BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Broker Risk Management (“BRM”) has received a number of inquiries regarding dealing with a buyer who signs a Buyer Representation and Broker Compensation agreement (“BRBC”) or other buyer representation agreement, but states that they cannot pay the buyer’s agent. There are three options for handling a buyer who states that they cannot pay your compensation including the following:
- Represent the buyer but, if a seller is unwilling to compensate the buyer with funds to pay your compensation, then terminate the buyer-broker representation at least with respect to that specific property;
- Continue to represent the buyer, but have the buyer partially pay and/or sign a promissory note for part and/or all the commission; or
- Continue to represent the buyer with no compensation.
There are advantages and disadvantages to each option.
With regard to the first option of terminating representation of the buyer, BRM previously distributed a tip regarding how to do that. BRM also provided release language for obtaining a release of liability associated with termination of the relationship. (See Broker Risk Management Tip “Options for Handling Buyers Who Cannot Pay”.)
Another option is to continue representation but accept a promissory note for all or a portion of the commission. The advantage to this option is that the agent will continue to represent the buyer and hopefully, earn a commission. The disadvantage of this option is that a buyer may sign a promissory note but not pay. As outlined below regarding a buyer who does not pay, errors and omissions insurance may not provide for coverage and the broker may be incurring liability without sufficient compensation to compensate for undertaking that risk.
At the request of several BRM clients, BRM has prepared a form promissory note which can be used under these circumstances. Please note this promissory note is not secured by real property. If the parties agree to a note secured against real property, management should contact BRM for appropriate forms.
In the event that a buyer defaults on the promissory note and fails to pay the brokerage, the brokerage will have the option of proceeding to mediation and if the issue does not resolve, the broker will need to consider whether to file a lawsuit. Note that the promissory note contains a provision with attorney’s fees limited to collection of the commission and excludes attorney’s fees for the handling of the underlying transaction.
Agents should note that a promissory note is no guarantee that the agent and/or broker is going to get paid. If the buyer refuses to pay the compensation, a lawsuit may be required. If that occurs, generally buyers will counter claim against the agent alleging that the agent mishandled the underlying transaction, even if there is no basis for those claims.
A third option is an agent representing a buyer without compensation. BRM discourages this practice due to the liability associated with accepting such representation without compensation and the risk that the brokerage’s errors and omissions insurance company will not cover any claims arising out of a transaction without compensation.
RISK MANAGEMENT TIPS:
- If your buyer states that they cannot pay your commission, it is important that you discuss the options set forth in this tip with your manager. Management must be consulted before deciding how to proceed.
- If a buyer is willing to sign a promissory note, agents may use the attached form after discussing the matter with their manager. If the obligation is to be secured by real property, the promissory note will need to be secured by a deed of trust to be recorded against real estate owned by buyer.
- For all of the above reasons, BRM discourages agents from undertaking representation of buyers without any form of compensation.
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 practices