BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
BUYERS BEHAVING BADLY
A number of Broker Risk Management (“BRM”) clients have requested assistance with claims against buyers for failing to honor buyer representation agreements (See CAR’s Buyer Representation and Broker Compensation Agreement (“BRBC”)). The following addresses the process and concerns with regard to handling those commissions.
A BRBC is an agreement between a buyer and the real estate brokerage promising to pay the brokerage a commission if the buyer purchases a property as defined by the Agreement within a specified period of time (that time must be no longer than 90 days and may not be automatically renewed according to state law). Assuming the BRBC has valid terms (i.e., it has not expired, the property at issue was specifically defined in the Agreement) and the Agreement was exclusive, if a buyer buys a property, the buyer owes a commission to the agent. (For a detailed discussion of buyer representation requirements, see Weekly Practice Tip “Differences between the NAR Settlement Requirements and the New 2025 California Law” 11/1/24)
Recently, we have seen instances where buyers have signed more than one exclusive buyer representation agreement, either intentionally or unintentionally, creating liabilities to both brokerages. Other buyers have purchased property without advising their broker/agent, hoping to avoid the payment of a commission. The following addresses the process for collection of a commission which is validly owed to a broker/agent and not paid.
The first step in pursuing a commission is to review the BRBC and ensure it is valid. For example, confirm it has not expired and covers the property at issue. Assuming the BRBC is valid and applies to the property the buyer purchased or is purchasing, the first step is sending a demand letter to the buyer. If the property is in escrow, a demand letter can be sent to the escrow company with a request that the escrow company pay or hold the commission amount due pending a resolution of the dispute. (There is no guaranty that the escrow company will act on another broker/agent’s commission request.
If the buyer refuses to pay the commission, the next step is mediation, which is required by the BRBC. The demand letter to the buyer should explain why a commission is owed and how much is owed. This letter should be written by an attorney.
The California Association of Realtors has a mediation center, which can be utilized for mediation. Brokers can represent themselves against buyers without needing counsel. If the buyer refuses to participate, the buyer will waive the right to collect buyer’s attorney’s fees.
If the buyer declines to mediate, or the matter proceeds to mediation and is not resolved, the broker will be in a position of having to decide whether to file a lawsuit, or to initiate arbitration if the arbitration provision has been initialed by both parties.
There are two distinct disadvantages to initiating a lawsuit, including the following:
- The cost of retaining an attorney. The retainer of an attorney to litigate a case can be extremely expensive. To handle a matter through mediation, the cost is likely in the range of $10,000. If mediation is not successful and a lawsuit is filed and the case is taken through the first phase of litigation including discovery, the cost could be upwards of $25,000 or more. If a matter goes to trial, the trial budget could be in the range of $150,000 or more.
- Risk of a Buyer Cross-Complaint. There is also a risk that the buyer will assert a cross-complaint for negligence, breach of fiduciary duty or other allegations against the agent, potentially invoking the errors and omissions insurance policy. If that occurs, generally, the broker will need to tender the matter to the errors and omissions insurance company. While the insurance company will pay to defend the case, the insurance company will not pay for the prosecution to recover the commission. In addition, the agent and/or broker will be responsible for the retention (deductible). Further, any expenditure on the part of the insurance company will detrimentally affect the broker and agents as it could increase the cost of obtaining insurance in the future.
Many brokers, for these reasons, decline to initiate commission recovery actions against buyers. In many instances, the agents will request that the broker assign the commission dispute to the agent, so the agent can pursue it. While BRM has an indemnity agreement available to brokers for these purposes, brokers need to be cognizant of the fact that if an agent pursues a commission, while the agent may be paying the attorney’s fees, the risk of a cross-complaint arising remains a concern.
PRACTICE TIPS
- Before initiating a commission recovery claim, agents are advised to discuss the matter with their manager and/or broker, because under California law (1) all commissions belong to the broker not the agent; and (2) only the broker can initiate legal action to recover commissions.
- Broker Risk Management is available to write demand letters but generally will not pursue a commission without further agreement regarding handling.
- Brokers need to seriously evaluate the potential risk before allowing an agent to move forward with a commission collection action.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry but rather are intended to suggest good risk management practice