Listings Employment by Public - Part 5 - Chapters 18-20 Flashcards
Properly include the terms for payment of your broker fee when as a buyer’s agent you prepare a purchase agreement
A fundamental rule of real estate practice for judicial enforcement of fee arrangements requires broker fee agreements to be in writing and signed by the parties responsible for payments. Without the provision, the seller’s broker has no right to a fee and the buyer’s broker has to resort to judicial inclusion of an implied promise to collect a fee from their breaching client.
A common flaw in the construction of many purchase agreements is the placement of the broker fee provisions. Broker fee provisions in a purchase agreement are to be placed BOTH above the buyer’s signature and “within the four corners of the contract.”
When the buyer’s purchase agreement references a separate fee agreement entered into by the seller and the seller’s agent, the buyer’s offer to purchase the property contains an Implied Promise by the buyer to their broker not to wrongfully interfere with the payment of the broker fee. On the buyer’s breach, the implied promise obligates the buyer to pay their broker the fee the seller was to pay on closing.
However, due to the lack of a fee provision in the buyers purchase agreement, the seller’s broker has no right to collect a fee from the breaching buyer. The seller’s broker lacks:
- a client relationship with the buyer which carries with it the implied promise to avoid interference with the payment of an expected fee or
- a written agreement signed by the buyer to pay the fee in lieu of the seller on the buyers breach.
Protect your broker fee when acting as the buyer’s agent if the buyer breaches their purchase agreement
When a buyer and seller both sign an agreement with a provision calling for the payment of broker fees, the brokers are considered third party beneficiaries due to the included fee provision.
When the fee provision is separate, located outside the buyer’s offer and agreed to only by the seller and the brokers, the purchase agreement is closed without calling for payment of the fee. Thus, the brokers are left with a separate claim against the seller for breach of the fee agreement entered into by the seller and their broker, the buyer not having agreed to the payment.
implied promise
An IMPLIED PROMISE is the presumption that a buyer or seller entering into an agreement will in good faith fulfill their obligation to close the transaction.
In the case of a buyer’s broker, they can claim that a signed purchase agreement is subject to an IMPLIED PROMISE from the buyer to close the transaction so their broker receives the fee they earned.
Question –Is the buyer’s broker able to collect a fee from a defaulting buyer who never agreed, verbally or in writing, to pay any fees?
Yes! The buyer orally retained the services of the broker. Although at no time did the buyer verbally or in writing promise to pay a fee if the agent located a suitable property for the buyer to purchase, their signed agreement is subject to an implied promise from the buyer to close the transaction. In the above example, on entering into a purchase agreement the buyer knew their agent’s broker was to receive a fee on closing from someone – either the seller or the seller’s broker – though the buyer had promised nothing. Here the buyer’s offer to purchase the property contains and IMPLIED PROMISE by the buyer to their broker, arising out of the principal/agent relationship, not to wrongfully interfere with the payment of the broker fee. The implied promise, as though written into the body of the buyer’s offer – which it should have been to avoid the dispute but was not – obligates the buyer to pay their broker the fee the seller was to pay on closing.
separate fee agreement
A SEPARATE FEE AGREEMENT is an agreement between the seller and the seller’s broker in a sales transaction, separate from the buyers purchase agreement offer, that obligates the seller to pay a broker fee to their agent.
When the seller signs this acceptance provision and the separate fee agreement, depending on the terms of the fee agreement, the seller agrees, directly or indirectly, to pay both their broker and the buyer’s broker fee when the sale closes.
third party beneficiary
A THIRD PARTY BENEFICIARY is a person for whose benefit to other person’s place a provision in agreement, such as a provision for payment of broker fees.
Instruct an escrow officer on broker fee provisions to be mutually agreed to by a buyer and seller to prevent either from acting alone to modify or cancel the fee and close escrow
The best protection a broker has against cancellation, revocation or alteration of the broker fee instructions is to dictate that escrow prepare MUTUAL INSTRUCTIONS for payment of the fee. Here, the signed agreement for the seller to pay the broker fee is entered into and signed by both the buyer and the seller.
