What is a Real Estate Commission Agreement?
Real estate commission agreements take various forms, but the most common is the listing agreement. This is the agreement that a seller signs with a broker or real estate agent to market a piece of real estate on the seller’s behalf. Generally speaking, the real estate broker will then enter into a cooperation agreement with the buyer’s agent. The commission agreement will set out the rights and obligations of the parties with respect to payment of a commission, including the percentage and the timing of payment. Although the amount of the commission charged by real estate agents has increased in recent years, 5% of the purchase price of the property is still the norm in Texas.
A commission agreement is generally enforceable, even if it is not in writing. If an agent or broker provides value to the buyer or seller in a commercial or residential transaction, they are entitled to a commission . In fact, these agreements do not always require even a written agreement; however, the agreement must be express contract that sets out the parties’ intent to formalize their employer/employee relationship. A verbal or handshake commission agreement can be enforceable if all elements of an express contract are established including acceptance (mutual consent) and consideration (something of value). It is wise to obtain a written commission agreement simply to eliminate any doubt.
Under these commission agreements, the broker/buyer’s agent generally has the right to commission for a certain number of days after closing. The date of closing itself is the most valuable date to brokers because their commissions are typically triggered upon closing and not when the contract is signed or the deal involves other paperwork or contingencies to be cleared.
Essential Elements of a Commission Agreement
The essential elements of a real estate commission agreement can vary from transaction to transaction. However, there are some things that every good commission agreement should have:
Parties to Agreement
Most commission agreements will list the parties – the licensed real estate professional and the consumer party to the agreement. In Michigan, commission agreements are almost always with a real estate broker, as opposed to the licensed real estate agent. The parties may also agree to appoint a specific sales associate to be the primary/contact person in the agreement, with the remainder of the terms set forth typically between the broker and the consumer.
The Broker is the Party Entitled to Commission
In Michigan, it is imperative that the consumer understands the party entitled to receive the commission. It is the broker, not the individual agent. Leaving this term out of the agreement positively invites confusion or worse. Nothing is worse than having a closing and have someone tell you that the commission cannot be paid because the individual recipient no longer works for the broker. Or, even worse, that the individual broker or salesperson was not licensed at the time of the agreement or the closing. It is best for a commission agreement to specify the name of the person entitled to the commission (whether the individual agent or broker), and require that if that person is no longer employed, the commission should be paid directly to the broker.
The Commission Amount
The commission dollar amount or the percentage of the purchase price should be clear in the agreement. The commission amount should also be clearly listed for all expected scenarios in the transaction (e.g., if the property sells/leases, subleases, if the offer is accepted but then falls through, etc.). In addition, if the agreement requires the seller to pay a different commission if the buyer is not represented by an agent, then this should be spelled out clearly.
The Timing of the Payment
When is the day the commission should be paid? At closing? Within 24 hours of funding? Upon mutual acceptance? When the offer is submitted? Upon contingency removal? Does this change if there is an appraisal or financing contingency? For an offer proposal for the sale or lease, do you owe a commission if the offer fails? The timing of the commission payment should be clearly set forth in the commission agreement.
The Earned Commission
A commission can be earned in a variety of ways. For example, if an offer is made, and earnest money is delivered with that offer, but the offer does not become a binding contract, does the broker still get paid? Is there a fee for presenting the offer? Must the buyer be credit approved on a sale? Is a purchase agreement required? Must the buyer deliver a deposit with a lease? Must the conditions be satisfied on appraisal? Must the deal close? Does it matter if the seller refuses to allow showings? Does it matter if the buyer backs out after an inspection? How about if the buyer made a change to the offer after a counter-offer and the seller accedes to that change? Does it matter what the reason is for the failed transaction? Is the reason relevant if the seller refuses to make the repairs or the buyer makes unreasonable repair requests, if the buyer cannot secure financing on their own, or if there are legal impediments to the transaction? Does it matter if another agent sells the property?
The language around earned commissions can make or break the commission agreement. The work must match the pay, and the expectations must be clear.
Commission Rate Negotiations
It is not uncommon to find parties that are represented by counsel agree to a lesser commission rate then they might otherwise be obligated to pay had they been unrepresented or had they not negotiated the commission rate at all. It is important to know that while a seller generally has more direct leverage in negotiating the commission rate upfront, a buyer also can be impactful in changing or challenging a commission rate, if warranted. Anticipating that there may be a dispute over the amount of the commission in the future, many brokers will attempt to have in writing a buyer’s agreement to the commission rate paid by their purchaser clients. In addition depending on how the language is worded and the conditions for payment are set up, a broker may only be entitled to the lesser of the agreed rate between the buyer and the broker or the greater of the two rates when (as described above) the seller and buyer have different commission rates to pay their respective real estate brokers.
There are many factors that can be taken into consideration when negotiating a commission rate. A seller may be willing to negotiate a lower commission rate if a real estate agent will be representing both the buyer and the seller to the transaction (commonly known as dual agency). An agent that has permission to be a dual agent, may then be able to provide incentives to the buyer or seller in order to facilitate the sale (for example, by offering the other agent a split of the commission in order to provide the same net effect of a lower commission rate to the party paying the greater percentage of the fee, and thus, the potential for obtaining a lower price for the property).
