BROKER RISK MANAGEMENT WEEKLY PRACTICE TIP
We have recently observed a number of agents changing brokerages. When agents change brokerages, there is often confusion regarding the handling of listings and pending transactions. How are listing agreements handled? How should transactions in escrow be handled? The following addresses several scenarios and discusses recommendations for handling.
SCENARIO NO. 1: I represent a seller and have a listing agreement. I have changed brokers, but have continued to work on the listing for my prior broker because the prior broker will not release the listing. Have I done anything wrong?
RESPONSE: Yes. Under California Department of Real Estate (“DRE”) regulations, agents may not work on transactions belonging to brokers under which the agent is not licensed. Therefore, if the listing stays with the former broker, you may not continue to work on the transaction. (See the discussion below regarding your options for handling.)
SCENARIO NO. 2: I represent a seller in a transaction, which is currently in escrow. I am leaving my brokerage for another brokerage. The listing and pending transaction remain with my former broker and I have brought the file with me and continue to work on it. Is that acceptable?
RESPONSE: No. As set forth in the above response, agents may not work on listings or transactions through brokers under which they are not licensed.
SCENARIO NO. 3: I recently left a brokerage. The transaction closed two days after my departure. Can my former broker pay me directly or does the payment have to go through my new broker?
RESPONSE: The DRE has advised that, so long as the payment is made by your former broker within a reasonable period of time, the DRE will not object to your former broker paying you directly. However, if a prolonged period of time has transpired between your departure and the payment, the DRE may have an issue with your former broker paying you directly. The DRE has not specified what it considers to be a reasonable period of time. Therefore, if the payment is made immediately after the close of escrow, it is unlikely that the DRE will have an issue. If any length of time has occurred between the payment of your commission and your departure, your former broker should pay your new broker and your new broker can pay you.
DISCUSSION: Many agents leave brokerages with listings and/or transactions. The following is a discussion of proper practices regarding when an agent leaves a brokerage to associate with another brokerage while having listings and/or pending transactions at the former brokerage.
Pursuant to DRE regulations, an agent may only work on transactions under the supervision of the agent’s broker with whom the agent is licensed. Therefore, if an agent moves from one brokerage to another while a transaction is pending, either the transaction stays with the original broker and another agent with that former broker is assigned to handle it or the transaction is transferred to the new broker. Remember, the listing belongs to the broker, not the agent. Therefore, if an agent moves from one brokerage to another, the agent cannot continue to work on the transaction, as long as the transaction remains with the original broker. This is true also for listings which are active, but not in escrow when the agent leaves for the new brokerage.
Notwithstanding DRE regulations, there are other legal reasons why agents from one brokerage should not work on transactions from another brokerage. If an agent begins handling a transaction with one broker and moves to the second broker and continues to work on the transaction, unless an indemnity agreement is reached between the brokers, both brokers will be liable for any claims asserted by the parties to the transaction. If an agent at the new brokerage works on a transaction, which is still with the former broker and the new broker does not know about it, receives no compensation on that transaction and is sued, the result can be devastating.
For example, if an agent moves to a new broker and continues to work on a transaction belonging to the former broker and the buyer files suit, both brokers will be sued. The second broker will be disadvantaged given that it was not aware of the transaction, had not supervised it, and likely did not have a file. (Please note in these circumstances, it is possible that a broker may disown any liability and take the position that the agent was acting outside the course and scope of their relationship, leaving the agent to defend themselves with their own attorney at their own expense. If the broker takes this position, there will likely be no insurance pursuant to the errors and omissions insurance policy.)
If an agent moves from one broker to another, as indicated, there are three options for handling existing listings and pending transaction, including the following:
- A listing or pending transaction can remain with the former broker and the former broker can appoint another agent to handle it;
- Both brokers can act as co-brokers on the transaction and reach an agreement between each other similar to a co-listing arrangement; or
- The former broker can transfer the listing and/or existing transaction to the new broker. The allocation of compensation between the two brokers can be negotiated between them.
While CAR has created a Transfer of Listing Agreement (TOL), it has not yet created an agreement to address the transfer of a transaction. Broker Risk Management has created a transfer of transaction agreement in two versions: one version includes an indemnity provision and a release of liability, and another excluding those provisions. Both are attached to this Tip.
PRACTICE TIPS:
- Agents should never work on a listing or transaction if the listing and/or transaction still belongs to another broker, as it is a violation of DRE regulations and can create unnecessary civil liability.
- If an agent moves from one brokerage to another, the agent and the brokers need to promptly resolve the issue regarding the disposition of any listings and pending transactions.
- If a seller attempts to cancel their listing with the former broker without that broker’s mutual consent, that seller could be liable to that broker, as well as the new broker, for the commission specified in the listing agreements.
- If brokers intend to transfer existing transactions, they should consider using the transfer of transaction agreement, copies of which are attached.
- In all situations where an agent leaves one broker to associate with another, that agent should work closely with the former, and the new, broker or manager at each brokerage to ensure a smooth transition and fully document which agent will work on the active listings and pending transactions.