Buyer Representation And Broker Compensation Agreements Revisited (Part One)
By David Hamerslough
June 1st, 2023
In December 2022, C.A.R. released a Buyer Representation And Broker Compensation Agreement (“BRBC”). The BRBC replaced three prior buyer representation agreements: (1) the Buyer Representation Agreement-Exclusive (Form BRE); (2) the Buyer Representation Agreement-Nonexclusive (Form BRNE); and (3) Buyer Representation Agreement-Nonexclusive/Not For Compensation (Form BRNN).
C.A.R.’s December 2022 forms release also included the addition of ¶ G(3) to the C.A.R. RPA. This paragraph is to be checked when the seller agrees to pay some or all of the compensation to be paid to the buyer’s broker and where a buyer-broker compensation agreement is executed between the buyer and the buyer’s broker. This paragraph requires the use of a new C.A.R. form, Seller Payment For Buyer’s Broker (“SPBB”). Please note that the SPBB form and the checkbox in ¶ G(3) are not needed if the seller/seller’s agent are only going to pay the amount of compensation offered through the MLS or if the Cooperating Broker Compensation Agreement (“CBC”) is used.
My understanding is that the new BRBC and ¶ G(3) of the RPA have been added, in part, in response to the following: (1) investigations by the Department of Justice and class-action lawsuits brought against NAR, MLSes, and brokerage companies raising anti-trust claims as a result of the mandatory offer of compensation from the seller’s broker to the buyer’s broker pursuant to MLS rules and (2) the evolution of real estate brokerage models that offer compensation different than that traditionally provided through the MLS. C.A.R. set up a task force to consider potential responses to these issues and concluded that updating its forms, including those discussed in this article, was the best approach.
This is the first of two articles that will discuss the new BRBC form and some of the issues to consider when using the form. Please recognize that an executed BRBC is a contract subject to, among other things, California law, the laws of agency (including fiduciary responsibilities), the knowledge, training, skill, and experience of the parties, and the facts and circumstances surrounding its execution and performance. These articles are not intended to address all of the potential factual and legal consequences of a dispute over the execution and/or performance of a BRBC.
The following are some issues to consider when using the BRBC:
- Make sure to fully complete Paragraphs 1, 2, 3, and 4(A) of the BRBC
While this may seem obvious, the significance of doing so is that these paragraphs contain essential terms, including the representation period, the right to represent, the presence or absence of any preexisting representation and compensation agreements with other brokers, the property to be acquired, and the amount of compensation. As with any contract, the enforceability of the BRBC may be impacted if these essential terms are not, among other things, fully completed.
Paragraph 1 requires that the parties to the BRBC be identified. The names that are filled in become defined terms (“Buyer” and “Broker”) throughout the balance of the agreement. Please remember that agents who are only licensed as salespersons legally cannot enter into any type of commission agreement – only their brokers can do so. The BRBC needs to be an agreement between the Broker and the Buyer and must be signed by the Broker. The space for the Broker’s signature is on the last page under the heading “Broker’s Signature(s).”
Paragraph 1 requires that a definite commencement date be filled in. This starts what the agreement defines as the “Representation Period.” The Representation Period terminates (absent a cancellation, an extension, or the completion of a resulting transaction) within a specified number of days from the commencement date. Paragraph 1(i) requires that a specific number be inserted so that the number of days designating the length of the Representation Period are specified. This is in contrast to the C.A.R. listing agreement, which requires that a specific termination date be filled in.
Paragraph 2 contains an acknowledgement that the buyer has not entered into a representation agreement with another broker and has no obligation to pay compensation to any other broker arising out of the acquisition of property that is identified in ¶ 3. If this is incorrect, then language needs to be added to ¶ 2 identifying what representation agreements with any other brokers exist and the property or properties that are the subject of those representation agreements. Where there is a preexisting buyer representation and compensation agreement that the buyer has signed with another broker, the ability of the Broker identified in the second BRBC to be paid compensation is restricted by the terms of ¶ 4(I). If the Buyer acquires a defined property (¶ 3) during the time that the Buyer is obligated to compensate the other broker identified in ¶ 2, no compensation is to be paid to the Broker signing the second or subsequent BRBC. This underscores the significance of making sure that the provisions of ¶ 2 have been discussed and this paragraph is accurately filled out.
