Who Is Impacted When The Buyer’s Representations In The C.A.R. RPA Regarding The Terms In The Buyer/Broker Agreement Are Discovered To Be Inconsistent With The Actual Buyer/Broker Agreement?
By David Hamerslough and Victoria B. Naidorf
February 13, 2025
Last month’s article spotlighted several industry issues that we were going to monitor in 2025. One of those issues, unfortunately, has already resulted in three claims within the last 30 days.
In December of 2024, C.A.R. made three significant revisions to its forms regarding a buyer’s request for the seller to pay the buyer’s broker’s compensation. First, C.A.R. eliminated the Seller Payment To Buyer Broker form (SPBB) and did not replace it with a comparable form. Second, CAR revised its RPA in ¶ 3G(3) for the buyer to make a request that the seller pay compensation to the buyer’s broker. Paragraphs 3G(3) and 18A(2) of the RPA now require the buyer to affirmatively represent that they have a written representation agreement with their broker that is valid, covers the property, and provides for compensation for no less than the amount that the buyer requests the seller pay to the buyer’s broker. Third, C.A.R. eliminated its prior language in the RPA authorizing the seller to ask for a copy of the relevant buyer/broker agreement.
One of our concerns is that the RPA forces sellers to rely on the veracity of buyers and their brokers without any requirement that the buyer produce the actual buyer/broker compensation agreement or other written confirmation (collectively referred to herein as “BRBC”) that their statements in the RPA are true. While the C.A.R. RPA provides a remedy if the buyer’s statements are untrue (the seller does not have to pay the buyer’s broker’s compensation), one of the issues we see is that this remedy cannot be enforced if the seller has no way to confirm the representation. Another issue is that it potentially impacts the ability of the buyer to perform and/or negatively impacts the ability of the buyer’s broker to get paid.
One obvious solution to this situation is for sellers to require that a BRBC is provided as part of the seller’s counteroffer. We are aware that some brokerages are currently making this a company policy. Another solution is for sellers’ brokers to insist as part of the instructions for submitting offers that a copy of the BRBC is submitted with the offer. If that second approach is used, we recommend that those instructions are on a company or individual website that does not contain a direct or indirect link to any MLS data so as to avoid even the appearance that the seller is attempting to make an offer of compensation through the MLS.
We understand that some MLS may be implementing a program for spot-checking deals to verify that buyers have a written representation agreement and that the amounts of compensation are consistent with what is specified in other transaction documents. We believe that this type of program is intended to address the obligation of the MLS to monitor some of the practice changes required by the NAR settlement. It is unclear whether this type of program is intended to or will benefit a seller by providing a seller with any opportunity to verify the amount of compensation in the representation agreement.
We believe that it is a better ethical and business practice to have the validity and terms of the BRBC confirmed before the buyer and seller ratify a contract. Our belief is that doing so may eliminate, among other things, those claims that could be made (a) during a transaction when there are discrepancies between the buyer’s request for compensation in the RPA and the terms of the BRBC and (b) those discrepancies are discovered either just before or after escrow closes. Confirmation of this information may eliminate the following types of claims:
- Deposit disputes/breach of contract claims between the buyer and seller because the later discovery of the discrepancy means the seller is contractually free of any obligation to pay the buyer’s broker, which may result in the buyer having insufficient funds to be able to close the deal and/or pay the buyer’s broker;
- Conflicts between the buyer and their broker, resulting in a negotiation between the two of them as to how any shortfall is going to be funded;
- Claims by the seller against the buyer for fraudulently inducing the seller to enter into the purchase contract by misrepresenting the terms of the BRBC;
- Claims by the seller against the seller’s broker for negligence and/or breach of fiduciary duty for failing to secure confirmation of the buyer’s representations in the RPA before the contract was fully signed or because of the impact on the seller’s ability to close escrow and the consequences if that does not occur;
- Claims of negligence and/or breach of fiduciary duty by the buyer against the buyer’s broker for creating mistrust with the seller, which could impact the seller’s willingness to negotiate later buyer requests for repairs, time extensions, etc.; and
- Code of Ethics claims.
While claims will always depend on the facts and circumstances of each transaction, the three current claims that we are aware of illustrate how they might arise.
In the first claim, the seller requested the buyer representation agreement as part of a counteroffer but did not receive it before ratification. The seller’s broker followed up and then received the representation agreement and discovered discrepancies. The seller’s broker advised the seller that the seller was entitled to not pay the buyer’s broker any compensation. The seller wanted to close escrow and instructed his broker to notify the buyer’s broker that they were going to need to resolve this issue between themselves but reserve the right to not pay any compensation. The outcome was that the buyer’s broker reduced his compensation to the amount in the BRBC.
In the second claim, the request for a copy of the BRBC was not made as part of a counteroffer but was made after contract ratification. A transaction coordinator provided the BRBC, although it is unclear whether the buyer’s broker was aware that the TC was going to provide that document. Once again, the impact of the misrepresentation fell on the buyer’s broker, who lowered his commission to the amount in the BRBC.
