Commissions and Fees

QUESTION:   Broker represents a Seller who was interested in selling certain property. Broker has a signed Representation Agreement with Seller. The Representation Agreement with the Seller contained terms whereby, in the event Brokerage procured a purchaser, the Brokerage would be entitled to a commission based upon a certain percentage of the purchase price (x%). This agreement also acknowledged that one half of the total commission (½ x%) would be shared with any brokerage that brought forth a buyer to purchase the property. On behalf of the Seller the Broker listed the property in the local MLS which also offered a commission (½ x%) to any brokerages that procured a buyer for the property. Various offers were made relative to the property and eventually Seller accepted an offer from Buyer – who was also Brokerage’s client. Brokerage also had a Representation Agreement with Buyer which stated that Buyer would pay Brokerage a commission (½ x%) of the purchase price.

At some point during the transaction Buyer assigned Buyer’s rights under the Purchase and Sale Agreement, which was fully assignable. The Assignee is an LLC who has a real estate licensee as a member of the LLC. The Assignee does not want to pay Broker the selling agent (Buyer’s side) commission and is instead claiming that the Buyer’s side commission should be paid to their licensee member. Broker questions if his Buyer side commission was forfeited when the contract was assigned.

RESPONSE:   Based upon the facts provided to the Hotline (as noted above), nothing in the transaction appears to have changed the Broker’s contractual right to obtain the full commission on the transaction. Broker procured a Buyer to purchase the property. Broker has a clear contract with Seller for the full x% commission. Broker also has a contract with the original Buyer for ½ x% commission as the Broker found Buyer the property, and Buyer entered into a Purchase and Sale Agreement that legally requires him to complete the transaction. Depending on the rules of the MLS, Broker also could conceivably be considered a cooperating brokerage under the terms of the MLS which might also entitle him to the same ½ x% commission for procuring a Buyer.

Conversely, the licensee member of the LLC did not have a written contract with any party entitling her to a commission and she did not procure a Buyer under an offer of cooperation though an MLS. She may have brought forth an Assignee to step into Buyer’s shoes but it does not appear that she procured a Buyer as that term is used in the representation agreements and the standard MLS rules.

Further, Idaho law also states:

9-508. REAL ESTATE COMMISSION CONTRACTS TO BE IN WRITING. No contract for the payment of any sum of money or thing of value, as and for a commission or reward for the finding or procuring by one person of a purchaser of real estate of another shall be valid unless the same shall be in writing, signed by the owner of such real estate, or his legal, appointed and duly qualified representative.

It is always best practice to address real estate commissions in assignment circumstances; according to the Brokerage the parties used an Assignment Agreement drafted by the parties or their legal counsel and the agreement did not address compensation or commissions.

QUESTION:   Broker entered into a RE-14 with Buyer.  Buyer met with a builder who apparently used builder’s agent to write an offer for the property.  Once Broker was made aware of the situation, she notified the listing agent that she has a Representation Agreement with Buyer.  The listing agent has allegedly refused to acknowledge Buyer is Broker’s client, under the binding RE-14 she has with the Buyer.  Further, the MLS listing stated 2% would be paid to the cooperating broker.  When Broker finally saw a copy of the offer, the RE-21 contained language that reduced the commission offered in the MLS to Seller only paying 2% to the listing brokerage and would pay nothing to the Buyer’s brokerage.  Broker questions 1) if the Purchase and Sale Agreement is the appropriate place to document commission changes and/or reductions, and 2) if the listing agent is interfering with her Representation Agreement with Buyer.

RESPONSE:   Given the facts presented to the Hotline, the Buyer and Seller agreed to a reduction in commissions from what was offered in the MLS listing when they executed the Purchase and Sale Agreement.  Commission negotiations should never take place in a Purchase and Sale Agreement because the brokerages (those entitled to commission either through contract or through MLS offers of cooperation) are not a party to the Purchase and Sale Agreement.

The MLS is:
[A] means by which authorized participants make blanket unilateral offers of compensation to other participants (acting as subagents, buyer agents, or in other agency or nonagency capacities defined by law)… Entitlement to compensation is determined by the cooperating broker’s performance as procuring cause of sale (or lease).” [NAR Handbook on Multiple Listing Policy, Page 7].

