An Introduction To The Revised C.A.R. Buyer Representation And Broker Compensation Agreement (Part 2)
By David Hamerslough and Victoria B. Naidorf
October 9, 2024
Last month’s article began our discussion of C.A.R.’s newly revised Buyer Representation And Broker Compensation Agreement (“BRBC”) and some of the issues to consider when using that form. This month’s article completes that discussion. The two articles should be read together.
Property To Be Acquired (Continued) (Paragraph 2C)
The BRBC references three forms that can be used to assist the broker/agent in learning about the buyer’s background and financial situation as well as the buyer’s needs, wants, and concerns. Learning about all of these subjects can assist the broker/agent in fulfilling their fiduciary duties and obligations to the buyer.
The three C.A.R. forms referenced in the BRBC are (1) the Buyer Identification Of Preferences And Priorities (“BIPP”) referenced in Paragraph 2C, (2) the Buyer Financial And Personal Information (“BFPI”) referenced in Paragraph 2G(1)/9B), and (3) the Buyer Material Issues For A Specific Property (“BMI-SP”) referenced in Paragraph 9E.
The requisite information that the buyer is to provide about the buyer’s needs and wants (characterized by C.A.R. as “preferences and priorities”) is to be included in Paragraph 3A-3D of the BIPP. The buyer’s financial information is to be included in Paragraph 3A-3I of the BFPI. Information about the buyer’s background and experience, etc., is to be included in Paragraph 5 of the BFPI. The buyer’s concerns are to be included in Paragraph 3F of the BIPP and in the BMI-SP.
Since the BRBC refers to these other three C.A.R. forms, the natural first question would be: does the BRBC require use of all three forms to facilitate the broker/agent’s search for the buyer’s desired property? The answer is NO.
The C.A.R. BRBC does not require use of either the BIPP or the BFPI at any time. On the other hand, the BRBC does require use of the BMI-SP (Paragraph 9E), but only when the buyer has made, or is contemplating making, an offer to purchase or is already in contract on a specific Property. In other words, what the buyer considers to be their relevant “material facts” is not used to locate any property.
Although use of the BFPI is not required by the BRBC, Paragraph 9B of the BRBC does require that the buyer provide “relevant personal and financial information, including, but not limited to, proof of funds needed to complete the purchase of Property and satisfy the obligation to pay Broker, and a pre-approval/prequalification letter … to assure Buyer’s ability to acquire Property.”
The BIPP notes that the broker is going to use the buyer’s information in that form to “narrow the parameters Broker uses in searching for property that might be acceptable to Buyer.” Paragraph 2C contains a checkbox for the option of attaching the BIPP to the BRBC. Doing so will assist the broker in the search for potentially acceptable properties. The BFPI also states that the information in that form will be used by the broker in “assessing and identifying properties that may be satisfactory to Buyer.” Paragraph 2G(1) has a checkbox to indicate that the BFPI is attached. If it is not attached, Paragraph 2G(1) provides that the form is to be delivered within five calendar days from execution of the BRBC. Once again, having the buyer provide this information as soon as possible will assist the broker in the search for potentially acceptable properties.
Some of the questions/issues raised by these forms include the following:
- None of the three forms are currently bundled with the BRBC on the zipForm© platform. This means that if a broker/agent wants to use any or all of these forms, the broker/agent will need to separately obtain the forms from the platform;
- It is not clear why the buyer’s information is distributed over three different forms rather than being contained in a single form;
- Using these forms or some combination thereof in conjunction with emails, text messages, etc. maintains a written record of the information and subjects covered by these forms and avoids dispute that can arise when only oral discussions on these issues and subjects take place; and
- The BRBC and each of the three forms require that the buyer update the information provided when there are any changes. The BIPP has a blank space to fill in for updated versions of that form.
Although only the BMI-SP is required, the BRBC does identify the potential consequences if the buyer fails to provide (1) the financial information required by Paragraph 9B or (2) the BMI-SP, or if the information in any of these forms is not updated. Paragraph 9B provides that the broker may cancel the BRBC if the financial information is not provided. Paragraph 9E provides that if the buyer does not provide the BMI-SP or fails to update that form when required, the “Property shall be deemed to satisfy Buyer’s material considerations notwithstanding any preferences and priorities identified in the BIPP, if one has been completed”.
