It often comes as a bit of a surprise to people to learn that there is a separate law of agency.
And it is clear from reading the press that many letting agents are wholly unaware of it!
Agency law sets out the rules that apply when one person (the agent) is employed or authorised (it does not have to be a commercial arrangement) by a principal (in our case, the landlord) to create a contract between the principal and a third party (the tenant).
Agency situations are not confined to lettings. For example, there are shipping agents and actors agents. Auctioneers are also a special type of agent.
The fiduciary duty
The agent is in a very powerful position, and so is bound by a very strong duty of good faith, known as the ‘fiduciary duty’.
This means that they must behave honourably towards their principal, put their Principal’s interests above their own and not seek to make any profit out of the arrangement, which is not authorised by their agreement with the principal.
So, for example, if a letting agent speculates with his principal’s money on the stock exchange and makes a £10,000 profit, that money is not his.
It will belong to the Principal (because it was acquired by unauthorised use of the principal’s money), and the Principal will be entitled to claim it from him.
Agent’s authority
The other important issue in agency law is that of ‘authority’. An agent will be authorised to do certain things by his agreement with his principal (in a letting agency, this will normally be set out in a written agency agreement).
However, if the agent goes beyond his instructions, then provided this is the sort of thing an agent like him would normally be authorised to deal with, the Principal will, in most cases bound by what the agent does.
So, for example, if the landlord says ‘no pets’ and the agent agrees that a tenant can have a dog – the landlord is bound by this. Because it is the sort of thing agents are generally authorised to agree to, and the third party is entitled to rely on this.
After all, tenants cannot be expected to know what private instructions the landlord has given to his agent.
Also, if a payment is made to an agent – this is the same (legally – so far as the third party is concerned) as if it was made to the landlord. So if the agent ‘does a runner’ and goes off with it – the landlord cannot ask the tenant to pay it again.
This is why landlords need to be really careful who they choose to act as their agent – and why they need to make sure the agent is signed up to the SafeAgent scheme.
There is a lot more to agency law, but this will give you the flavour of it.
Note that Landlord Law members get access to our special ‘Legal Basics‘ agency law course as part of their membership.
It is indeed the case that many letting agents know little about agency law – either that or they know it and ignore it.
Tessa makes an important point not often appreciated which is that, whatever the terms of the agency agreement, every letting agent has ostensible authority to do the things which letting agents customarily do. The only exception is where notice is given to the contrary; I have never heard of a case where notice has been given to the contrary.