In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell [Handbook, Page 39]”

The sprit and effectiveness of the MLS would be undermined if a Listing Broker were allowed to unilaterally change the compensation offered to a cooperating brokerage once a Buyer has been procured by said brokerage.  If the MLS listed cooperating brokerage’s commission at 2%, the only way it can change is by either amending the listing or if all parties execute a written agreement; like the RE-16A.

            In response to Broker’s second question regarding interference, the RE-14 is a legally binding contract between a buyer and a brokerage.  Both Idaho law and the REALTOR® Code of Ethics have strict rules that prohibit interference with brokerage agreements:

Interference with real estate brokerage agreement prohibited. It shall be unlawful for any person, licensed or unlicensed, to interfere with the contractual relationship between a broker and a client. Communicating a company’s relocation policy or benefits to a transferring employee or consumer shall not be considered a violation of this subsection so long as the communication does not involve advice or encouragement on how to terminate or amend an existing contractual relationship between a broker and client. [Idaho Code 54-2054(4)]
Article 16 REALTOR® shall not engage in any practice or take any action inconsistent with exclusive representation or exclusive brokerage relationship agreements that other REALTOR® have with clients.  [Code of Ethics Article 16]

QUESTION:   Broker represents Seller, and Seller is under contract with a Buyer.  Seller wants to terminate the RE-16 with the brokerage.  The brokerage is willing to terminate the RE-16 as long it will still receive its commission once the property sells.  Broker questions best practices to achieve this.

RESPONSE:   Section 6 of the Seller Representation Agreement (RE-16) states in relevant part:

(C) Further, the brokerage fee is payable if the Property or any portion thereof or any interest therein is, directly or indirectly, sold, exchanged or optioned or agreed to be sold, exchanged or optioned within __________ calendar days (ninety [90] if left blank) following expiration of the term hereof to any person who has examined, been introduced to or been shown the Property during the term hereof; unless SELLER enters into a Seller Representation Agreement to market said Property with another Broker. This subsection (C) shall survive the term or termination of this Agreement unless explicitly revoked in a written document signed by Broker and Client.

The above cited language ensures the brokerage’s commission for 90 days after the expiration or termination of the RE-16 if the property is sold to a Buyer that was introduced to the property during the term of the RE-16.  However, Section 6C also states that brokerage is not entitled to a commission if Seller enters into an exclusive representation agreement with another brokerage, therefore if Seller hires a new brokerage after terminating the current representation agreement, Broker would not receive the commission. If the brokerage is willing to terminate the representation agreement, it can do so using the Broker Agreement Addendum (RE-16A), but it should not do so unless Seller and brokerage agree in writing that brokerage will still earn its commission after the agreement has been terminated.

QUESTION:   Broker represents Buyer.  Buyer made an offer but the terms were not agreeable to Seller so the offer was not accepted.  Buyer then made another offer and the parties continued to negotiate but were still unable to agree on terms.  Seller finally accepted Buyer’s third offer, which was submitted a day after the listing agent took the property off the MLS.  Broker questions if the listing agent would still need to honor the cooperating brokerage fee that was listed in the MLS.

RESPONSE:   The answer would likely be determined by the rules of the particular MLS in which the property was listed.  Since MLS rules vary throughout Idaho, the Legal Hotline cannot comment on any specific MLS; however, generally speaking, if an offer is made under the promise of cooperation, the negotiations would continue under those same terms unless it is clearly disclosed that the terms are changing.

            QUESTION:   Buyer hires Brokerage #2 to write an offer on a property.  Buyer tells Brokerage #2 that Buyer was previously working with Brokerage #1 but has terminated the Representation Agreement.  Brokerage #2 finds Buyer a property and Buyer goes under contract.  Brokerage #1 showed back up and provided a copy of a Representation Agreement with Buyer to the title company and maintains it is still a valid contract. Brokerage #2 questions if that agreement is valid even though Buyer terminated.

RESPONSE:  Whether or not the agreement between Buyer and Brokerage #1 is valid and binding is not for Brokerage #2 to decide.  Buyer will have to work that out directly with Brokerage #1. 

Given the facts presented to the Hotline, the dispute over who is owed the commission is holding up the transaction.  All Brokers involved should take care not to let the commission dispute interfere with closing.  Brokers may instruct the closing agency to hold the Buyer’s share of commissions in escrow until the two brokerages work out who is owed the commission.   

