26, which provides: Except in the execution of instruments under seal or for the performance of transactions requiring statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him to act principal's account.

The appellate court also found that the security company had been negligent in failing to determine whether an agency relationship existed between Poster and the management company. Citing Associated Creditors'agency v. Davis (530 P.2d 1084, California 1975), the court found that a person dealing with an agent has the duty to use reasonable diligence to determine the scope of the agent's alleged authority.

The court also recognized the opinion in Bank of America v. Barnett (supra), which states that: The mere fact that one is dealing with an agent, whether the agency be general or special, should be a danger signal, and like a railroad crossing, suggests the duty to stop, look, and listen. . . .[The vendor] is bound to ascertain, not only the fact of agency, but the nature and extent of the authority and in case either is controverted, the burden of proof is upon him [the vendor] to establish it. . . .

The outcome

This case illustrates the importance of clearly defining the relationships among the property manager, the owner, the vendor, and the tenant and of informing all parties of these relationships. While principal-agent rules of law provide certain protections for the property manager, it is important for the management company to document its relationships with all tenants and with vendors associated with those tenants.

In this instance, the property manager broke a cardinal rule of leasing by giving possession before all documents were signed and monies received. This error was compounded by the manager's failure to control events after the keys were turned over to the tenant.

The vacant space should have been inspected periodically during the negotiation, thus perhaps stopping part of the security firm's work before it was completed. The manager also had the option of changing the locks if keys could not be recovered from the prospective tenant after lease negotiations fell through.

As a result of this case, the management company reviewed its operating policies and made several changes. A new system of checks and balances was established to better monitor leasing activities. The management company also implemented instructions in its operating manual emphasizing the importance of posting and recording a non-responsibility notice as protection against mechanics liens.

A new leasing form was created to track every step in the process and to apply more stringent controls on leasing agents. Each level of activity now has to be reviewed and approved by the leasing director.

Even though the management company eventually won a favorable decision, almost two years were lost, and large amounts of time, money, and effort were spent to correct the wrong.

It is said that a person learns more from failures than from successes. If this is true, the learning process was a painful, but thorough, one for this management company.

Barbara K. Holland, CPM [R] is president of H&L Realty and Management, Las Vegas, a firm managing over 5,000 residential units and 240,000 square feet of commercial space. She has been the president of the IREM Las Vegas chapter, a director of the Nevada Apartment Association, and a board member of the Nevada Association of REALTORS [R].

Ms. Holland is a member of the IREM national faculty, a member of the IREM Academy of Authors, and a past JPM Committee chairperson. She is also the author of the IREM book Managing Single-family Homes.

Thomas Harper is a partner in the law firm of Thompson and Harper, Ltd., where he specializes in real estate and landlord/tenant law. He is an alternate judge in the City of North Las Vegas.

Mr. Harper is a graduate of Howard University Law School and was a law clerk for the Hon. Judge Joseph Pavilikoski in the Eighth Judicial Court, District of Nevada.
COPYRIGHT 1991 National Association of Realtors
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Article Details
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Author:Holland, Barbara K.; Harper, Thomas
Publication:Journal of Property Management
Date:May 1, 1991
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