Mutual instructions need to call for any change in the fee provision agreed to by the seller and the buyer to be subject to the Brokers approval. Thus, the broker locks in the payment of their fee by triangulation, if Escrow in fact closes. No buyer or seller can intervene with the fee payment and still close escrow, the entire point of mutual instructions.
Conversely, unilateral fee instructions give the seller the sole and absolute ability to cancel, revoke or alter the broker fee instructions and still close escrow.
Unless altered, fee provisions in purchase agreements set a fixed dollar or calculable dollar amount which is payable by the seller and due on the close of escrow. Escrow instructions are drawn to provide for the payment of this agreed to fee.
Understand a contingency fee provision merely designates the time for payment of a fee already earned
The contingency fee provision in the purchase agreement and the escrow instructions merely designate the time for payment of a fee already earned. The contingency does not defeat the brokers right to compensation they have earned simply because the event allowing escrow to pay the fee has not occurred. It is the sellers unexcused failure to perform on the purchase agreement and close escrow that interfered with the payment of the earned fee which permits the broker to collect from the seller.
In a listing agreement, a broker and seller are able to agree to any legally enforceable condition which needs to first occur or be satisfied before the broker earns their fee. Conditions include locating a ready willing and able buyer to purchase on the listed terms or any other terms of an offer accepted by the seller. When the condition for earning the fee occurs as called for in the listing, such as the seller’s acceptance of an offer, the fee is immediately due and payable to the broker. Now.
However, most purchase agreements used to write up a buyer’s offer include a boilerplate contingency-fee provision. The wording of the provision shifts the time for payment of the fee – the broker has already earned it as agreed in the listing agreement – from the date of acceptance of the purchase agreement offer, shifting to the time of closing.
Recover your broker fee from a seller who wrongfully interferes with your written or oral fee agreement with a buyer
An oral broker fee agreement by an agent and a buyer or seller on the purchase or sale of property is unenforceable against the buyer or seller verbally promising to pay the fee, unless the oral fee arrangement is later somehow formalized in a writing signed by the buyer or seller.
However, when the buyer has agreed to some arrangement for payment of a broker fee, either by a signed writing or by an oral agreement, and the seller knowingly interferes with that written or oral arrangement by inducing the buyer to breach their promise, the seller owes the broker the fee agreed to by the buyer.
contingency fee provision
A CONTINGENCY FEE PROVISION is a provision in purchase agreements and escrow instructions calling for a specific event to occur or act to be performed before the broker fee is payable.
Fee Provisions in a purchase agreement and escrow instructions typically State the fee earned is payable out of the sales proceeds do a seller on the close of escrow, called a Contingency Fee Provision. However, escrows do not always close. Thus, a broker fee which has been earned is not always paid. Nonetheless, the contingency fee is due to the broker when the sellers (or buyers) wrongful conduct causes the fee not to be paid, even when escrow does not close.
exclusive right to buy listing agreement
An EXCLUSIVE RIGHT TO BUY LISTING AGREEMENT is a written employment agreement by a broker and prospective buyer of real estate employing and entitling the broker to a fee when property is purchased during the listing period.
unilateral fee instructions
UNILATERAL FEE INSTRUCTIONS are instructions signed by only the seller which authorizes escrow to pay the broker fee from their net proceeds of the sale.
Of all the various fee arrangements available to Brokers for payment of their fees, the unilateral fee instructions (signed only by the seller) leave the Brokers with the least Assurance the fee will be paid on close of escrow. When unilateral instructions are canceled, no conflict arises to interfere with the escrow officers ability to close escrow under the mutual instructions by the buyer and the seller.
