For many years it has been a standard practice to 'nail down' the commission
obligations (who will pay how much to whom) in the same document that served
as a purchase agreement between buyer and seller. That practice is about to
come to an end, and many agents will be discomforted by the change. They
shouldn't be.
The recently introduced standard purchase contract produced by the California
Association of Realtors® (CAR) does not provide a space where it can be specified
how much commission (either as a percentage or a fixed number) each agent is to
receive. The contract, which is effective now and will be exclusively supported
as of Dec. 31, mentions brokerage compensation only by referring to other agreements.
In a typical scenario (there simply is not room here to discuss variations) the
seller is represented by a listing broker and another agent, commonly referred
to as the 'cooperating broker', represents the buyer. The seller's agent will
have already contracted, through the listing agreement, to receive a certain
commission amount for selling the property. That amount, usually expressed as a
percentage of the purchase price, will vary from case to case. For our example
let us stipulate that it is 7% of the purchase price.
The listing broker will then enter the property into the multiple listing service
(MLS) database, and in so doing will offer a commission amount to potential
cooperating brokers for bringing a buyer. That is, he will share his commission.
In our example the listing broker might - as a special incentive - have offered 4% to
potential cooperating brokers. Or he might have offered 3˝%, or 2%, whatever. (The
standard listing contract calls for the listing broker to tell the seller how much he
will offer to cooperating brokers.)
The new purchase contract recognizes this practice and defers to it. It says simply,
"…Seller agrees to pay compensation to Broker as specified in a separate written
agreement [i.e. the listing contract] between Seller and Broker."
What about the cooperating broker? It notes that the listing broker agrees to pay
the cooperating broker the amount specified in the MLS, if the cooperating broker
is a member of the MLS, or a reciprocal MLS. If, as sometimes happens, the buyer
is represented by a broker who is not an MLS member, then that broker will need to
have negotiated a commission-sharing agreement with the listing broker prior to
presenting the offer to purchase.
The point is: in the vast majority of cases commissions and commission-sharing
agreements have already been specified, and there is no need to reiterate them or to
reopen negotiations about them in the purchase contract. The purchase contract is a
document between buyer and seller, and brokers are not a party to it.
As noted, many agents will no doubt feel uncomfortable about this. Some will think
that removing commission language from the purchase contract will somehow lessen their
ability to enforce commission and commission-sharing agreements. Such concern is
understandable, but misplaced. Commission specifications in purchase agreements weren't
legally enforceable anyway. That is because purchase contracts lack the requisite
language, in ten-point bold type, telling principals that commissions are negotiable.
Bob Hunt is a CAR director, and a former chairman of its Standard Forms Committee. He
is manager at the San Clemente office of RE/MAX Real Estate Services. His email address
is scbhunt@aol.com.
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