QUESTION:  Broker called the Hotline regarding the Seller Representation Agreement (RE-16). 1) Does a Seller ever have an obligation to pay commission if Seller never accepts an offer? 2) Can the Brokerage unilaterally terminate a Representation Agreement with a client?

RESPONSE:   Regarding Broker’s first question, the facts presented to the Hotline indicate that the Brokerage has presented Seller with three full-price offers but Seller has not accepted any of said offers.  Section 6(A) of the RE-16 states: 

If Broker or any person, including SELLER, procures a purchaser ready, willing and able to purchase, transfer or exchange the Property on the terms stated herein or on any other price and terms agreed to in writing, the SELLER agrees to pay a total brokerage fee of                  % of the contract or purchase price OR $                      .

            If the Brokerage representing Seller has found purchasers ready, willing and able to purchase the property, Brokerage could, in rare and limited circumstances, be entitled to their commission based on the language above even if Seller does not accept an offer.  However, it would be up to the Broker/agent to prove that they did procure purchasers which could be a lengthy and costly process. 

As to Broker’s second question, no, the Representation Agreement cannot be unilaterally canceled by either party.  The RE-16 is a valid legally binding contract that cannot be cancelled without mutual consent; it does not contain language that would allow a Seller or the Brokerage to unilaterally cancel the agreement.  The Brokerage should attempt to get Seller to agree to a mutual cancellation of the agreement.  If Seller is failing to communicate, the RE-16 Section 35 states:

COMMUNICATION: Failure of SELLER to reasonably maintain communication with BROKER is a breach of this agreement.
            Unless Seller has breached the agreement, the RE-16 cannot be unilaterally terminated.

QUESTION:  Brokerage has an exclusive Representation Agreement with a client to purchase property.  Buyers allegedly found a property and had another agent write up the offer for them.  Broker questions if the Representation Agreement is an enforceable contract and the best way to handle the potential commission dispute.

RESPONSE:  The Idaho REALTOR® Form RE-14, Buyer Representation Agreement (Exclusive Right to Represent), when properly executed, is a valid and legally binding contract.  Generally speaking, if Buyers agreed to exclusive representation with the Brokerage; having another brokerage write up an offer is likely a breach of contract.  Broker may wish to instruct the closing agency to hold the Buyer’s share of commissions in escrow until the two brokerages work out who is owed the commission.  Broker may also be able to utilize the REALTOR® arbitration program for the commission dispute.

Further, the Code of Ethics of Standards of Practice of the National Association of REALTORS® prohibits knowingly interfering with representation agreements:

Realtors® shall not engage in any practice or take any action inconsistent with exclusive representation or exclusive brokerage relationship agreements that other Realtors® have with clients.

Article 16, Code of Ethics.

If Broker believes that another REALTOR® has violated the Code of Ethics, Broker can call his local REALTOR® Association who will advise him on the procedures for filing an ethics complaint.  The Hotline does not determine or offer advice as to whether or not any particular circumstance rises to an ethics violation.  Ultimately, whether or not there has been an ethical violation will be determined by a panel of REALTORS® after hearing all the facts of any given circumstance. 

QUESTION:   Broker 1 had an active RE-16 with Seller.  Broker 2 attempted to purchase the listing from Broker 1 for a referral fee.  A referral fee agreement was never signed.  Neither Seller nor Broker 1 terminated the RE-16 and Broker 2 ended up selling the property without involvement of Broker 1.  Broker 1 questions if Broker 1 is entitled to a commission.  Broker also questions if Idaho has a law on contractual interference.

RESPONSE:   The RE-16 is an exclusive right to represent and it can only be terminated if both Seller and Broker agree.  Given the facts presented to the Hotline, Broker 1 did not agree to terminate the RE-16 with Seller, nor was he ever requested to by Seller.  Therefore, Seller would still be bound by the terms of the RE-16 with Broker 1.  The RE-16 states:

If Broker or any person, including SELLER, procures a purchaser ready, willing and able to purchase, transfer or exchange the Property on the terms stated herein or on any other price and terms agreed to in writing, the SELLER agrees to pay a total brokerage fee of                  % of the contract or purchase price OR $                      . Of this total brokerage fee,                % of the contract purchase price OR $                            will be shared with the cooperating brokerage unless otherwise agreed to in writing. The fee shall be paid in cash at closing and deducted from the seller’s proceeds on the settlement statement unless otherwise designated by the Broker in writing.

