BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
As a result of the NAR settlement, buyer broker agreements are going to be used in virtually all transactions whereby agents represent buyers in purchasing one to four residential units. Recently, one arising phenomenon is that buyers are behaving badly. In these instances, buyers are breaching those contracts and using other agents to purchase a property or attempting to cancel them. This is an issue which agents and brokers are going to need to address. Consider the following scenarios:
SCENARIO NO. 1: I have a BRBC with a buyer. I wrote a couple of offers for these buyers but they were not accepted. I recently learned that the buyers purchased a property through the listing agent for that property. What is my recourse?
RESPONSE: Remember that under California law all clients, transactions and commissions belong to the broker. So, your broker has three alternatives for proceeding including the following: (1) you can do nothing; (2) you can proceed with asserting a claim against the buyers; or (3) you can file for arbitration against the listing agent. (See below for a more detailed discussion of these avenues.)
SCENARIO NO. 2: I am a listing agent. A buyer came to my open house without an agent. I asked the buyer if the buyer was represented by an agent and the buyer said, “No.” I then asked the buyer if the buyer had a buyer representation agreement with any agent. Again, the buyer said, “No.” I represented the buyer in the transaction, which closed and I received a commission. I later learned that the buyer had signed an exclusive BRBC with another agent. That agent has now taken me to arbitration. How can I protect myself?
RESPONSE: When a buyer tells you they are not represented by another agent, it is recommended that you confirm that statement in writing as soon as you start working with them. For example, send an email to the buyer confirming that the buyer told you that the buyer was not represented by another agent and has not signed a BRBC. If you have this confirmation in your file and you have no other reason to know that the buyer was previously represented, then an arbitration panel should find in your favor.
SCENARIO NO. 3: I am a listing agent. An agent wrote an offer for a buyer on my listing which was not accepted. Subsequently, the buyer approached me and asked me to represent the buyer. I asked the buyer if the buyer was still being represented by his agent and the buyer said, “No.” I also asked the buyer if the buyer had a BRBC with the first agent and the buyer responded, “No.” After the close of escrow, the buyer’s agent asserted a procuring cause claim against me. How should I have protected myself?
RESPONSE: As indicated above, it is recommended that you confirm with the buyer in writing if they have told you they are not being represented by another party. However, while not the law and not required under NAR Code of Ethics, some arbitration panels have found an agent representing a buyer under these circumstances liable for the first agent’s commission if that agent did not contact the first agent to confirm that the agency relationship was terminated. Therefore, it is advisable that when you have notice that a buyer was previously represented by another agent, you contact the first agent to confirm the agency relationship is terminated. Document that conversation in writing.
DISCUSSION: Similarly to sellers refusing to pay a commission under a listing agreement, buyer’s agents are going to face the dilemma of buyers refusing to compensate them under the BRBC. As indicated above, there are three alternatives for handling this situation, and the commission belongs to the broker. Therefore, agents are advised to consult with their manager or broker before taking any action to collect on a commission from a buyer.
If an agent and their broker decide to proceed against the buyer, the first step will be a demand letter. If that does not render a satisfactory result, an agent/broker should demand mediation. A mediation can be handled through CAR’s mediation services at a lower cost. If that does not render satisfactory results, an agent/broker can consider filing a claim in court. Before legal action is initiated, careful consideration needs to be given to a buyer’s potential defenses (i.e., the agent made mistakes or did not properly represent them), the cost, and the likelihood of success. In many instances, it is entirely likely that the potential attorney’s fees and costs could exceed the amount of the commission.
One other alternative is if the commission is less than $12,500 a broker can file in Small Claims Court if the broker/plaintiff is an individual, or less than $6,250 if the broker is a corporation.
Another alternative, which appears to be increasing in popularity, is to file an arbitration claim before the local Association against the listing broker. Many agents are finding this to be an inexpensive process, particularly when they do not need to involve attorneys in asserting a claim for a commission.
Recently, BRM has assisted several clients in arbitrations wherein agents asserted a claim for a commission against the listing agent. In two of those arbitrations, the listing agent had no awareness that the buyer was previously represented by an agent. In those cases, the arbitration panels found in favor of our clients. In a third case, a buyer’s agent was aware that the buyer was previously represented by an agent. In that instance, the agent did not contact the buyer’s former agent to confirm that the relationship had been terminated. In that case, the panel found in favor of the first agent. Therefore, while it may not be required by the law, it is advisable that if you are aware that a buyer had been represented by another agent, you should contact that agent to confirm termination of the relationship prior to undertaking representation of that buyer.
PRACTICE TIPS:
- Before representing a buyer, always inquire of the buyer as to whether they are represented by another agent and if they have signed any written agreement with another agent. If the answer is no, it is further recommended that you confirm this information in writing. If the answer is yes, ask to see a copy of any agreement(s) the buyer may have signed with one or more agents.
- If you learn that a buyer with whom you have a signed BRBC works with another agent, immediately consult with your manager or broker as to how to proceed.
- Do not make a demand on a buyer whether in writing or retain an attorney without obtaining your broker’s approval. Remember, the commission belongs to the broker, not the agent. It is the broker’s decision as to whether to move forward with collection efforts.
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