BROKERAGE COMMISSION ISSUES: TWO CASES

I. Commission-Split Provisions In Sales Contracts

Suppose you are a real estate agent with a customer who wishes to purchase a house which is the subject of an exclusive listing contract between the seller and another firm. Although the listing firm is willing to pay a three percent sales commission to cooperating brokers, your firm wants four percent. Question: Can you prepare an offer for your customer which includes a provision requiring the listing firm to pay your firm a four percent commission? What about a provision requiring the seller to pay your firm a four percent commission? The answer in both cases is "No."

Generally, commission agreements between real estate firms and property owners should be contained in formalized written listing contracts. Any further arrangement providing for the listing firm to share its commission with cooperating brokers 15 solely within the discretion of the listing firm and subject to negotiation between the listing and cooperating firms. Buyers and sellers should not be involved in such negotiations, nor should a buyer's offer to purchase be used as a device to acquire a portion of the listing firm's sales commission.

The function of the sales contract is to memorialize the transaction between the parties—the buyer and seller. Neither the listing firm nor the selling firm nor any agent involved in the transaction is a "party" to the contract. Inserting a commission-sharing provision in a sales contract forces the contract to govern a situation which it was never intended to address. It could jeopardize the entire transaction between the buyer and seller or cause it to be restructured in a way which is not advantageous to the parties.

By inserting a commission-split provision into the contract between the buyer and seller, agents could lose sight of their agency duties and seek to promote their own interests over those of the seller. Real estate brokers and salesmen must constantly be aware that the agency relationship under which all licensees operate dictates certain behavior. The listing agent has a direct agency relationship with the seller under which he owes to the seller duties of loyalty and good faith dealing, among other duties. And cooperating agents, as subagents of the seller (in the typical transaction), owe the seller the same agency duties. However, the cooperating broker is directed by the listing broker in the performance of his duties and is compensated by him; therefore, their commission-split arrangement should be separate from the sales contract.

II. Commission Payments To Salesmen

The question has been raised whether a "bonus" offered to a salesman by a seller or a listing broker is considered to be a "commission or valuable consideration" and whether such a bonus can be paid directly to a salesman by a seller or a listing broker who is not the salesman's broker-in-charge.

A long-standing principle of North Carolina's Real Estate License Law (G.S. 93A) is that in order to engage in the real estate business, a salesman must be supervised by a broker. A licensed salesman's work is in the nature of an apprenticeship; therefore, the salesman must be supervised by one who has demonstrated a superior knowledge of real estate principles and practices.

One of the key methods which the License Law employs to ensure that salesmen are being properly supervised is to prescribe the procedure by which they are compensated. Section 93A-6(a)(5) of the License Law provides that salesmen may (after a hearing) be reprimanded or censured, or have their licenses suspended or revoked if they are found to have "accept[ed] a commission or valuable consideration as a real estate salesman for the performance of any acts [which require a real estate license],from any person except the licensed broker toy whom he is employed. " (Emphasis added). A salesman accepting compensation from someone other than his broker-in-charge would also violate Section 93A-6(a)(15) of the License Law and Commission Rule 21 NCAC 58A .0506 regarding supervision of salesmen. Similarly, the salesman's broker-in-charge can be disciplined for failure to properly supervise the salesman if he allows the salesman to accept direct payment of a brokerage fee or commission from other persons. Additionally, a broker-in-charge who pays a brokerage fee or commission directly to a salesman supervised by another broker-in-charge violates Section 93A-6(a)(9) of the License Law.

Especially in "soft" real estate markets, when properties are slower to sell and business becomes more competitive, sellers and listing agents are inclined to offer bonuses to selling agents to promote their properties. This bonus may be in the form of cash or something other than money (dinner for two, tickets to a Broadway show, a new BMW, etc.). Apparently there is a misconception in the industry that these "non-cash" prizes or bonuses are not commissions, but a review of the License Law proves this theory" wrong.

The License Law is triggered whenever a person receives or expects to receive money, a gift, a prize, or any other valuable consideration for performing acts or services which require a real estate license. Put another way, compensation in any form is considered to be the same as a regular commission if it is paid or promised to a person for using his real estate license.

As for payment of a bonus or prize to a salesman by someone other than the salesman's broker-in-charge, this is prohibited by the statutory and rule provisions previously cited. The following examples may help to clarify this matter.

Assume that a listing company is offering a new BMW to any agent who sells one

of its specified listings and whose name is chosen at a drawing. Assume also that the lucky agent who sold one of the specified properties and who won the drawing is a salesman employed by another firm. Can the listing company's broker-in-charge have the car title transferred directly to the salesman rather than to the salesman's broker-in-charge? The answer is "NO."

As another example, assume that a developer (who does not hold a real estate license) is aggressively marketing a new subdivision. As an extra incentive, the developer offers a trip to Europe to any agent who sells a particular house in the subdivision. If a licensed salesman sells the house, can the developer award the trip directly to the salesman? The answer is again "NO." If a developer were to award such prizes to salesmen, the Real Estate Commission would advise the developer to discontinue awarding the prizes directly to salesmen. Should the developer refuse to comply with this request, then the Commission could seek legal redress in the form of an injunction or even refer the matter to the District Attorney for criminal prosecution.

By incorporating in the License Law and the Commission's Rules these provisions governing the procedure for compensating salesmen, it was not the intent of the General Assembly or the Real Estate Commission to interfere with or otherwise curb the ability of property owners to expedite the sale of their properties. Rather, these provisions are designed and intended to better ensure that the activities of real estate salesmen are being adequately supervised by their broker-in-charge.

To avoid misunderstandings, controversy, disputes, and possible disciplinary action by the Real Estate Commission, brokers-in-charge and their salesmen are advised to enter into mutually agreeable arrangements providing for the division and payment of fees and any other compensation earned, including any non-cash bonuses or sales incentives offered by sellers and co-brokers.