Final answer:
When Bill's house is destroyed by fire, the agency relationship with Charles, the real estate agent, is automatically terminated due to the legal principle of 'frustration of purpose' as the subject matter of the agency no longer exists.
Step-by-step explanation:
When Bill employs Charles as a real estate agent to sell his house and the house is destroyed by fire, the agency relationship is generally considered to be automatically terminated. The specific reason for this is that the subject matter of the agency (the house) no longer exists, which makes the fulfillment of the agent's duties impossible. This situation falls under the legal principle of 'frustration of purpose'. Since the property that Charles was employed to sell is no longer available, the agency relationship can no longer continue in its current form.
Addressing the options provided: 1) The relationship is not automatically applied to the next property Bill sells. Charles was specifically hired to sell that particular house. 2) There generally is no requirement for Bill to compensate Charles unless there was a special agreement to that effect. 3) The most likely answer: the relationship is automatically terminated. 4) The reasonableness aspect usually does not come into play unless the contract specifies conditions under which the agency continues even if the property is destroyed.