Commission Issues
Top 10 Legal Issues Relating to Commissions
By Monica S. Staaf, RIAR General Counsel
#1 Is a verbal offer of compensation legally enforceable?
No. A Rhode Island law “the “Statute of Frauds” requires a writing for a promise to pay a commission to be legally enforceable. State-Wide Multiple Listing Service requires member to make a written offer of compensation to cooperating brokers, which meets this requirement. With “for sale by owner” properties, non-MLS listings, rentals, commercial, and others, make sure that the seller or listing broker – if there is one – agrees in writing to pay you.
#2 Is a listing broker required to offer a 50-50 split to a cooperating broker?
No. A listing broker is not legally required to share his/her commission equally with a cooperating broker.
#3 What does a “V” mean in the MLS compensation field?
“V” refers to a variable rate commission in MLS. This means that the seller agrees to pay one commission if the listing broker has both sides of a transaction and a different commission rate if a cooperating broker procures the buyer. A variable rate commission means only that the listing broker’s own commission will vary. It does not mean that the compensation to cooperating broker will vary.
#4 What does “NS” mean in the MLS compensation field?
“NS” means that a listing broker is offering compensation to a cooperating broker in MLS as a percentage of a net sales price instead of the gross sales price. The net is calculated by deducting seller concessions, such as seller-paid closing costs, construction upgrades for a new home, or repairs or a credit paid by the seller for an unforeseen deficiency in the property. The MLS Rules require the listing broker must explain in Compensation Comments what types of concessions would be deducted from the gross. EXAMPLES: “Compensation excludes seller-paid closing costs” or “Compensation will not be based on repairs or seller credits.” The comments are required since some listing brokers might deduct seller-paid closing costs while others might deduct repairs.
#5 Can a cooperating broker use the purchase and sales agreement to require the listing broker to pay a higher commission?
No. It’s a violation of the REALTOR® Code of Ethics to use the purchase and sales agreement to try to use the purchase and sales agreement to change the amount of compensation that a listing broker is offering.
Allowed: This agreement is subject to Seller paying Cooperating Broker a commission of ______.
Not allowed: This agreement is subject to Listing Broker paying Cooperating Broker a commission of ________.
#6 Can a Rhode Island broker legally pay a commission to a broker who is not licensed in Rhode Island?
No, but a Rhode Island broker can pay a referral fee to a broker who is not licensed in Rhode Island if the out-of- state broker refers a client or customer and has a valid license from another state. The out-of-state broker cannot legally be involved with showings, inspections, negotiations, or have his/her name on the purchase and sales agreement. Brokers and salespeople who are involved with a transaction relating to Rhode Island real must hold a Rhode Island license in order to receive a commission.
#7 What is the deadline for a principal broker to pay a commission?
Rhode Island regulation requires a principal broker to pay a cooperating broker, referring broker or affiliated licensee his/her commission within 10 calendar days after the principal broker is paid, unless otherwise agreed in writing.
#8 Can a listing broker offer compensation to a cooperating broker that is different from what the listing broker is offering other brokers in MLS?
Yes, a listing broker can offer alternative compensation to another company under the following circumstances:
- the principal broker and office company policy allows this practice.
- the listing broker sends a written notice about the commission to the cooperating broker before his or her licensee has produced an offer.
- the listing broker informs the seller that the company is offering different compensation to a particular company; and
- no one in the listing broker’s company discusses this with a competitor.
#9 How does “procuring cause” affect compensation that is offered in MLS?
The MLS rules state that the compensation offered is for a cooperating broker who is the procuring cause. This means that the broker “initiated a series of events which were unbroken in their continuity and which resulted in the sale.” If the principal brokers cannot agree on who is entitled to compensation, he or she can file an arbitration request and seek meditation with his/her local REALTOR® association. The National Association of REALTORS® has adopted a number of criteria to determine who is the procuring cause. Here are some examples.
Who introduced the buyer to the property? Did he or she provide a Mandatory Real Estate Relationship Disclosure form to the buyer? Was there any abandonment or estrangement between the licensee and the buyer? Did another broker interfere? Who motivated the buyer to buy?
#10 Is a licensee who changes offices entitled to receive his/her normal split if the closing happens after he or she leaves?
It depends on what the company’s written termination policy says. Some companies pay a full commission if a transaction closes after a licensee leaves; some offer a different rate, depending on whether the property has just been listed or is days away from closing; others offer no compensation after a licensee leaves.
All principal brokers must adopt a written termination policy that explains how the commission split will work. The policy must have the licensee’s signature to apply.
Legal Hot Line contact information:
Monica S. Staaf, RIAR General Counsel
401-432-6945
[email protected]