What is a Broker to Broker Agreement?
A real estate broker to broker agreement is a written contract between two real estate brokers. In the context of a listing agreement, the listing broker might write the agreement to a participating broker from his or her MLS or even in the case where the listing broker and participating broker are not both members of the same MLS. The professional industry purpose of the broker to broker agreement is to identify, define and/or allocate the commission rate or commission amounts due the listing broker when the buyer’s agent/participating broker sells the listed property to a buyer who is the customer of the buyer’s agent/participating broker.
The real estate broker to broker agreement should also define who the commission is owed , how the commission is owed, when the commission is owed and what happens if the commission is not paid. It could be said that the real estate broker to broker agreement is the "backup" for the listing agreement between the seller and the listing broker which identified the commission due. The broker to broker agreement should also answer the general business questions concerning who the commission is owed to, when it’s owed, how it’s paid, what happens if it isn’t paid and what recourse exists to compel payment.
For most real estate brokers their MLS membership agreement provides and dictates to them the terms and conditions of participation within their MLS system.
Key Elements of the Agreement
The content and terms of a broker to broker agreement can vary considerably.
Typical components of the agreement include "whereas" clauses explaining the purpose of the agreement, definitions of the various parties to the agreement, introduction of the assets or assets to be sold and related contingencies, along with commission structure, assignment, confidentiality, prevailing party attorney’s fees clause, and dispute resolution provisions.
Parties:
The agreement will identify the parties to the transaction, with an explanation of the nature of the relationship. For example in a direct sale of real estate, the agreement might include language such as "Broker A represents the Buyer and shall remit a 3% commission to Broker B." Or, the agreement might be broader and state "Broker A represents the Buyer and has entered into an agreement with Broker B to share commission with respect to the sale of the Property." …
Agreement specifics:
Agreement specifics: The agreement will specify whether the commission is a flat fee or a percentage of the final sales price. If there is a flat fee, it will be stated in the agreement. If it is a percentage of the final sales price, the agreement will provide for payment of the commission only when a transaction closes. The agreement will provide that commission allocated to the referring broker gets paid first from the brokers’ agreed upon share.
Overview of Contingencies:
- Deposit
- Financing contingency
- Disclosure and remediation of environmental hazards
- Approval of lease document terms
- Order of possession procedure
- Environmental assessments, if applicable
- Further rental hazard disclosures
- Other due diligence items
Assignment provisions
The agreement will typically provide that neither party may assign its rights and obligations under the agreement without the written consent of the other party. The parties may agree to a non-circumvention clause, which would provide that neither party may be circumvent the other party to buy or sell the property, or any part of it, without personal participation of both brokers.
Confidentiality provisions
The agreement typically requires that the parties keep all information confidential with respect to the contemplated transaction for up to two years after the end of the agreement.
Commission and fees provision
The agreement typically will provide that in addition to the real estate brokers’ commissions, attorney’s fees, if incurred in enforcing the agreement, are recoverable, plus interest from the date due. The interest rate will often be set at a specified default rate.
Dispute Resolution provisions
The agreement will typically provide for either mediation or arbitration in any dispute. Arbitration clauses require that the parties submit to arbitration instead of filing a lawsuit in a court of law.
Benefits of Broker to Broker Agreements
Performing a real estate transaction in an efficient manner is the best way for a broker to make money. The timing of a commission payout, the strength of the client relationship, and the ability to service a deal all suffer when the time to completion before payment is extended. This is also true in the broker to broker context. When a matter between two brokers is referred through a broker to broker agreement, the participating brokers are able to quickly and efficiently communicate about their roles as broker in the transaction. If one of the brokers is not the exclusive listing agent for the transaction, they can rely on the broker to broker agreement to guide their role without risking a violation of their duty to the listing broker. It is much better to have the rules of conduct for a broker to broker relationship laid out in a written agreement at the start than it is to trust that the parties will remember their duties as a broker to the transaction. Having this written agreement also allows brokers to service a large volume of properties at any given time because each transaction can be handled fluidly by the broker to broker agreement.
How to Create a Broker to Broker Agreement
The goal in drafting a broker to broker agreement, as in any contract, is to get what you think you are getting and not what you think you are giving. In the case of a broker to broker agreement, you are likely entering into a transaction with a fellow licensed professional. Both parties may not literally need a formal written agreement if the relationships are successfully maintained.
However, having a written broker to broker agreement can be useful in summarizing what is agreed to, avoiding misunderstandings of expectations and scope, and/or creating a record of the overall transaction.
Broker to Broker agreements may run longer than 2 pages or even 10 depending on the term of the agreement, the number of parties involved and the scope and pricing terms of the services to be provided. There may be a fee sharing schedule, an indemnity provision, or an arbitration clause when the agreement is between brokers that are members of separate real estate boards.
