Publications

Phillip C. Querin
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

Cooperative Compensation Disputes
[September 2006]

The issue of cooperative compensation between listing and selling brokers is a source of frequent confusion and uncertainty. This has been fueled, in part, by the hot real estate market, which, in the Pacific Northwest, shows no signs of abating.¹ The result has been that occasionally, offers of compensation made through the RMLS™ can become the subject of disputes between selling and listing brokers. Before analyzing the problem, let’s look at how we got to the point we’re at today.

Historically, the multiple listing service model has dominated the sale of residential real estate in most parts of the country. That model is based upon the premise that through cooperation, competitors will be able to better serve their clients and be compensated for doing so. To that end, Realtor® listings are placed in a common pool known as a “multiple listing service,” or “MLS,” which is accessible to all participating members. However, since the listing agreement is usually the sole basis of compensation for both the sides of the transaction,² the MLS model requires that the participating listing broker make an “offer of compensation” to all other MLS participants (i.e. “cooperating” buyer agents). In almost all transactions, the offer of compensation model works well; the selling agent brings a ready, willing and able buyer to the table, the transaction closes, and the listing agent and selling agent jointly share in the total commission.

In order to avoid abuse or run afoul of the law, the MLS system places restrictions upon itself and its members. For example, our local system, the Regional Multiple Listing Service™ or “RMLS™,” provide in its Rules that:

• No Control of Commission Rates or Fees Charged By Participants. RMLS™ shall not fix, control, recommend, suggest or maintain commission rates, fees or other compensation for services to be rendered by Participants or Subscribers in any manner whatsoever. Further, RMLS™ shall not fix, control, recommend, suggest or maintain the division of commissions, fees or other compensation between cooperating Participants or among Participants, Subscribers and others.
  
  
• Cooperative Compensation Specified on Each Listing. The Listing Broker shall specify, on each listing filed with RMLS™, the compensation offered to other RMLS™ Participants for their services in the sale of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker’s performance as the procuring cause of sale (or lease). *** (Emphasis added.)

However, the offer of compensation concept becomes tested when it attempts to deal with situations in which the listing is an exclusive right to sell,³ and the buyer’s agent does not get paid after having brought a ready, willing and able buyer to the table. There are several different scenarios in which nonpayment can occur: (a) The seller refuses to accept a full-price offer (where competing offers are not involved); (b) The seller refuses to close a transaction that he/she has already fully agreed to in writing; (c) The seller pays the listing side’s commission, but refuses to authorize any payment to the buyer’s agent; (d) The seller and listing agent agree to remove the listing from the RMLS™ after a cooperating broker has already procured a ready, willing and able buyer; or (e) the seller, acting alone, removes the listing from the RMLS™ after a cooperating broker has already procured a ready, willing and able buyer.⁴

In each of these situations, where the buyer agent’s right to a commission becomes “vested,” i.e. they were unquestionably the procuring cause, the cooperating agent does not have an independent legal claim against the seller under the statutory law of most – if not all – states. In Oregon, for example, two statutes conspire to make this so: (1) ORS 41.580(1)(g) (“the Statute of Frauds”) says that agreements to pay a real estate commission must be in writing and signed by the obligated party; (2) ORS 696.582 provides that in order to “freeze” a commission in an escrowed closing, there must be an underlying written agreement to pay that commission.⁵

The practical effect of these statutes is that only listing brokers may enforce commission claims against sellers.⁶ Since there is no clear, written, and signed agreement between the seller and the buyer’s broker to pay anything, cooperating agents are largely unprotected when bringing a buyer to the table. This is why the offer of compensation rules under the RMLS™ are so important. They are the last line of protection to buyer agents.

Essentially, the issue is one of contract law. By placing the exclusive right to sell listing into the RMLS™ and specifying the amount of commission⁷ payable to cooperating agents, the listing broker makes a “blanket,” “unilateral,” and “unconditional” offer of compensation.⁸ If that offer is “accepted” by bringing a ready, willing and able buyer to the table, there is a binding contract that is enforceable by the buyer’s broker.

The RMLS™ rules attempt to set forth certain guidelines for brokers and Realtor® arbitration panels, by providing that the listing broker’s obligation to compensate the cooperating broker may be excused if it is determined that:

• It was impossible or financially unfeasible to collect a commission from the seller;
  
  
• The listing broker was not at fault;
  
  
• The listing broker exercised good faith and reasonable care

RMLS™ Rule 6.2 gives further direction to Realtor® arbitration panels by suggesting that they examine “all relevant facts and circumstances” and identify:

• “(W)hy it was impossible or financially unfeasible for the Listing Broker to collect some or all of the commission established in the listing agreement.”
  
  
• “(A)t what point in the transaction did the Listing Broker know (or should have known) that some or all of the commission established in the listing agreement might not be paid.”
  
  
• “(H)ow promptly had the Listing Broker communicated to cooperating brokers that the commission established in the listing agreement might not be paid.”

If, after a review of all of the “relevant facts and circumstance,” a Realtor® arbitration panel concludes that a commission is owing from the listing broker to the cooperating buyer’s broker, an award may issue. The legal basis of this award is totally independent of any claim that the listing broker may have against their seller under the listing agreement.

Conclusion

Underscoring the contractual nature of the offer of compensation concept is the requirement in RMLS™ Rule 6.2 that the published listing information “…shall clearly inform the Participants as to the compensation they will receive in cooperative transactions unless advised otherwise by the Listing Broker in writing in advance.” (Emphasis added.) Without the security of knowing that a listing broker’s offer of compensation is enforceable, the concept of cooperation among competitors in the Realtor® industry fails.

FOOTNOTES:

1 Oregon home prices increased 19.5% in the second quarter of 2006 compared to the same period last year. This was the fourth highest increase of any state in the country. Oregonian, September 6, 2006.

2 This assumes that the source of the buyer agent’s compensation is from a portion of the gross listing commission. Certainly, buyer agents can contract directly with their own client for compensation. Frequently, “buyer broker” or “buyer service” agreements provide for such payment, but they usually say that the agent will first seek recovery of the commission from the listing broker’s offer of compensation.

3 Exclusive agency listings present somewhat different issues, and will not be addressed in this article.

4 This article does not address claims by the cooperating agent in which the listing broker is seeking the entire commission for themselves. These situations are most commonly procuring cause disputes between the Realtors® themselves, and do not involve a seller’s nonpayment of the buy-side commission.

5 This statute does not act to enforce the collection of a commission, but it authorizes escrow to withhold disbursement of some or all of the agreed-upon commission back to the seller. In this manner, the broker seeking payment may enforce their commission claim knowing that the funds are being held by a neutral party.

6 There is a possibility that the listing broker could assign their commission claim against the seller to the cooperating broker to collect. However, this legal gambit is not usually pursued and may have problems of its own.

7 Stated in terms of dollars or a percentage of the gross selling price. RMLS™ Rule 6.2.

8 RMLS™ Rule 6.2.

© Copyright 2006, Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.

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