Copyright 1998 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.
Introduction
Occasionally a prospective cooperating broker is dissatisfied with the listing broker's MLS offer of compensation and wishes to increase the amount of commission that he/she will receive. This Legal Brief will address the question of whether it is permissible and enforceable for a cooperating broker to attempt to modify the offer of compensation. The following is a common scenario that will be discussed in a Question and Answer format: Listing broker from XYZ Realty offers 2% to a cooperating broker through the MLS. The prospective selling broker from ABC Realty is unhappy with this offer of compensation and inserts "3%" in the broker compensation paragraph of the offer that is signed by the buyer. The listing office presents the offer to the seller and the seller signs the buyer's offer. No mention is made about the change in compensation. Escrow closes and the selling broker claims he/she is entitled to 3% rather than the 2% offered through the MLS. The listing broker insists that regardless of selling broker's attempt to modify the compensation, the selling broker is only entitled to 2%.
Q 1. Can a selling broker modify a listing broker¹s MLS offer of compensation by modifying the offer of compensation in the buyer¹s offer to purchase?
A No. Such a modification violates both the MLS Model Rules and the N.A.R. Code of Ethics.
Q 2. What provision of the MLS Model Rules is violated by such action?
A MLS Model Rule 9.5 states that a cooperating broker shall not use the terms of an offer to purchase to attempt to modify the listing broker¹s offer of compensation nor make the submission of an executed offer to purchase contingent on the listing broker¹s agreement to modify the offer of compensation. However, failure of a cooperating broker to comply with this rule shall not relieve a listing broker of the obligation to submit all offers to the seller as required by California law.
Q 3. What provision of the N.A.R. Code of Ethics is violated by such action?
A Article 16 states that REALTORS® shall not engage in any practice or take any action inconsistent with the agency or other exclusive relationship recognized by law that other REALTORS® have with clients. Standard of Practice 16-16 provides guidance regarding interpretation of this article in the context being discussed. It reiterates the language contained in MLS Model Rule 9.5 above and adds that the prohibited conduct also applies to the lease context. In other words, under the Code of Ethics, REALTORS® may not use the terms of an offer to purchase/lease to attempt to modify the listing broker¹s offer of compensation nor make the submission of an executed offer to purchase/lease contingent on the listing broker¹s agreement to modify the offer of compensation.
Q 4. If, in violation of the above rules, the cooperating broker submits such an offer, must the listing broker present the offer to the seller?
A Yes. The listing broker has an obligation to present all offers to the seller.
Q 5. Despite the violation of the MLS Model Rules and N.A.R. Code of Ethics, if such an offer is accepted, can the selling broker legally enforce the purchase contract against the seller since he/she agreed to pay 3% commission in the broker compensation paragraph?
A No. The purchase contract is a contract entered into between buyer and seller. The selling broker is not a principal to the contract and, therefore, does not have the right to enforce terms that were agreed to between buyer and seller. The C.A.R. purchase contract specifically states that real estate brokers are not parties to the agreement between buyer and seller. Rather, the selling broker's right to compensation is based on a contractual relationship with the listing broker. It is the MLS offer of compensation from the listing broker that the selling broker has accepted and can enforce. (One California case did allow the selling broker to enforce this contract and collect the commission from the seller, finding that the broker was a third party beneficiary of the contract entered into between buyer and seller. However, this would not be the likely result in most situations).
Q 6. In addition, doesn¹t California law require certain language to be included in any contract that initially establishes or increases the compensation to be paid to a real estate licensee for the sale of residential real property containing not more than four units or for the sale of a mobilehome?
A Yes. The California Business and Professions Code requires that the following language be included in not less than 10-point boldface type immediately preceding any provision of an agreement that initially establishes or increases such compensation of the licensee: Notice: The amount or rate of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiated between the seller and broker. This language is not included in the C.A.R. purchase contract. Since the broker compensation paragraph is the initial agreement whereby the seller is agreeing to compensate the selling broker, the absence of the "notice" language is another reason, in addition to the fact that the selling broker is not a principal to the purchase contract, that the selling broker cannot recover the increased compensation from the seller.
Q 7. If the listing broker leads a selling broker to believe that this modification is agreeable to him, can a selling broker insist on receipt of the 3% from the listing broker?
A Maybe. Since an oral agreement to split a commission is enforceable, the selling broker could be entitled to the 3% commission if he/she can demonstrate that the listing broker agreed to this increased amount. Facts demonstrating the selling broker's detrimental reliance upon the listing broker's words and actions would bolster the selling brokerÕs claim to the 3% from the listing broker.
Q 8. Since it is not appropriate for a selling broker to modify the compensation offered through the MLS by way of the purchase contract, how should a selling broker who desires a higher percentage negotiate the increase?
A Such negotiation should be done before presenting an offer. The selling broker should contact the listing broker and request a different split than that offered through the MLS. He could even ask the listing broker to inquire whether the seller is willing to increase the total compensation being paid. Alternatively, the broker could enter into a buyer/broker agreement that would allow him/her to collect the differential between the MLS offer of compensation and the desired percentage directly from his/her buyer.
Q 9. Where can I get more information?
A This and other Legal Q&As, Legal Briefs, and Memoranda are distributed automatically to Risk Management Program subscribers and local Associations/Boards of REALTORS®. For information on the Risk Management Program, call 213.739.8227. C.A.R. members may also obtain a copy through the Member Legal Hotline by calling 213.739.8282.
In addition, many of these items are available through CARFAX, C.A.R.¹s fax-on-demand system. CARFAX items are available at no charge to C.A.R. members. To access CARFAX, call 213.739.8329 and request the CARFAX catalogue.
Readers who require specific advice should review the facts with an attorney. C.A.R. members with questions may contact the Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 A.M. to 6:00 P.M. C.A.R. members who are broker-owners, office managers, Designated REALTORS®, or Risk Management Program Subscribers may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail their questions to the Member Legal Hotline at 213.480.7724 or legal_hotline@car.org. Letters concerning this topic may be addressed to:
California Association of REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, California 90020
The information contained herein is believed accurate as of September 22, 1998. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.