Keep Commissions Out of the Contract
Posted on May 10, 2003 by Michelle Lind, Esq.
The Arizona Association of REALTORS® Residential Resale Real Estate Purchase Contract (“Contract”) should not be used to address broker compensation or commission issues. The Contract is an agreement between the buyer and the seller outlining each party’s rights and obligations in the sale of a home. The Contract should not be utilized to negotiate or renegotiate the rights and obligations of third parties, including the broker (and agents). Thus, brokers should keep commission issues out of the Contract.
The commission due to the listing broker should be addressed in the listing agreement, which is a separate agreement between the listing broker and the seller. The commission due to the buyer’s broker should be addressed in a written employment agreement between the buyer’s broker and the buyer, or through the MLS offer of compensation, which is an agreement between the listing broker and the buyer’s broker. All of these agreements are separated to avoid disputes and liability, and should remain so. The Contract clearly states that any commission due as a result of the transaction will be evidenced by a separate written agreement.
Negotiating the commission in the Contract can lead to disputes and increased liability. For example, if upon receipt of an offer from the buyer, the listing broker advises the seller to respond with a counter-offer requesting that the buyer’s broker reduce his or her commission, that counter-offer has the same legal effect as rejecting the buyer’s offer. The buyer would then have the opportunity to reject the counter-offer and decline to enter into a contract with the seller to purchase the home. If the commission issue subsequently becomes an obstacle to contract formation, the listing broker may have breached the broker’s fiduciary duty to the seller by making broker compensation a part of the Contract negotiation. The same principal applies if the buyer’s broker submits an offer on behalf of the buyer with a provision that the listing commission be reduced.
Further, A.A.C. R4-28-1101(D) states: “[a] licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of a client.” Thus, negotiating the commission in the Contract may result in a violation of the Arizona Department of Real Estate Commissioner’s Rules.
Finally, Standard of Practice 16-16 of Article 16 of the REALTOR® Code of Ethics states:
REALTORS®, acting as subagents or buyer/tenant agents or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer’s agents or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation. (Amended 1/98)
Therefore, attempts to negotiate the commission in the Contract may also result in a violation of the REALTOR® Code of Ethics.