Final answer:
An agency relationship is created when an agent has the authority and obligation to act on behalf of a principal in their best interest.
Step-by-step explanation:
An agency relationship is created when the agent has the authority to act on behalf of the principal and is obligated to act in the principal's best interest. In the context of real estate, an agency relationship can be formed when a real estate agent is authorized to represent a client in buying, selling, or leasing property. The mere payment or promise to pay compensation to a licensee does not determine whether an agency relationship exists, as it is the authority and obligation to act that are the defining factors.