Last month, the National Association of REALTORS® published its 2005 Legal Scan (hereinafter, the Scan). The Legal Scan is a research project first commissioned by NAR Legal Affairs in 1996, and generated every two years thereafter, to systematically collect information on over 92 issues involving the legal liability of real estate brokers, agents and managers.[1]
One of the many important issues identified by the '05 Scan was commission disputes. According to the Scan, 41% of respondents ranked the issue in their top 3 most important current and future problems. A full 52% of those surveyed responded that there is a significant need for training on the issue. Confirming these perceptions, the Scan also found that the number of legal cases in which a commission or fee was at issue remained at the high levels found in the Association's previous Scan in 2003.[2]
Commission disputes can be treacherous for real estate agents and brokers alike. Common issues involve splitting commissions, commissions sought without written agreements, commissions sought by unlicensed persons and, of course, procuring cause disputes.[3] A small sample of recent commission dispute cases includes the following:[4]
Pennington v. Washington-III, Ltd. 2005 WL 3549480; Dec 29, 2005. Where services (identified in a Marketing Agreement) that required a real estate agent or broker's license were performed by a non-licensed party the Agreement as the alleged basis for the commission was held illegal and void.
Krogh v. Pargar, LLC. 2005 WL 3160013; Nov 29, 2005. Failure of financing contingency did not void the entire contract or broker's entitlement to a commission.
Brafa v. Christ, 915 So.2d 957, La. App. 3 Cir; Nov 2, 2005. Release executed prior to closing terminated listing agreement and thus the basis for agent's claim of entitlement to commission.
While commission disputes in these cases eventually resolved in courts of law, the majority of such disputes is resolved at hearings held by local REALTORS® associations, as well as through arbitrations. The Texas Real Estate Commission does not have the authority to settle commission disputes.
Given the current industry climate and likely softening of many markets, disputes over commissions seem likely to increase. Specifically, despite NAR's best efforts in this environment, the REALTORS® image continues to come under attack by both the federal government (DOJ v. NAR) and the national media. Recent stories by the Wall Street Journal,[5] as well as television commercials by T-Mobile and others featuring motivated realtors†as greedy and untrustworthy, will continue to embolden consumers to not only question the value of agent and broker services but, moreover, will further propel such consumers to actively dispute the validity of commissions being demanded.
Given this hostile environment and the NAR Scan's findings, prudent real estate professionals would be well advised to re-invest their time and energy into ensuring they fully understand the best practices for avoiding commission disputes. The National Association of REALTORS'® features many resources on the topic; the following is a short list:[6]
Keep in contact with your clients even if they're not currently looking at homes to avoid charges of abandonment.
Contact a cooperating broker and reach a common understanding of each broker's role as soon as you hear about any interaction between the buyer and the broker.
Ask customers early on whether they have a buyers' agency agreement with another practitioner.
Educate consumers about how real estate professionals are compensated; ignorance is often the reason behind a customer changing brokers midstream.
If someone is covering for you while you're on vacation, decide how to compensate each party for listings and sales that are finalized during that period. Put your agreement in writing, and give a copy to your broker.
One Legal Scan respondent summed up commission disputes this way: they will always be a problem, because, while we as an association talk about standards and ethics, we measure success in dollars.[7] Given today's hypercompetitive marketplace and softening of the market, as well as the media and government's assertions about the industry and the demands of today's contemporary consumer, those real estate professionals that manage to aggressively pursue profitability without sacrificing a high quality of service will be well positioned to avoid commissions disputes and the many headaches that go along with them.
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[1] 2005 NAR Legal Scan
[2] Id. at page 43, Section 2.4.1.4, Commission Disputes/Procuring Cause
[3] Procuring cause is the interplay of factors that together demonstrate that the unbroken efforts of a specific broker were responsible for the buyer making the decision to consummate the sale on terms that the seller found acceptable. In other words, a broker who is the procuring cause of a sale is a sine qua non of the sale -- the sale would not have occurred but for the broker's efforts.
[4] All cases dependent on applicable state law; cited cases presented for reference purposes, only.
[5] Broker Commissions Are The Real Component To the Real-Estate Bubble,Wall Street Journal, Monday, February 6, 2006; see also the WSJ Online Question of the Day for Monday, February 6, 2006: Are real estate agent's commissions generally justified? 84% voted No.
[6] Adopted from Stephen C. Murphy, Missouri REALTORS®; Robert Bass, Robert N. Bass Ltd., Phoenix; found at www.realtor.org.
[7] NAR 2005 Legal Scan, page 46, Section 2.4.1.4
