What is a Cooperating Broker Compensation Agreement?
A cooperating broker compensation agreement is a legal document used in the real estate industry. Its purpose is to document the payment agreement between a listing broker and a cooperating broker who has agreed to work on the sale of a property, typically represented by an agent. Often, the payment terms are outlined in the Multiple Listing Service that the brokers are members of. That payment will usually be shared between the brokers for that sale . A cooperating broker compensation agreement can also stipulate additional terms such as the time frame of the agreement and how any disputes will be handled. The agreement is signed by the listing broker when the property is listed by the seller and by the cooperating broker at the time the cooperating broker or firm enters into a contract with the listing broker to show the property to potential buyers. The buyer agent specific to the buyer does not sign the agreement. It is only an agreement between the listing broker and another broker or firm.
Core Elements of the Agreement
The exact composition of what is to be contained within a cooperating broker compensation agreement can vary depending on the situation and the needs of the individuals involved, but more often than not certain aspects will always be included. Generally, the percentage of the commission that the cooperating broker will receive from a real estate transaction will be described in detail and spelled out within their agreement, typically written as a percentage minus any expenses.
Usually, you will find an area dedicated to the location of the property that the agreement concerns. The property’s address, notations of whether it’s located within a development or subdivision and any other relevant descriptors are usually listed in this area.
Cooperating broker compensation agreements will usually contain a specific time frame in which they will be considered valid. These agreements usually involve one specific transaction but they sometimes can be extended to cover multiple transactions between the same two parties.
Much like the time frame, the extent of the geographical coverage of where the agreement will apply is typically spelled out. This may be limited to just the county that the property that the brokers are dealing with is located in, or it may extend to the entire state.
There are many different clauses that can make their way into a cooperating broker compensation agreement, but generally they will be designed to protect both of the parties involved.
Any costs that are accrued when trying to procure compensation as designated in the agreement can also be factored into the agreement. Certain actions that are taken as a result of the agreement can be withheld from the commission that is paid out to either broker.
Legality and Enforceability
Cooperating broker compensation agreements are commonly structured as compensation agreements among real estate brokers; as referral agreements through which title companies agree to pay referral commissions to brokers for every completed transaction where a referred client retains the services of a title company; as participating broker compensation agreements, whereby the broker undertakes to share compensation with other brokers distributing marketing materials to brokers; and as a cooperation agreement, whereby a cooperating broker agrees to cooperate with the primary broker or company in a single transaction. However, in all cases, the description of the activities covered under the agreement should be carefully circumscribed to limit potential liability.
The leading case regarding the applicability of the PAY BROKER model of the cooperating broker compensation agreement is the case of Laing v. California Title Company (1988) 206 Cal. App. 3d 427, 253 Cal. Rptr. 426. In this case, Laing, a broker, had a sales force which did not participate in MLS and would market his listings directly to end-users, without MLS participation. Laing did not agree to pay this ‘unauthorized’ MLS broker its usual five percent commission on the sale of a business opportunity. Despite the lack of the MLS broker’s participation in the sale of Laing’s listings, the case held that these actions by the MLS broker in marketing Laing’s listing were protected by the terms of the compensation agreement. Further, the case provided the additional protection that Laing could enforce the terms of the compensation agreement and obtain compensation for the services performed. Therefore, consistent with the provisions of the compensation agreement, MLS competing listings used by an MLS broker could not limit the rights of the parties to receive the higher of the fees established by the terms of the compensation agreement, or the normal fee acquired by the MLS broker, whichever is greater.
Finally, a cooperating broker compensation agreement may also involve the discussion of the compensation paid to real estate agents or salespersons. The payment of any commissions or referral fees to salespersons is subject to the real estate licensing laws of the state concerned. Almost all states prohibit such payments to unlicensed individuals or those with inactive licenses. For example, in California, a broker may not pay a commission, finders fee or other consideration to an unlicensed individual. The California Real Estate Commissioner has broadly construed this rule, not only to persons who are unlicensed, but also to those licensed persons whose licenses are inactive. The payment of any commission, finders fee or other consideration to an unlicensed or inactive salesperson is therefore prohibited.
Tips for Negotiating Favorable Terms
While just about any terms are subject to negotiation, certain aspects of cooperating broker compensation agreements are more frequently discussed. The following general guidelines may be helpful to you as a Cooperating Broker in planning compensation negotiations with other MLSs.