If the property sold, Broker would be entitled to the amount that the parties agreed upon when the RE-16 was executed.

In addition, the State of Idaho is one of the jurisdictions that allows recovery of damages pursuant to tortious interference with a contract.  In Idaho, the framework for a case of tortious interference is as follows:
A prima facie case of tortious interference with contract requires a plaintiff to prove:
(a) the existence of a contract; (b) knowledge of the contract on the part of the defendant; (c) intentional interference causing a breach of the contract; and (d) injury to plaintiff resulting from the breach. Idaho First Nat’l Bank v. Bliss Valley Foods, Inc., 121 Idaho 266, 283–84 (hereinafter “Bliss”) (citing Barlow v. Int’l Harvester Co., 95 Idaho 881, 893 (1974)).
Rocky Mountain Med. Mgmt., LLC v. LHP Hosp. Grp., Inc., No. 4:13-CV-00064-EJL, 2013 WL 5469890, at *6 (D. Idaho Sept. 30, 2013).
While these cases are at times hard to prove due to the causation element, under the right circumstances, a victim of tortious interference is certainly entitled to recovery under Idaho law.
            The Hotline does not get involved in disputes.  Broker may wish to talk to brokerage’s legal counsel to determine his rights in this matter.

QUESTION:   Broker has been approached by a Seller.  Seller was previously listing the same property with another brokerage but the listing agreement with Brokerage 1 has expired.  Broker questions if Seller will be liable to pay commission to Brokerage 1 if Seller enters into a Representation Agreement with his brokerage.

RESPONSE:   Section 6(C) of the Seller Representation Agreement (RE-16) states in relevant part:
[T]he brokerage fee is payable if the Property or any portion thereof or any interest therein is, directly or indirectly, sold, exchanged or optioned or agreed to be sold, exchanged or optioned within ____ calendar days (ninety [90] if left blank) following expiration of the term hereof to any person who has examined, been introduced to or been shown the Property during the term hereof; unless SELLER enters into a Seller Representation Agreement to market said Property with another Broker. (Emphasis added).

Given the facts presented to the Hotline, Seller’s Representation Agreement with Brokerage 1 has expired, and Seller has now expressed interest in entering into a Seller Representation Agreement with Brokerage 2.  The language cited above states that the brokerage fee is no longer payable if Seller enters into an exclusive right to represent with another brokerage.  Absent extraordinary circumstances, like fraud, Brokerage 1 will not be able to claim a brokerage fee from Seller.
            However, the Hotline is unaware of the provisions contained in Seller’s agreement with Brokerage 1 and cannot comment on the terms therein.  Broker may wish to advise Seller to retain private legal counsel to determine whether or not Brokerage 1 might have a right to its brokerage fee. 

QUESTION:   Broker has an agent that is representing a Buyer. In their Buyer Representation Agreement, Buyer and agent agreed that $1,000 of agent’s commission would go toward Buyer’s closing costs.  Agent included said information in the RE-21 and Broker questions if this practice is permitted.

RESPONSE:   Although highly unorthodox, there is no direct prohibition against listing commissions in the RE-21.  The practice is unusual because the RE-21 is a contract only between the Buyer and Seller.  According to the facts presented to the Hotline, agent listed her commission reduction in the RE-21 to avoid a double contract situation.  A double contract is defined as:

[T]wo (2) or more written or unwritten contracts of sale, purchase and sale agreements, loan applications, or any other agreements, one (1) of which is not made known to the prospective loan underwriter or the loan guarantor, to enable the buyer to obtain a larger loan than the true sales price would allow, or to enable the buyer to qualify for a loan that he or she otherwise could not obtain. An agreement or loan application is not made known unless it is disclosed in writing to the prospective loan underwriter or loan guarantor.

Idaho Code § 54-2004(23).

Best practices would be for agent to memorialize the commission in the Representation Agreement or some other written document with client because it is a contract between agent and client and therefore legally enforceable.  As long as a copy of the Representation Agreement or other document memorializing the agreement is sent to the lender, it would not be considered a double contract.