New Way to Resolve Fee Disputes

Under new procedures, listing brokers who aren't paid may be excused from paying cooperating brokers.

February 1, 1997

Imagine that you're a listing broker who wins a listing and sells the house but ends up paying out everything you've earned to satisfy a claim from a cooperating broker.

Or--even worse--imagine that, after paying the claim, you're forced to dig into your own pocket to pay another cooperating broker who's found to be the procuring cause of the transaction.

In recent years these situations weren't imaginary. They actually happened as a result of arbitration awards made in connection with fee disputes in different parts of the country.

Last November the Board of Directors of the NATIONAL ASSOCIATION OF REALTORS® refined the procedures for resolving compensation disputes in an effort to bolster their fairness. The changes will reduce the likelihood that listing brokers will end up without a fee through no fault of their own. The modifications will also cut down the likelihood that listing brokers will end up having to pay a cooperating broker for transactions in which they've received no money from the seller.

The amended procedures went into effect Jan. 1.

In the area of compensation dispute resolution, the NAR directors took three major actions:

  1. Established a policy clarifying that arbitration panels can excuse listing brokers from compensating cooperating brokers when circumstances make it impossible or financially unfeasible for listing brokers to collect their commission from the seller.
  2. Mandated arbitration of certain noncontractual compensation disputes. In other words, they established specific instances in which cooperating brokers may arbitrate compensation disputes with each other without involving the listing broker.
  3. Reaffirmed that "procuring cause" will continue as the basis for resolving compensation disputes stemming from cooperative transactions.

Here are two "nightmare" scenarios for listing brokers that the new procedures are designed to correct.

1.Sellers don't pay

John Doe gets the listing on a house. The contract specifies that the listing broker will receive a commission. Cooperating brokers are offered half of Doe's commission. Cooperating broker Joyce Adams brings an offer that the seller accepts.

Before the transaction closes, the sellers disclose that they are declaring bankruptcy and have just recorded a second mortgage on the property--meaning that it's unlikely there will be enough equity in the sale to satisfy the mortgage lenders.

At closing, there's no money to pay listing broker Doe's commission. Doe is left empty-handed.

Cooperating broker Adams brings arbitration against Doe, claiming that he owes her compensation regardless of whether he actually was paid or not. The arbitration panel awards Adams her money.

Doe must pay Adams even though he himself received nothing from the sale.

Under previous procedures, arbitration boards had no definitive guidance concerning how to decide disputes like this. Arbitration panels in different areas of the country handled the problem in various ways, according to Bruce H. Aydt, CRB, chairman of the working group that recommended the procedural changes to the NAR Board of Directors (see "What Prompted the Changes?"). Aydt is executive vice president and general counsel of The Henry Co., REALTORS®, in St. Louis.

Some panels concluded that since the seller had given no money to the listing broker, there was no money to divide with the cooperating broker. Those panels decided against the cooperating broker, saying there was nothing to arbitrate.

Other panels went in the opposite direction. They held that the listing broker had promised to pay the cooperating broker under specified circumstances and that as long as the circumstances were met, the listing broker had to pay.

The new procedures clarify that the listing broker's obligation to compensate a cooperating broker may be excused "if it is determined through arbitration that, through no fault of the listing broker and in the exercise of good faith and reasonable care, it was impossible or financially unfeasible for the listing broker to collect a commission."

2. Listing salesperson "pays" twice

Susan Smith lists a house. The contract specifies that the listing broker will be paid a commission if the house is sold. A buyer's representative, John Jones, presents an offer in the name of a buyer. The offer specifies that Jones will be paid a commission directly by the seller--not by the listing broker.

Smith agrees to cut her listing broker's commission by 3 percent to facilitate the transaction.

After the sale closes, Smith is approached by another broker, Barbara Baker, from a third realty company. Baker says, "I showed this house to the buyer before John Jones. I'm the procuring cause, and my company should get the commission you offered through the MLS."