Paragraph 3(A) is where the property to be acquired (then defined as “Property”) is to be identified. The Property can be defined in terms of its location, city, county, price range, or other features (e.g., residential or residential income). If Paragraph 3(B) is checked, the definition of the Property is limited to specific properties identified on the blank line. If checked, ¶ 3(C) allows the parties to attach a list of properties. There are different philosophies regarding whether it is better to be neighborhood-specific, identify particular properties, or specify broader areas by city and/or county that the Buyer may have expressed an interest in. The criteria selected and the descriptions used may, among other things, have an impact on the Broker’s ability to recover compensation but, conversely, may limit the scope of services to be provided by the Broker. The criteria selected by the parties may also be impacted by whether the parties agree to non-exclusive representation (the default provision in the BRBC) or exclusive representation.
Paragraph 4(A) is where the amount of compensation is negotiated and specified. Paragraph 4(A)(1) requires that a number be filled in representing the percent of the acquisition price that is to be paid and a separate blank for any additional compensation designated as a specific dollar amount. This might be used where the Buyer agrees to pay a fee for an outside transaction coordinator or another outside service provider. Please remember that it should not be used to have the Buyer pay the Broker (or salesperson) for performing those same duties. The compensation identified in ¶ 4(A)(1) applies unless ¶ 4(A)(2) or ¶ 4(A)(3) is checked. Only one of those two boxes is to be checked. Paragraph 4(A)(2) identifies the compensation as a specific dollar amount that must be filled in. Prior buyer representation forms included an option for no compensation to be paid; the BRBC does not expressly contain this option. If that is the decision the Broker reaches, the number zero should be filled in in this blank. If ¶ 4(A)(3) is checked, the parties have agreed to attach a compensation schedule.
- Identify the default provisions in the BRBC and determine if they are acceptable to the Broker and the Buyer
The default provisions exist, in part, because the BRBC represents a consolidation of three previous buyer representation forms. The default provisions include, among others, (1) the representation is non-exclusive (¶ 4(B)(1)), (2) the representation is revocable and/or capable of being cancelled (¶ 4(C)(1)), (3) that payments made to the Broker by other parties (e.g., the seller’s broker and/or seller) shall be credited toward the Buyer’s obligation to pay compensation under the BRBC (¶ 4(D)(1)), (4) that if any such third-party payments exceed what the Buyer is obligated to pay, the excess amount shall be paid to the Broker (¶ 4(D)(2)), (5) that the Buyer authorizes the Broker to include a term in the Buyer’s offer obligating the seller to pay the Broker directly or through escrow for any compensation that the Buyer owes the Broker (¶ 4(D)(3)), and (6) that the Broker will disclose to the Buyer, prior to writing an offer on a Property, the amount of compensation the Broker expects to receive from a third party (e.g., the seller’s broker and/or seller) (¶ 4(F)(1)).
- The impact of some of these default provisions
If the representation is non-exclusive, the Buyer can sign BRBCs with other brokers and is only required to pay compensation to the Broker if there was what is defined in ¶ 4(B)(1) as “Broker Involvement.” Broker Involvement, and therefore the obligation to pay compensation where there is non-exclusive representation, means that the Broker showed the purchased property to the Buyer in person or virtually or wrote and presented an offer to the seller that the Buyer signed. Sending the Buyer a list of properties is not Broker Involvement without documented action on the part of the Broker analyzing the Property for the Buyer, specifically, or assisting the Buyer in the potential acquisition of the Property, or communicating with the seller or seller’s agent regarding Buyer’s potential acquisition of the Property.
If the representation is non-exclusive, any cancellation is effective upon receipt of the notice (i.e., immediately) (¶ 4(C)(1)(i)). This date is important because the Broker has five (5) days after the effective date of a Notice Of Cancellation to provide the Buyer with a list of properties for which there has been Broker Involvement. C.A.R. developed a new form for doing so (the “Notice of Broker Involved Properties” or “NBIP”). Providing the Buyer with the NBIP or a similar list of Broker-involved properties is necessary to preserve a claim for compensation in the event of cancellation or the expiration of the BRBC.
- What are the alternatives to the default provisions, and what is their impact?
If Broker and Buyer agree to exclusive representation, the checkbox next to ¶ 4(B)(2) of the BRBC needs to be checked. In this circumstance, compensation is payable to the Broker if during the Representation Period of the BRBC, the Buyer purchases any Property defined in ¶ 3, whether or not the Broker was involved in any way in that transaction.