In addition to setting the actual amount of compensation that will be paid to a Cooperating Broker by the Listing Broker, your MLS may also establish guidelines that clarify other compensation matters such as: As you talk to other brokers about compensation in their MLS, it is also a good idea to talk about the following issues: A complete and accurate cooperating broker compensation agreement is important to understanding how to handle different commission scenarios . It is equally important that all parties involved clearly understand the terms of the agreement and the responsibilities that go along with them. Once discussions about compensation are completed, they should be put in writing as soon as possible so that everyone is fully aware of the terms or remembers what the terms are. Many times this is accomplished simply by documenting the terms agreed to in an email or text message that all parties can reference later on if needed. But, no matter how the agreement is documented, having something in writing clearly is the best way to avoid any misunderstandings. In addition, be sure to review your MLS rules to be certain you are compliant regarding the payment of commissions to cooperating brokers.
Common Issues and How to Resolve Them
Cooperating broker compensation agreements are well-intended tools designed to clarify compensation for both the listing and cooperating brokers. Unfortunately, like many tools designed with the best intentions, they can cause problems for both brokers and their clients. The primary issues that arise in conflicts over cooperating broker compensation are: 1) the percentage of the sale price that is to be paid to a specific cooperating broker; and 2) entitlement to be paid when the compensation is contingent upon the transaction closing. Both issues involve situations where the cooperating broker contends it is owed compensation in a specific amount or as a percentage of the sale price while the seller and/or listing broker contend that the compensation is owed to the cooperating broker for a lesser percentage, if at all. The percentages or amounts at issue vary greatly. In one case where we were involved, the amount in issue was $18,000 (or 1%), in another, $83,000 (or 7.5%) and in another $85,000 (or less than 1% of the sale price). Other common disputes have centered on whether a well intentioned assistant has the same rights as a licensed cooperating broker. The manner in which these disputes are resolved is usually dictated by the broker’s themselves. All major local and national real estate organizations offer varied levels of mediation services. The most streamlined and practical mechanism to resolve compensation conflicts is through mediation. Unlike litigation or arbitration, mediation is a process which seeks to resolve a dispute by negotiation and compromise. Mediation involves engaging a qualified real estate professional who listens to each party and offers practical solutions to the problem. The most experienced mediators tailor their approach to each dispute. In disputes where the disagreement is focused upon a reasonable percentage, most mediators propose a settlement near the middle of the parties’ positions. To resolve disputes concerning simple issues like the compensation of a licensed assistant, the mediator may suggest that the parties base compensation on factors such as hours worked or tasks performed. By contrast, when the parties refuse to move from their initial position, mediators employ other techniques designed to give each party options which enable them to settle their dispute. In addition to mediation techniques unique to real estate disputes, the mediators draw on many strategies to settle disputes, including: Although the parties ultimately decide what settlement terms work best for them, these mediation techniques help negotiate a favorable resolution.
Ensuring Compliance and Best Practices
To ensure compliance with cooperating broker compensation agreements, it is advisable that brokers regularly audit these agreements and ensure that their documentation and record-keeping practices are thorough. You may wish to consider performing an audit of your broker cooperation policies and cooperating broker compensation agreements every two years. These processes will help you ensure that your cooperating broker compensation agreements are up-to-date, that you are in compliance with all relevant real estate laws, and that all of your procedures are being properly documented and followed. When conducting an audit of your broker cooperation policies, you should look for any required documents that might be missing and determine what the most current version of all of your policies is. You should also check to see if these policies were distributed to all necessary employees and independent contractors and whether they were acknowledged by all necessary employees and independent contractors. Of course, when updating your broker cooperation policies, it is important to make sure that any revisions to your policies do not conflict with any of the policies of other brokers with whom you cooperate . If there are any conflicts, it is likely that you will need to renegotiate your contracts with these other brokers to resolve the conflicts and ensure your continuing cooperation. You should also periodically audit all of your current cooperating broker compensation agreements for compliance with all relevant real estate laws and regulations. In addition to state and federal laws, make sure that all of your cooperating broker compensation agreements are consistent with any MLS Rules and Regulations that may apply. If your broker cooperation policies require certain forms to be completed or documents to be completed, make sure that you routinely confirm that all of these are performed and on file. Depending on the size of your brokerage, you may want to conduct these audits quarterly, semi-annually, or annually. Given the rising popularity of screen scraping, you should also be prepared to regularly audit all of your websites and portals to make sure that they are functioning properly and ensure that your cooperating brokers are still being paid as agreed. To cover all your bases, you should make sure that you label all of your documents appropriately, keep all of your records and document retention policies up-to-date, and review these to ensure that everything is consistent with all relevant real estate laws, regulations, and your company’s internal policies.