For example, if a seller cancels their unilateral fee instructions, escrow has to close and pay all net proceeds to the seller – including funds originally intended for payment of the broker fee. Thus, no funds remain in escrow as a source of recovery by the brokers.
Understand the conduct permitted of a finder
A finder is someone who identifies and refers a potential real estate client or participant to a broker, agent or principal in exchange for a fee.
Limitations are placed on the conduct of a finder. A finder lacks legal authority to participate in any aspect of property information dissemination or other transactional negotiations.
Licensed brokers and sales agents employed by principles owe fiduciary duties to the principles they represent. However, an unlicensed finder has no such fiduciary duty and does not act in the same capacity as a license agent or broker.
The employment of unlicensed finders/locators of buyers and sellers is one method a broker or their agents may use to extend business to bring earnings to a level sufficient to sustain the broker and agent sought-after standard of living.
The Real Estate Settlement Procedures Act (RESPA) prohibits brokers, with two major exceptions, from giving or accepting a referral fee if the broker or their agent is already acting as a transaction agent in the sale of a 124 unit residential property which is being funded by a PURCHASE ASSIST, FEDERALLY-RELATED MORTGAGE.
Distinguish the two exceptions under which referral fees are allowed under the real estate Settlement Procedures Act (RESPA)
Two Real Estate Settlement Procedures Act (RESPA) exceptions go to the heart of sourcing new clientele and sharing fees by brokers:
- referral fees paid to or received from other brokers, known as HORIZONTAL disbursement from one broker to another, but only if neither broker is involved as a mortgage broker or lender in the home sale transaction and
- fees paid by the broker to the broker-employed licensed sales agents or unlicensed finders, known as VERTICAL disbursement within the broker’s office, not paid to providers or third parties connected to or to be connected to a resulting home sale transaction.
While both of these exceptions to RESPA permit payment of fees under federal law, DRE regulations limit the conduct of these individuals when actually rendering services for fee permitted by RESPA.
While the RESPA exceptions allow fee splitting activity, DRE regulations require fee-splitting to be limited exclusively to:
- payments between brokers (who then may split the fee vertically with agent they employ) or
- payments by a broker to their employees, licensed or unlicensed
To satisfy RESPA, the employment of a finder must be under an agreement where the employee/finder is obligated to report to the broker every prospect located of the sort the broker is looking for. Finders are also entitled to a fee for referrals under RESPA, depending on the type of business relationship they have to the broker or agent.
Three classes of finders with different expectations for a referral fee exist under RESPA:
- A friend or past customer type of unlicensed finder who is NOT under contract and that’s NOT employed by a broker is NOT entitled to a finder’s fee when the transaction contemplated is RESPA controlled. If RESPA did not control, this type of finder would be entitled to a fee under California law if agreed to by a broker.
- A bona fide employee of a broker, classified as financial services representatives (FSRs), is not barred from collecting a fee or salary from their employer broker since employed individuals are exceptions to RESPA
- A person who sells lead lists is also able to legally collect a fee under both RESPA and non RESPA transactions. Lead lists are considered goods and are perfectly legal in California, as well as under the RESPA exception for goods and services actually furnished.
fee-splitting
FEE SPLITTING is when fees made to a broker are split vertically with employed agents or split horizontally among other brokers. While RESPA exceptions allow fee splitting activity, DRE regulations require fee-splitting to be limited exclusively to:
- payments between brokers – who then may split the fee vertically with agents they employ or
- payments by a broker to their employees, licensed or unlicensed
fiduciary duty
FIDUCIARY DUTY is the duty owed by an agent to act in the highest good faith toward their client and not to obtain any advantage over the client by the slightest misrepresentation, concealment, duress or undue influence. Licensed Brokers and sales agents employed by principles owe fiduciary duties to the principles they represent. Fiduciary duties require licensees to perform on behalf of their clients with the utmost care and diligence. —Note— an unlicensed finder has no such fiduciary duty and does not act in the same capacity as a licensed agent or broker.