The effective date of a cancellation where there is non-exclusive representation can be modified in ¶ 4(C)(1)(i) by checking a box and filling in the number of days in the blank line adjacent to that box. Doing so extends the effective date by which the NBIP needs to be provided.
Cancellation rights are also different when the representation is exclusive. Under ¶ 4(C)(1)(ii), cancellation only becomes effective 30 days after receipt of the notice. The effect of this date is to extend the Representation Period for an additional 30 days, which may impact the circumstances in which compensation is owed.
Paragraph 4(C)(2) provides an option, if the box is checked and only if exclusive representation applies, for the parties to agree that neither one of them shall have the right to cancel the BRBC prior to expiration except by mutual agreement. This choice also may impact the circumstances in which compensation is due.
Paragraph 4(D)(2) allows the Broker and Buyer to modify who will receive the benefit of any third-party payments that exceed Buyer’s obligation under the BRBC. If the box is checked, those third-party payments will be credited to the Buyer rather than paid to the Broker. Another alternative, “Other,” also requires that a box be checked, which would then allow the parties to split these payments or allocate them to any other individual.
Paragraph 4(D)(3) provides the Buyer with the option to not authorize including the payment of compensation by the seller to the Broker in the offer. The Buyer may prefer to do so if they want to negotiate payment to the Broker directly and they don’t want the seller involved in that negotiation.
Paragraph 4(F)(1) contains an option for the disclosure by the Broker to the Buyer of the anticipated compensation the Broker expects to receive from a third party to be made prior to the showing of a Property rather than prior to writing an offer on a Property. The Buyer may want to exercise this option to the extent that it might affect negotiations between the Broker and the Buyer regarding the amount of compensation that is to be paid to the Broker.
- Issues related to payment of compensation in the event of a cancellation or the expiration of the Representation Period
These subjects are covered in ¶ 4(C)(1) and ¶ 4(E). Payment of compensation in the event of a cancellation requires that (1) the Buyer acquire a Property identified in ¶ 3 during the Representation Period or at any time specified in ¶ 4(E), (2) there has been Broker Involvement (as defined in ¶ 4(B)(1)), and (3) the Broker has delivered to the Buyer a written list of those properties for which there was Broker Involvement. C.A.R. has developed a specific form, the NBIP, to address this requirement. Paragraph 4(C)(1) requires, however, that this form or a comparable written list be delivered to the Buyer within five (5) calendar days after the effective date of the cancellation. Under non-exclusive representation, cancellation is effective upon receipt of the notice unless the box is checked extending that time by filling in a specific number of days (¶ 4(C)(1)(i)). Under exclusive representation, cancellation is effective 30 days from receipt of the notice.
Paragraph 4(E) provides an additional right to compensation if a specific number of days is filled in in the blank space preceding the words “calendar days.” This protection period is similar to what is in the C.A.R. listing agreement. In this situation, compensation shall be paid after expiration of the Representation Period or any extension thereof, or, if there is a cancellation after the effective date of the cancellation in ¶ 4(C), provided that (1) the Buyer enters into an agreement to acquire Property identified in ¶ 3, (2) there was Broker Involvement, and (3) Broker delivers to Buyer the NBIP or a comparable written list prior to the expiration of the BRBC or, if there was a cancellation, within the time specified in ¶ 4(C) (five calendar days).
The foregoing highlights what the Broker needs to do, and when they need to do it, in order to preserve a claim for compensation where there is a cancellation or where the BRBC expires. The third aspect to the potential claim for compensation involves the timing of the Buyer acquiring a Property (i.e., during the Representation Period or during the protection period that is set up in ¶ 4(E)).
The foregoing discussion assumes that the claim for compensation is based upon the express terms of the BRBC and the Buyer and any other third party have acted in good faith and have not otherwise tortiously interfered with a Broker’s right to compensation. Under those circumstances, there may be an independent basis under California law to pursue a commission.
Next month’s article will continue this discussion and identify other issues with the BRBC. PRDS is working on its own version of a buyer representation and compensation agreement, and that will be addressed in a future article. Any real estate licensee interested in learning more about buyer representation and buyer representation agreements should take the NAR course to become an Accredited Buyer’s Representative (ABR).