BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
LIMITATIONS ON PAYING AND RECEIVING REFERRAL FEES
Last week, Broker Risk Management (“BRM”) issued a tip regarding disclosures required when receiving or paying referral fees. Since that time, BRM has received a number of questions regarding whether there are limitations on receiving or paying referral fees, particularly relating to properties out of the country or out of state. This tip addresses those limitations.
SCENARIO NO. 1: I am a California agent. I grew up in Pennsylvania and have a lot of contacts there. I am not currently licensed in Pennsylvania to sell real estate. I receive a number of referrals from Pennsylvania agents each year. The Department of Real Estate (“DRE”) has contacted me and initiated an investigation as to whether I am illegally receiving referral fees from out-of-state agents. What are your thoughts?
RESPONSE: The DRE has stated that real estate agents may pay and receive referral fees relating to out-of-state properties, but only if they are paid or received, “occasionally.” If the payment of referral fees is “regular,” then the DRE considers it to be illegal and requires the agent to be licensed in that state. The DRE has not defined “occasional” nor “regular.” However, if an agent receives two commissions a year consistently for several years, it is likely that the DRE will consider it to be an illegal practice. In this instance, if you are going to regularly do business with agents in the State of Pennsylvania, it is recommended that you obtain a Pennsylvania license.
SCENARIO NO. 2: I have a client purchasing a property in Arizona. I referred that client to an agent in Arizona and I am getting paid a referral fee. However, the client has continued to request my assistance and now I am receiving a commission instead of a referral fee. What are the risks?
RESPONSE: Unless you are licensed to sell real estate in Arizona, you should not be participating in the representation of a party in the purchase or sale of real estate in Arizona. Not only is that a licensing violation, but if a claim arises, you will not have any insurance coverage for claims for properties in Arizona. Your insurance company likely will not cover claims arising out of out-of-state properties where you performed acts for which a license is required. Moreover, if your broker in California gets sued, your broker can ask you to indemnify them, including the payment of all attorney’s fees and costs affiliated with that claim as well as any settlement or judgment.
SCENARIO NO. 3: I have a client that has requested that I list, market, and sell his property in Mexico. Is that legal?
RESPONSE: It is legal only if you have a license to sell real estate in Mexico. Even if you have a license to sell property in Mexico, you cannot do it under a California broker license.
DISCUSSION: As indicated herein, there are two significant risks affiliated with listing and selling property out of state and out of the country. First, the DRE has taken the position that an agent may only “occasionally” receive or pay a referral fee out of state. If a practice becomes regular within a particular state, that agent must obtain a license in that state.
The other significant issue is liability and claims handling. Generally, if an agent is merely a referral agent and has no further participation in the transaction, there is little risk of a claim against that agent or the broker. However, if the agent starts participating in the transaction such as consulting or advising the client, the agent has not only committed a regulatory violation (violated DRE regulations of practicing real estate in a different state without a license in that state), but there is likely no insurance coverage for any claims. If a claim arises, the insurance company will not cover it. In addition, under standard independent contractor (IC) agreements and the California Association of Realtors’ IC agreement, the agent will be responsible for indemnifying the broker which includes paying all the broker’s attorney’s fees and costs, as well as any judgment or settlement on behalf of the agent and the broker. Therefore, if a claim arises, it is likely that the cost of the claim could far exceed the potential commission/fee to be earned. Therefore, it is generally not worth the risk.
PRACTICE TIPS:
- If you are referring property sale to an out-of-state agent or receiving a referral from an out-of-state agent, it is recommended that you consult with your manager to discuss any internal broker rules or requirements and to ensure that such referral fee does not violate DRE regulations.
- Agents may not materially participate in the purchase or sale of out-of-state property if they are not licensed in that state. If they are licensed in that state, they may not do so under their broker’s California license.
- If an agent participates in a transaction involving an out-of-state property and a claim arises, agents need to be aware that there is a significant risk to them and the fact that their insurance company will likely not cover out-of-state transactions. If there is no insurance coverage, likely the agent will not only be liable for the agent’s defense attorney’s fees and costs, but those of the broker.
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.