Best of the Hotline

By James L. Goldsmith, Esq.

Carelessness costs

The legal hotline is a great asset for PAR members to receive free legal advice. Here's a recent case about referral fees that may benefit you.

Background: The owner of commercial realty decided it was time to sell. He approached a close friend who is a residential salesperson, Mr. R, and asked for advice and the name of a good commercial broker with whom he could list his property. The owner also knew that by allowing Mr. R to make the referral, Mr. R would likely realize a referral fee.

Mr. R. approached Ms. C, a commercial salesperson with a good reputation for moving the type of property in question. As for the referral fee, Ms. C offered to pay a stated percentage from the "listing side" of the commission.

The owner made contact with Ms. C and was impressed with her presentation and her opinion of the property. He entered into a listing agreement with her that provided that the selling broker who procured the ready, willing and able buyer would earn an amount equivalent to half of the commission the owner agreed to pay. Ms. C embarked on marketing the property.

In short order, Ms. C had a buyer who said he that he was not working with a real estate agent. The buyer stated that he was working with an attorney who would handle his side of the transaction. In fact, it was the attorney who submitted the written offer and who negotiated the transaction and represented the buyer through closing. The attorney was paid by the buyer outside of closing.

Question: Ms. C and her broker are prepared to pay Mr. R the agreed referral percentage, but only on half of the commission charged. Ms. C claims that of that commission, 50 percent is attributed to the listing side and 50 percent to the selling side that she and her broker were prepared to pay a cooperating broker. Mr. R claims entitlement to his percentage referral fee as applied to the entire commission earned by the listing broker. What is the referral fee: a percentage of 100 percent or 50 percent of the commission charged?

Answer: Had this gone to arbitration, a decision would have been made by three Realtors® exercising their peer judgment. But since I don't have the benefit a three-Realtor® panel to guide me, I will venture an answer on my own: the fee to be paid is a percentage of the entire commission less that portion that would have been paid to a cooperating selling agent. My reason is based, in part, on PAR's Referral Agreement (REF), a standard form offered to memorialize referral arrangements. The form provides for a referral fee as a percentage or a flat amount of the "fee received by receiving broker for the 'listing side' or 'purchase side' of the transaction."

By parsing the commission into a "listing" and "purchase" side, it is clear that the referral fee is not intended to be paid on the entire commission. Even though the form was not used in this transaction, it sheds light on the standard in the industry that there is a listing and purchase side to each commission regardless of whether both sides are earned by a listing broker (who may also be the selling broker) or whether it is shared with a selling broker. Parties who wish to make an arrangement different from that suggested by the standard Referral Agreement can do so. Had Ms. C precisely stated that in the event of an in-house sale, a sale by the listing salesperson, or if there is no "selling" side, the referral fee will be a different amount. In our example, no referral fee agreement was used which makes establishing the original arrangement much more difficult. In the absence of a writing, the parties are forced to rely on their recall which is subject to claims of incredibility.