Another potential consequence is contained in Paragraph 9F. It provides that the buyer must indemnify, defend, and hold harmless the broker with respect to “incorrect information supplied by the Buyer or from any material issues that the Buyer fails to disclose in writing to the Broker.”
One potential issue that may arise is how the buyer can be in breach of their contractual obligations to provide the information detailed in the three forms if the broker/agent fails to provide the form to the buyer. Similarly, what is the enforceability of the indemnity clause in the event that these forms are not provided by the broker/agent to the buyer?
Please recognize that notwithstanding the language chosen by C.A.R., the legal consequences of a buyer failing to provide any of the information contained in the BIPP, the financial and personal information required by Paragraph 9B, and/or the BMI-SP are going to be impacted by any number of factors, including the facts and circumstances of the transaction, the discussions that took place between the broker/agent and the buyer, the knowledge, training, skill, and experience of both the broker/agent and the buyer, any questions that have been asked, etc.;
There are other questions and issues with regard to the use of the BIPP:
- What is the potential impact if the buyer’s information in the BIPP with respect to the location of the property to be acquired is in conflict with what is provided on the same subject in Paragraph 2B(2) of the BRBC?
- What is the impact if no information on this subject is provided in Paragraph 2B(2) of the BRBC but is only provided in Paragraph 3E of the BIPP?
- The broker’s right to compensation turns on, among other things, the buyer entering into an agreement to acquire any Property described in Paragraph 2B of the grid (see Paragraph 4B of the BRBC). By default, the Property described in Paragraph 2B is single-family residential, including condominiums and manufactured homes, absent any other information being provided in these three paragraphs. Given the foregoing, my suggestion is that any reference to the location of the Property by county or city be included in Paragraph 2B(2) of the BRBC rather than in Paragraph 3E of the BIPP;
- Paragraph 3F of the BIPP is a blank section that allows the buyer to identify not only any other desired features that they are interested in but also “matters of concern or importance based upon previous experience, prior offers, expectations, intended future use, financial ability to make repairs or improvements, or otherwise.” This is a broad, open-ended question, and the buyer needs to understand what information is being requested. Another issue could arise if a response conflicts with other responses provided by the buyer in other forms or documents.
There are also questions and issues with regard to the use of the BMI-SP. This new form is actually a portion of the original BMI form introduced by C.A.R. in 2005, a form that in our experience was not widely used. The language of Paragraph 2 of the BMI-SP requires that the buyer request information on, or express concerns regarding, “any issue of interest or importance to Buyer” which is then defined as “Material Issues.” Paragraph 3 of the BMI-SP requires the buyer to disclose Material Issues regarding the specified chosen Property.
- Arguably, included within the scope of a “Material Issue” are any generic preferences, buyer sensitivities, time and financial constraints, concerns over the condition of a property, the ability to expand the property, uses of the property that may conflict with current zoning ordinances, concerns about school districts, mold or allergy concerns, etc. Since our experience with the old BMI was that buyers often failed to identify any Material Issues or did so in a very general way, we anticipate that the new version may continue to have the same problems, with the result that the buyer’s responses (if any) to this open-ended question may not provide much useful information;
- If the BMI-SP is used, confidential information may be provided to the broker/agent regarding the buyer’s financial position, motivation, bargaining position, or other personal information that might impact the price the buyer was willing to pay or could afford to pay. While the BIPP and the BFPI forms seek that same information, those forms indicate that the information is confidential irrespective of any agency relationship. Interestingly, no comparable warning language is included in the BMI-SP. If the buyer includes such confidential information in the BMI-SP and it is a dual agency transaction, then the broker/agent needs to recognize this potential problem and must prevent inadvertent disclosure of that confidential information.
Broker Compensation (Paragraph 2E(1), (2), (3))
The practice changes that went into effect on August 17th state that a broker may not receive compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement between the broker and the buyer. This limitation is described in the C.A.R. Broker Compensation Advisory (“BCA”).