In the third claim, the seller discovered the discrepancy between the broker compensation representations in the RPA and the BRBC after escrow closed when the seller learned that the amount of compensation stated in the RPA was higher than what the broker received due to a rebate made by the buyer’s broker to the buyer. The BRBC, including the rebate on an addendum, was provided to the seller’s broker at the time the offer was submitted. We will leave for another discussion whether this rebate agreement violates the terms of the NAR settlement or what ethical issues might exist in the event the rebate was, among other things, not timely disclosed. The seller’s claim is based upon, among other things, their broker’s failure to read the BRBC, analyze its impact on the seller’s net sale proceeds, and discuss the ramifications and consequences of these facts and issues with the seller before the seller accepted the buyer’s offer. What the seller in this claim is seeking from the broker is the difference between the amount that the buyer’s broker agreed to receive after the rebate and the percentage that the seller agreed to pay based on the buyer’s representations in the RPA that the buyer had agreed to pay the buyer’s broker that percentage.
Another way discrepancies between the buyer’s representations in the RPA and the BRBC may be discovered before close of escrow is where the escrow officer requests documentation on the buyer’s broker’s compensation or issues a preliminary closing statement where this information is revealed. Whether this will occur will turn in part on the practices and procedures of each title company/escrow and other transaction documentation.
Although this article is primarily aimed at discrepancies regarding the amount of compensation that the buyer is asking for as compared to the buyer’s obligations in the BRBC, there are other potential discrepancies that could have the same effect. Examples include the BRBC not being signed by all parties, the BRBC expiring without a valid extension, and/or the BRBC not covering the particular type or location of the Property. If the BRBC is not legally valid in connection with the subject transaction, then the buyer’s representations are false, and the seller is not obligated to pay the buyer’s broker anything.
The bottom line, as Shakespeare wrote in The Merchant of Venice, is that the “truth will out.” Eventually, sellers will learn whether or not the buyer’s representations in the RPA regarding the BRBC are truthful. Efforts to hide the BRBC from sellers during contract negotiations for any reason can generate significant issues and/or damages for brokers, sellers, and buyers.
We do not really know all of the reasons for C.A.R.’s shift to (a) having buyers affirmatively represent that they have a valid representation agreement that is not in conflict with the request made by them in the RPA and (b) eliminating the contractual language giving the seller the right to request a copy of the BRBC. It is possible there was some concern regarding proprietary or confidential information being conveyed to the seller’s broker and the concern on the part of buyers’ brokers that that information would be used to solicit clients. Another rationale may be that conveying that information creates antitrust issues. Our view is that as long as there is a representation regarding the validity of the BRBC and the amount of compensation in that BRBC, these concerns should give way to a seller’s right to confirm the terms of the BRBC. If C.A.R. intended to somehow insulate brokers from potential claims, we are concerned that not only will that not be the result, but these three claims support our concerns that there are potential issues with respect to C.A.R.’s approach.
Dissatisfied buyers and sellers are always going to look to their brokers to explain why potential issues and disputes were not anticipated, discussed, and/or addressed in a timely manner. Creating a system where facts are withheld from the sellers and buyers are made legally responsible for any discrepancies in their representations will not necessarily insulate brokers and agents representing these parties.
We are also concerned that the current structure C.A.R.’s RPA is fostering workarounds by brokers/agents that are not in compliance with the NAR settlement and/or the new California statute on broker compensation. We are already hearing of agents who are forgoing having a BRBC and then creating one that is backdated after learning of the compensation that the seller is willing to pay. We have also heard about agents who create zero or nominal compensation provisions in the BRBC and attach a series of addenda to match whatever various sellers might be willing to pay. Finally, we know there have been attempts to have buyers sign an addendum to the BRBC at the same time as the BRBC is created so as to extend the term of the BRBC beyond the 3-month limit. Efforts to actively circumvent the NAR settlement and/or California law could ultimately lead to investigations by the Department of Justice, the Attorney General, and/or the Department of Real Estate.
An ounce of prevention is worth a pound of cure. We therefore strongly encourage sellers’ brokers/agents to secure a copy of the buyer/broker agreement (including any addenda) entered into by all buyers making offers on their listings before their clients accept any offers. Once the buyer/broker documentation has been provided, sellers’ broker/agents should carefully review the information in the BRBC and compare it with all of the buyers’ representations in the RPA. The sellers’ broker/agent is not being charged with enforcing the law; the seller’s broker/agent is meeting its fiduciary obligations to the seller to confirm that the buyers’ representations are true. If the representations are false, then this should be pointed out to the seller so that the seller can decide what course of action to take.
C.A.R. typically revises its forms, if at all, on a yearly basis. If that pattern holds true with the RPA, then it is important for buyers, sellers, and their respective brokers/agents to actively take into consideration the better practices that we have raised in this article. Following our risk management recommendations may help to eliminate the time and expense involved in claims, the potential impact on future business with unhappy buyers and sellers and/or governmental action.
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