Another example would be that an agent may be willing to negotiate a lower percentage of the commission rate when purchasing a second home or a foreclosure where the commission rate is generally greater.
In any case, it is important in negotiating a lower rate, that professional expectations regarding the role of the agent are articulated prior to signing the agreement.
Legal Considerations and Compliance
In addition to the elements of a real estate commission agreement discussed above, it is vital that the agreement be in compliance with other applicable laws. In some instances, the failure to fulfill these statutory requirements may be fatal to a real estate broker’s commission right. One of the most important requirements for a real estate commission agreement is that it must be in writing, and signed by the owner. Moreover, most states require that the agreement must include certain key terms, such as the property description and other specific information (which may vary by state). However, some important exemptions are available, including the "justifiable reliance" doctrine, wherein a real estate broker may enforce an unwritten commission contract based on evidence that it was reasonable for the broker to rely upon its belief that it would be paid so long as the contract is enforceable in some form. Further complicating compliance with real estate commission agreements is the fact that certain states treat agreements in which the primary duties of the broker are merely stated as the introduction of buyers to sellers and the preparation of the purchase contracts as sales contracts, so that the broker for all intents and purposes becomes a principal rather than a broker.
In a recent case where, under the applicable statute, the broker was precluded from recovering any compensation from the seller because the contract was not in writing, the court emphasized the fact that the parties’ relationship was established through multiple written agreements, and that were it not for the failure of the owner to sign the final agreement, it would have been binding . As a result, because all of the written documents were ultimately related to the same transaction, the court required the owner to pay the broker a calculated commission since it was reduced to writing and signed by the relevant parties. However, while the "other writings" doctrine may avoid the pitfalls of the general statute of frauds, it does not apply where, (1) reliance was unreasonable; (2) where in some states the agreement does not contain a heads of agreement (when only a heads of agreement is signed); or (3) where the final agreement is contrary to the initial agreement. Courts generally look favorably upon reliance of the broker in these situations where there was at least an attempt on the part of both parties to agree on terms for the sale of the property.
Finally, in addition to statutory requirements, a real estate broker must ensure that he or she fulfills all ethical and fiduciary requirements of the profession throughout the process. While certain accepted industry practices of real estate brokers are not legally binding, the Texas Supreme Court has held that the duty of a broker is to use "that degree of diligence as will be expected of a person acting in good faith, and exercising reasonable business judgment, in the protection of his own property rights".
Disputes and Resolutions
Although many commission agreements are properly thought out and written, misunderstandings can and do occur which lead to disputes between the parties. The following are some of the more common disputes that have arisen with commission agreements: a. The seller feels that he is being pursued by both the listing broker and another broker who is also claiming to be representing the seller in the same transaction. Resolution. If the seller did not sign a listing agreement with either broker, he cannot be compelled to pay a commission to either broker. If the seller executed two or more listing agreements with respect to the same property given to two or more different brokers, he is obligated to pay the broker(s) whose contracts serve as the producing cause to the sale or rental. A plaintiff must demonstrate that but for the efforts of the broker, the sale would not have been consummated. See Stanley v. Boggs, 632 So. 2d 624 (Fla. 5th DCA 1994). b. The seller claims that the listing broker told other brokers and potential buyers that the property was "under contract" when no such contract was signed. Resolution. A salesperson cannot directly negotiate a sale on behalf of the principal without written authority of the principal. See XX North Condo. Ass’n, Inc. v. Diversified Consultants, Inc., 725 So. 2d 1108. (Fla. 3d DCA 1999). Where a licensed salesperson/agent has no authority to enter into a contract with the buyer, the seller cannot be charged with a commission. c. The seller enters into a listing agreement with a broker but sells the property to a purchaser who had already inspected the property prior to entering into the listing agreement. Resolution. In such instance the seller would have no obligation to compensate the broker. The listing agreement should contain an "exemptions" clause which excepts the payment of a commission if the buyer is one with whom the seller has already negotiated a contract, or "is otherwise prospectively involved in the purchase of the Property at the time this Agreement becomes effective …" The foregoing is an illustrative nonexclusive list of the more common disputes with respect to the terms of a real estate commission agreement. It is recommended that any owner who intends to list property for sale seek the advice of a real estate attorney to eliminate, or at least limit any such disputes.
Real Estate Best Practices
When negotiating a real estate transaction, the parties must decide how much the real estate broker will be paid and at what point in the transaction the broker will receive payment. The listing agreement defines these terms, which may be negotiated with the client or customer, but in order to receive the fees mentioned in the listing agreement, it is essential an agent or broker have a legally binding listing agreement in place before acting as an agent to either party, for example, showing properties to a potential buyer .
As a result, a broker or agent should:
- Carefully review and understand the provisions of any listing agreement to which they are a signatory;
- Ensure the proper form is used and each section of the document is being fulfilled in accordance with the expectations of the parties;
- Ensure the language of the listing agreement is clear and unambiguous; and
- Ensure listing agreements are signed.
Importantly, although one or both parties may breach the agreement, a commission agreement must be performed before either party can bring a breach of contract action to compel performance or seek damages.