In order to preserve a right to compensation, a percentage or a dollar amount must be filled in on one of the two blank lines in Paragraph 2E(1) of the BRBC. Alternatively, a box can be checked indicating that a compensation schedule is attached or otherwise identifying the specific amount of compensation. Please remember that the practice changes require that the amount of compensation must be objectively ascertainable and may not be open-ended (a specific example used in the NAR settlement document of what not to use was “Buyer-Broker compensation shall be whatever amount the Seller is offering to the Buyer”).
The total amount of compensation that the buyer’s broker/agent wants is what should be specified in the blank lines in Paragraph 2E(1) of the BRBC. The focus of this part of the BRBC should not be on who is going to pay the compensation (the buyer, the seller, or others) but the amount that will be received by the buyer’s broker/agent. Paragraph 2E(2) provides that if the broker receives compensation from the seller or others for the broker’s representation, that amount shall be credited against the buyer’s obligation to pay the broker.
Paragraph 2G(2) of the BRBC contains two check boxes. The first box is checked if the buyer does not have sufficient funds to pay the broker, while the second box is checked if the buyer intends to purchase with a loan product that does not allow the buyer to pay compensation to the broker. If either of the boxes in Paragraph 2G(2) is checked, there is a potential conflict between the amount of compensation that the buyer has agreed to pay in Paragraph 2E(1) and the fact that the buyer does not have the funds to pay that compensation. While this conflict may be resolved if the compensation is paid by the seller or others, a question arises as to whether or not the BRBC as a stand-alone document is an enforceable contract. Would the broker have to work for free?
C.A.R.’s approach, found in Paragraph 9B(2) of the BRBC, provides the broker/agent with a contingency right to cancel the BRBC related to that specific property. If the broker/agent exercises this contingency right, the parties contractually agree to complete a new agency confirmation removing the broker as representing the buyer for that specific property. The new C.A.R. form for exercising the contingency right is the Cancellation Of Agency Confirmation; Amendment To Purchase Agreement (“CAC”).
Alternatively, if the broker and buyer are going to cancel the BRBC in its entirety, then the new C.A.R. form Cancellation Of Buyer Representation (“COBR”) can be used. These two forms will be released in December of this year.
Another issue to consider is whether the BRBC can be amended to address any situation involving a change in the amount of broker compensation. There has been a discussion in the industry about the ability of brokers and buyers to modify the amount of compensation either based upon changed circumstances or because a low amount of compensation is initially inserted in Paragraph 2E(1) but the seller subsequently indicates that they will pay compensation to the broker in an amount that exceeds the amount already identified in the BRBC.
While any contract, including the BRBC, may legally be amended, the enforceability of an amendment regarding the amount of compensation is going to depend upon many factors, such as the facts/circumstances of the transaction, discussions between the broker/agent and the buyer, whether the amount is being increased or reduced, whether the adjustment is in conflict with the required practice changes, whether the broker/agent has met its fiduciary obligations, whether adequate consideration is given for any amendment, and whether either box in Paragraph 2G(2) was initialed. Don’t assume that any amendment, especially one that increases the amount of compensation, will be enforceable. As noted above, complete Paragraph 2E(1) with the amount of compensation that you want to receive rather than with a low amount with the expectation that you can automatically adjust that amount with an amendment to the BRBC.
Paragraph 2E(3) provides the broker with the opportunity to create what the BRBC calls a “Continuation Period.” The Continuation Period allows the broker to be paid compensation if the following has occurred: (1) a timeframe has been filled in in the blank space in Paragraph 2E(3); (2) the buyer enters into an agreement to acquire Property described in Paragraph 2B; (3) there has been Broker Involvement (defined in Paragraph 4B(4)) with respect to that Property; and (4) prior to the expiration of the BRBC or any extension thereof, the broker has delivered a written notice of those properties for which there was Broker Involvement to the buyer. C.A.R. has a notice form (NBIP) to facilitate that process.
