In real estate, the concept of agency describes the legal relationship formed when the principal appoints the agent to arrange a transaction on the principal's behalf. The agents is usually not authorised to make a contract with the third party. The agent is only permitted to act on behalf of the principal, to bring to that principal a third party who is willing to agree to the principal's terms. The principal and the third party then make their own binding contract.

A real estate agency may be owned and operated in three different ways:

  • sole trader
  • partnership
  • company

    A sole trader is the oldest and simplest form of real estate business ownership. A sole trader owns and controls the business, thereby assuming the role of owner, manager and risk taker. A distinguishing characteristic of the sole trader is the nature of the legal liability. A sole trader is totally liable for all debts, both personal and private. If the business fails the sole trader's private assets may be liquidated to satisfy the debts of the business.

    A partnership is defined as 2 or more persons carrying on the business with a view to profit, although there is a maximum number of people who may join together, i.e. 20 members. A partnership in real estate usually has between 2 to around 6 or 7 members.

    The partnership is not, in law, a seperate legal entity. All partners are liable for the debts of the partnership business to the full extent of their personal assets.

    The general rule for liability arising out of the contracts made by a partnership is that all partners are jointly liable to a third party for debts and obligations incurred through the contracts of the partnership. Partners can be sued jointly but not individually. A creditor may bring only one action against the partners. If the firm's assets are insufficient to pay the creditor each partner will have to contribute from his or her personal assets. This arrangement is known as joint unlimited liability. The property of the partnership is owned jointly by the partners.

    A company is a seperate legal enitity quite distinct from the members who form the company. A company can own property in it's own right, and it can sue or be sued.

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