New Form For “Communicating Referral-Related Compensation To Clients”

By David Hamerslough and Victoria B. Naidorf

In December, as part of its biannual forms release, C.A.R. introduced a new form, “Realtor Acknowledgment And Disclosure” (“RAD”). C.A.R.’s literature expresses its belief that the RAD is part of the “best practices for communicating referral-related compensation to clients.” It is intended to “reinforce transparency and trust” with respect to the disclosure of referral fee arrangements.

C.A.R.’s literature identifies a number of other reasons for the new form, including the following: (1) obtaining the informed written consent and agreement of a client for the payment or receipt of a referral fee; (2) obtaining such informed consent avoids the potential for a client to claim that there has been a breach of fiduciary duty or a violation of the Code of Ethics relating to, among others, the receipt of undisclosed compensation, an agent’s/broker’s failure to be honest and loyal in their dealings with the client, and/or concealing pertinent facts from a client, such as the motivation behind and existence of a referral fee; and (3) achieving transparency with regard to the payment of compensation and thereby avoiding any claim that might be made on that ground.

There are three sections to the RAD. The first contains a definition of the term “Realtor” and a disclosure of whether the licensee is or is not a Realtor and/or a member of C.A.R. and/or a member of a local association of Realtors. The second section invites the client to contact the licensee’s broker, office manager, and/or supervisor if they are dissatisfied with the services they are receiving as well as to contact any local association of which the licensee is a member if contact with the broker/office manager/supervisor is ineffective.

Section three of the RAD directs the agent to disclose (1) if they are receiving compensation from multiple sources (e.g., both the buyer and seller) and contains boxes that are to be checked identifying those sources, (2) if they have or will have a present or potential ownership interest in the property that is the subject of the transaction and/or any relationship that the licensee and/or broker has with any party to the transaction, and (3) the amount of any referral (or other) fees that are to be received or paid and the amount of such compensation. The RAD calls for the signature of any client or principal potentially impacted by the payment of the referral (or other) fee.

The RAD should be provided to the client and/or principal as soon as the licensee knows that a referral (or other) fee will be paid or at the signing of a buyer representation and broker compensation agreement or an actual referral of the principal to another licensee. If the referral fee is negotiated after the transaction begins, the RAD should be prepared and signed promptly. Any disclosure should include the amount of the referral (or other) fee or the way it will be calculated. C.A.R. recommends the disclosure of any such referral (or other) fees even if they don’t affect the client’s costs.

The following are some of our preliminary comments regarding the RAD:

• California law requires that commissions and/or compensation (including referral fees) must be paid through real estate brokers. Sales associates should not be reaching agreements regarding compensation and/or referral fees directly with other agents or with a client without the knowledge and approval in writing of their broker.
• Paragraph 2 of the RAD contains the following statement: “I pride myself on providing good service and behaving ethically.” While we certainly hope that any licensee subscribes to this credo and recognizes that they need to provide competent, professional, and ethical service to a client, just recognize that you have acknowledged and agreed to this credo.
• The RAD is not a substitute for a buyer representation and broker compensation agreement or a residential listing agreement. According to C.A.R., it is the primary tool for referral (or other) fee disclosure. The BRBC and RLA have been revised to add a checkbox to indicate if a referral fee is being paid. As we understand it, if the box is checked, then the RAD will be automatically generated at that time so it can also be prepared and signed.
• One issue that we have heard from several agents who work with Zillow and pay Zillow compensation in exchange for potential buyers is whether it will be necessary and possible to obtain a signature from Zillow on any RAD. If a referral fee is to be paid in exchange for contact information for prospective buyers, ask the following questions preliminarily: (1) is the relationship a referral-fee-based one or a lead-generation fee, (2) is the entity with whom this relationship is established a licensed broker, (3) is the payment tied to or dependent upon a closing of any escrow? If the answer to question 3 is yes, then the compensation is more likely to be characterized as a referral fee.
   
  At this point, we recommend that all agents working with any referral entities carefully review any agreed with their broker and/or with a qualified California real estate attorney to assist in determining whether the compensation being paid is a referral fee or a lead-generating fee. Once that is determined, then one can determine if the signature on a RAD by that entity is required and whether it can be obtained.

Currently, the Code of Ethics does not contain an affirmative statement that referral fees need to be disclosed to a client/principal. C.A.R.’s literature has interpreted the current language of Article 2, which requires that Realtors “avoid concealment of pertinent facts,” as providing a reason why referral fees should be disclosed. Our understanding is that at a national level, there was a recent proposal introduced to amend the Code of Ethics to affirmatively require the disclosure of referral fees. While that measure passed the Board of Directors, it failed, by a slim margin, to pass the delegate body. NAR’s website indicates that many delegates voice support for transparency on this subject but thought that the measure needed further review and development at a committee level. This is something we will have to monitor in 2026.

Even if NAR does not revise the Code of Ethics, we recommend that all agents comply with these new C.A.R. procedures. That recommendation is based, in part, on the fact that C.A.R. has taken the position that agents need to secure written client consent to pay or receive referral fees as part of their fiduciary obligations. After all, since agents legally need to be completely transparent with their clients on the topic of agent compensation, it is illogical to exclude from that requirement some of that compensation simply because it is to or from a referring entity.