Please remember the following points with respect to any attempt to preserve the broker/agent’s right to compensation during the Continuation Period:
First, there must be a number filled in in Paragraph 2E(3) for how the long the Continuation Period will last. If no number of days is written in that space, then logically there is no Continuation Period;
Second, the number of days filled in should be reasonable. What is “reasonable” is a question of fact, but given that the California legislature has just passed a law regarding buyer representation agreements and limits the term of those agreements to three months where an individual (as distinguished from a corporation, LLC, or partnership) is the buyer, then three months may be deemed to be reasonable for a Continuation Period.
Third, the broker/agent must provide the list of Broker Involved properties “prior to expiration of the BRBC or any extension.” This means that the broker must anticipate this issue before the expiration of the BRBC. This is different than the timeframe in which a notice is to be provided in the event of a cancellation of the BRBC.
Broker And Buyer Obligations (Paragraphs 8 and 9)
Paragraphs 8 and 9 of the BRBC identify specific obligations that the broker/agent and buyer agree to undertake. Some of these obligations with respect to the three forms have been discussed above. The list of Broker Obligations in the BRBC is limited and fails to reference agency duties, disclosure obligations, and/or fiduciary responsibilities. Everyone should realize that the broker obligations contained in the BRBC cannot and will not limit what duties and responsibilities a broker/agent is legally obligated to perform.
No one should assume that the outcome of any dispute between the various parties will only be evaluated and/or decided pursuant to the contents of these C.A.R. documents. The outcome will depend upon the specific facts and circumstances of the transaction, the contents of all documents, the knowledge, training, skill, and experience of all parties, what was discussed and what was not discussed by the parties, standard of care, the application of California law, common-law, whether the practice changes have been followed, and other legal concepts.
Attorneys’ Fees and Mediation in the BRBC
Paragraph 10 of the BRBC provides that in the event of any dispute arising out of the BRBC, the buyer and broker/agent will each be responsible for paying their own attorneys’ fees and costs except as otherwise specified in Paragraph 12A. Paragraph 12A contains a mediation clause, which requires the buyer and broker/agent to mediate any dispute or claim between them before resorting to arbitration or a court action.
Unlike the corrections made to the mediation clause in the existing C.A.R. residential listing agreement, the consequence for failing to mediate under Paragraph 12A of the BRBC is the potential payment of attorneys’ fees by the “losing party” to the “prevailing party.” The term “losing party” is not defined in the BRBC and does not have any precise legal definition. On the other hand, the term “prevailing party” is discussed in published appellate decisions, but that definition provides a judge with potential latitude. Issues may arise based on the interpretation given to these terms.
Irrespective of how the terminology used by C.A.R. in the BRBC is interpreted, there is now a potential for broker/agents to be responsible for paying the buyer’s attorneys’ fees and costs, which does not exist in other C.A.R. forms. In addition, the scope of the mediation clause (“any dispute or claim arising under the BRBC”) raises the possibility that brokers/agents will now be contractually required to mediate any dispute that involves any claim that might fall within the contractual obligations set forth in Paragraphs 8 and/or 9 and/or claims arising from the BIPP, BFPI, and/or the BMI-SP.
What is Missing?
One issue that the BRBC does not address is the mode(s) of communication that the broker/agent and buyer agree are acceptable. While there are blank lines for the telephone number and email address of the broker, there is no corresponding space for the buyer to provide that data, nor is there any mechanism in the BRBC to confirm how information is to be relayed between the parties. While the buyer’s data may already be known, broker/agents should document the mode of communication that the broker/agent and buyer intend to use when communicating regarding the BRBC and any resulting transaction.
Final Comments
Real estate licensees using the BRBC should take the time to familiarize themselves with all aspects of that form and the potential issues we have discussed in the SILVAR Legal Corner. We also encourage you to compare and contrast the C.A.R. BRBC (with its three separate forms) with the PRDS BRBC and its Buyer Needs And Wants Assessment form.
The articles that we have written regarding the C.A.R. BRBC do not address all of the issues that might arise as a result of using this form. Any questions or concerns should be discussed with your manager and/or a qualified California real estate attorney.