Agents moving from one brokerage to another is common practice. However, there are significant risks if the agent’s pending listings and transactions are not handled properly.
Consider the following scenario:
Agent is representing a buyer in a transaction. Midway through the transaction, the agent leaves her brokerage and joins another. At the time of the departure, disclosures had been provided by the seller and the buyer was midway through his inspections. No contingencies had been removed. The agent’s former broker retained the file, but the agent continued to work on the transaction at her new brokerage. She used her email address at her new brokerage and forms with new broker’s name on it. Her new broker was not aware that she was working on it. The new broker did not maintain a file. At close of escrow, the old broker received the commission and paid the agent directly for her share. The agent’s new brokerage did not receive any portion of the commission.
The buyer subsequently sued the seller, agent and both brokerages for non-disclosure. The buyers also filed a complaint with the Department of Real Estate against the agent and both brokerages.
Is there liability?
Answer: Yes.
If the file remained with the prior broker, the agent should not have been working on it while licensed with a different broker. The former broker has no ability to supervise an agent licensed with another broker.
The transaction could have been transferred from the original broker to the new broker as soon as the agent moved to the new broker, and the commission should be paid to the agent through the agent’s new broker.
The following is a discussion of alternatives for handling this situation.
- SALESPERSON LICENSEE
If the departing agent holds a Salesperson’s license then, according to the DRE, the scenario described above is not an acceptable approach. However, there are three acceptable ways to handle pending transactions when an agent leaves to work with another brokerage:
- TRANSACTION STAYS WITH ORIGINAL BROKER: Under this approach, the transaction stays with the original employing broker, the broker assigns another agent/manager in the office to work on the transaction, and the original agent has no further contact with the client or the transaction while at the new brokerage. This method is permitted and, in fact, contemplated, in paragraph 8F of the CAR Independent Contractor Agreements (ICA-BA, ICA-NA or the revised ICA (6/22).
When the transaction closes, the broker determines the “reasonable compensation” to the departing agent, and to the person designated to complete the transaction. For example, if the broker determines that the transaction was 60% completed at the time the agent departed, the broker would pay the departed agent their commission split due on the 60% attributable to that agent’s work on the transaction; and pay the other agent who completed the transaction their agreed-upon compensation based on the remaining 40%.
- TRANSACTION GOES TO NEW BROKER: If the original broker, the buyer, the seller, and the new broker who hired the agent all agree, the entire transaction can be transferred to the new brokerage. If the transferring agent represents the Seller in the pending escrow, the Listing Agreement should also be transferred to the new broker. (See CAR form Transfer of Listing Agreement – form TOL on zipForms) They would likewise agree as to the percentage of the transaction completed with the original broker and the new broker and split the commission on that basis (say, 60%-40%). At close of escrow, the commission check is split between the two brokerages based on that split. While the DRE has stated that so long as the close of escrow is close in time to the agent’s departure, the original broker can pay the agent, it is not a preferred practice. However, it is preferred that commissions be paid through the agent’s existing broker.
- TRANSACTION IS “CO-REPRESENTED” BY THE TWO BROKERS: If the original broker, the client and the new broker who hired the agent (Seller and/or Buyer) agree, the new broker is added to the transaction to “co-represent” the client for the balance of the transaction. This would require an amendment to the Purchase Agreement; the Additional Broker Acknowledgement (form ABA on zipForms) is not sufficient as a separate written agreement is specified as required by the ABA itself. The commission would be split as above at close of escrow. The difference here is that the original broker remains involved as an active participant in the transaction. One reason for this is that the original broker may want to exercise some control over the representation of the client and of the transaction; this may also result in a larger portion of the commission going to that former broker.
- BROKER LICENSEE
If the departing agent holds a Broker’s license with the DRE, then the above three options apply, but there are two more options which are variations on Options 2 and 3 above. One possibility is for Broker licensee to be a Broker-Associate with both brokerages who agree to co-represent the client(s). Or, instead of being “co-represented” by the new brokerage, the transaction is transferred to the individual Broker’s license for handling. This, of course, would have to be approved by any new brokerage that the departing Broker licensee has affiliated with as a Broker-Associate.
One consideration here is whether that departing Broker licensee has obtained individual E&O Insurance to cover these transactions. The reason for this is that the Broker licensee is now acting under his/her license and is liable for any errors or omissions in providing professional brokerage services. If that departing Broker licensee does not have adequate E&O insurance, the original broker would likely be responsible for the majority of any liability on the transaction, even if the errors or omissions occurred after the agent left their employ.
PRACTICE TIPS:
AGENTS
- When joining a new brokerage, you may not work on any listing or pending transactions at your former brokerage. That can lead to legal liability and DRE license sanction.
- Remember that, under California law, all clients and all transactions belong to the broker not the agent. As a result, the former broker has a right to refuse to transfer the listing or pending transaction to your new broker and instead appoint another agent in that office to take over the handling of those listings and sales. That, in fact, is the contemplated and specified approach in the standard CAR Independent Contractor Agreements.
- Advise your new broker of all pending listings and transactions in escrow at your former brokerage. Work out a plan with your broker/manager to attempt to have those listings and transactions transferred from your former broker to your new broker.
- Do not solicit the clients with whom for whom you have a signed listing or are representing in a purchase agreement to cancel those agreements and follow you. That is a violation of the NAR Code of Ethics and can lead to monetary damages. It is also a violation of your Independent Contractor Agreement with your prior broker.
BROKERS/MANAGERS
- When deciding how to handle pending transactions when an agent leaves your brokerage, do not allow that agent to continue to work on that transaction as if they were still at your brokerage company. From the DRE’s perspective, if that agent violates California law or the DRE Regulations while employed at the new brokerage, you could be accused of failure to supervise, and also of allowing someone not affiliated with your brokerage to work on your brokerage transactions.
- When hiring an agent from another brokerage, do not allow them to continue to work on listings or pending transactions at the prior firm without working out a solution vis-à-vis one of the above options.
- Conversely, do not allow an agent leaving your brokerage to continue to work on a transaction which was started while that agent was associated with your firm without working out one of the above solutions.
- It is preferable that agents be paid their commissions by the broker with whom they are then licensed.
WEKLY 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 practices