Baker can't arbitrate the dispute with Jones because there's no contractual relationship between them. However, Baker can arbitrate with the listing broker, Smith, since Baker believes she accepted Smith's offer of compensation--creating a contractual relationship between them by being the procuring cause of the sale.

Baker takes Smith to arbitration and, demonstrating that she caused the successful transaction, wins the case.

Smith ends up with nothing--even though she was the listing broker and the house was sold.

After studying this type of dispute, the working group recommended permitting arbitration of commission disputes in circumstances in which brokers don't have a contractual relationship with each other, Aydt says.

Under new procedures, the cooperating broker claiming to be the procuring cause, Baker, would have two avenues of recourse. She could file for arbitration directly with Smith, the listing broker, who, in turn, could name the other cooperating broker, Jones, as a third-party respondent. Alternatively, Baker could arbitrate directly with Jones.

This expansion of mandatory arbitration drew criticism from the National Association of Exclusive Buyer Agents, which complains that the new procedure favors traditional practitioners at the expense of exclusive buyer's agents who represent only buyers and never sellers.

Abraham Tieh, NAEBA president, says the rule undermines buyer's representatives by requiring them to arbitrate with other professionals whom they don't have contractual relationships with.

In a sense, the new arbitration rule treats buyer's representatives and traditional practitioners as if there were no distinction between them. Exclusive buyer's representatives are sensitive about this issue, since they view themselves as unique--offering service above and beyond what traditional practitioners provide.

"This policy is going to hurt the consumer," says Tieh, who is president of The Buyer's Agent in Houston.

Aydt responds by pointing out that the concept of arbitrating noncontractual disputes isn't new. "In previous years, some associations of REALTORS® arbitrated noncontractual disputes directly between cooperating brokers. It was only during the last four years that noncontractual disputes were completely excluded from arbitration."

Aydt says the working group was not biased toward any segment of the real estate community but was simply trying to come up with the fairest approach to resolving compensation disputes.

Procuring Cause Upheld

One key action was to reaffirm procuring cause as the foundation for resolving compensation disputes.

Under procuring cause, brokers are entitled to compensation in a cooperative transaction if they can show they're the procuring cause of a sale. In other words, the brokers must show they initiated the unbroken series of events that resulted in the successful transaction.

Procuring cause has been the basis for resolving compensation disputes between brokers for more than two decades, according to NAR staff.

In retaining procuring cause, the working group rejected two widely discussed alternative approaches:

  1. Contract in hand—The compensation goes to the cooperating broker who writes the purchase or lease offer that results in the successful transaction.
  2. First showing—The compensation goes to the cooperating broker who first shows the listed property to the eventual buyer or tenant.

The alternatives were appealing because of their simplicity, Aydt says. Although procuring cause is more complicated, experience shows that it results in awards that are consistently fair, he says. "In addition, NAR's Legal Affairs department showed that the predominant way that courts around the country resolve compensation disputes is by looking at transactions in their entirety--in other words, procuring cause," says Aydt.

What Prompted the Changes?

In 1995 the NATIONAL ASSOCIATION OF REALTORS® decided to reexamine the procedures local REALTOR® boards use for resolving compensation disputes. The move stemmed from concerns about the continued viability of procuring cause as the basis for resolving such disputes.

At the annual convention, the Professional Standards Committee asked that a working group be appointed to look into the issue. The group was headed by Bruce H. Aydt, CRB,executive vice president and general counsel of The Henry Co., REALTORS®, in St. Louis.

The working group gathered information, including the results of a survey sent out to NAR's 54 state and territorial associations as well as to other realty organizations.

In November 1996 the working group submitted a list of recommendations to the committee. The recommendations were subsequently passed on to the NAR Board of Directors.

To implement the recommendations, the Board of Directors approved a new Standard of Practice in the Code of Ethics and amended the Code of Ethics and Arbitration Manual; the directors and the NAR Delegate Body made further changes by amending Article 17 of the Code of Ethics. In addition, the NAR Multiple Listing Policy Committee amended two related Multiple Listing Policy Statements.

Walt Albro is a former senior editor for REALTOR® Magazine.

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