There are some basic elements to the agreement that should be included. This includes but is not limited to a date of the agreement, names of parties, addresses, and the scope of the services to be provided. A value or distribution of the consideration should be included. Typical examples of a distribution of the commission are either 50%:50% or 60%:40% in favour of the brokerage representing the party who procured the sale or rental. This is not a setation and a range is acceptable as long as it is clear what increments may be used.
As a starting point, I suggest using the standard "nobody" template provided by real estate boards and associations. I have attached a copy of the OREB standard "nobody" form. It may not be appropriate for your particular situation but it is a start and will give you an idea what to include. Once you receive the necessary advice from your lawyer, you will be able to make the necessary contractual modifications to meet your needs on a case-by-case basis.
Mistakes to Watch Out For and How to Avoid Them
There are several common mistakes real estate brokers make that can lead to lawsuits, regulatory action, or both. One of the most significant problems is attempting to have agreements created by internet contract shopping sites serve as your standard residential or commercial real estate broker to broker agreements. Just because a contract looks good and is provided very cheaply by one of these services does not mean that it is legal, will hold up in court, or is appropriate for all circumstances.
Real estate contracts, including brokerage agreements and listing agreements must be created by a licensed /insured attorney in order to be enforceable. At Caldwell & Lawrence Ltd., our contract attorney drafts customized agreements specific to the facts and circumstances of each situation. Our clients sleep well at night knowing the important agreements they enter into are legally enforceable and comply with all realtor agency rules and regulations.
Other common pitfalls include:
- Entering into a purchase agreement , listing agreement, or other real estate related contract without having the other party’s in-depth financial information.
- Representing multiple parties who have conflicting demands, causing you to be a defacto mediator in a contract dispute.
- Entering into an exclusive representation agreement with another broker without adequate supervision to ensure that the work is being performed as agreed to by each party.
- Failing to explain the difference between an exclusive representation agreement and a multiple listing service agreement.
- Failing to write separate contracts for the sale of commercial property and the sale of residential property.
The best way to avoid these pitfalls is to consult with an experienced contract attorney before entering into any real estate broker to broker agreement.
Examples of Broker to Broker Agreements
As real estate lawyer, we work with brokers all the time on agreements between brokers. One recent example involves the sale of a nursing home portfolio that netted our broker client over $1,000,000 in commission as a result of the following deal: The seller of the nursing home portfolio is owned by Company A and Company B. Company H represents Company A as to the sale of the nursing homes. Company X represents Company B as to the sale of the nursing homes. The buyer of the nursing homes was Company the related to Company B. In other words, the two brokers, working for separate companies represented the two sellers’ (meaning the parent companies) and negotiated a 50/50 split of the commission.
In order to effectuate a similar deal, the brokers involved first agreed as to the commission they would seek to obtain. In this example, the commission agreement is that if the transaction closes, the seller’s brokers shall divide the net commission equally. All parties to the deal had to agree that the brokers would receive a 3% commission on the sale price (a healthy commission) in order for this deal to work out as it did. The buyers and seller agreed to the above commission arrangement and otherwise no agreement to the contrary was made.
In most broker to broker fee agreements, such as the one above, there is a 60/40 or even 66.67/33.33 split of the commission. A smaller split thus allows for double the potential commission by referring the transaction to another broker. However, in this case, a 3% commission allowed the deal to be structured as it was, with both sellers and both brokers agreeing to a 50/50 split of the fee.
Setting up a deal as we did in the above situation, is not easy and takes strategy and a lot of practice. That’s where an experienced broker to broker transaction agreement can make the difference.
What the Future Holds for Broker to Broker Agreements
Looking ahead, the makeup of the real estate industry may shift with the growth of discount brokerages, the "iBuyer" model where a company quickly buys a house before reselling it, and new technologies that speed up the process of selling or buying real estate. With commission rates already at historical lows, the advent of these discount business models will likely force more traditional brokerages to cut their commission rates in order to stay competitive. Indeed, we have already seen real estate agents use app-based services to bargain for lower commissions. Formations of broker to broker relationships that require alternative fee arrangements to reflect the increasingly common fixed-rate or even flat-rate commission agreements among brokers may be a contractual trend of the future.
"Traditional" broker to broker relationships will also continue to evolve. For example , while customarily one member of a broker-to-broker relationship can only succeed in procuring a contract if the other has helped the parties find a suitable property, and vice versa, testimonials from such brokers currently call that arrangement into question. Technology-based and other similar brokers (i.e., those offering MLS services, financing, or inspections) may be prompt to more flexible arrangements that provide for increased compensation for wider ranges of services or that reward brokers for exceptional service or effort.