States Act on Surprise Referral Fees

November 1, 2002

If you’ve ever been hit with an after-the-fact referral fee, you know the letdown. You’ve worked hard to help a relocating buyer and you’re already mentally spending your commission when a relocation company calls demanding that you pay a referral fee for the buyer. You had no idea the buyer was working with a relocation company.

Do you have to pay the after-the-fact referral fee? What are your rights if the relocation company threatens to cut off its benefits to the buyer if you don’t pay?

Brokers commonly pay referral fees to other practitioners and to relocation companies for referrals of buyers, sellers, lessors, or lessees. Real estate professionals often associate after-the-fact referral fees with instances in which a relocation company demands a fee after a salesperson has created a relationship with a client, even when the relocation company didn’t refer the buyer or seller to the salesperson in the first place.

Although you may not have any legal obligation to pay the fee, many licensees feel pressure to when a relocation company threatens to withhold benefits—such as paying moving expenses—from the buyer or seller.

To address the problem, at least 10 states have enacted laws regarding the fees. Typically, these laws require that there be not only an actual introduction of the client by the referring broker but also a written referral-fee contract between the licensees. These states also prohibit paying referral fees to any person or entity, including a relocation company, that isn’t a duly licensed broker.

A New York law, which takes effect in February 2003, prohibits licensees from demanding or receiving a referral fee or compensation after a listing agreement has been signed, an offer to purchase has been accepted, or a buyer agency agreement has been signed. The only exception to these rules: reasonable cause for payment.

What’s reasonable cause? A recently enacted Connecticut regulation provides some guidance. The Connecticut rule prohibits licensees from demanding a referral fee unless there’s an actual business introduction, a subagency relationship, a contractual referral-fee relationship, or a contractual cooperative brokerage relationship.

Other states, such as Alabama, Colorado, Idaho, Illinois, Kansas, Louisiana, and Tennessee, also require reasonable cause for referral fees. In Idaho, a written contract concerning the referral fee must exist before the seller signs the listing agreement, or the buyer signs the representation agreement or a purchase offer.

Iowa similarly prohibits requesting a referral fee after a listing agreement has been signed or a purchase offer has been accepted.

Further, to protect relocating consumers from companies that threaten to reduce benefits if a referral fee isn’t paid, many states—such as Alabama, Idaho, Kansas, Kentucky, Louisiana, New York, and Tennessee—have passed laws prohibiting such interference in client-licensee relationships. Other states, including Connecticut, Illinois, Kansas, and Kentucky, prohibit counseling a client to amend or terminate an agency agreement in order to receive a referral fee.

Even with the trend to prohibit, or at least narrowly limit, after-the-fact referral fees, you can still take steps to protect yourself from a relocation company or other licensee demanding such a fee.

  • Routinely check with buyers and sellers at your first meeting to determine if their move is related to their job. If so, ask if their employer is providing relocation benefits.
  • If buyers and sellers are receiving relocation benefits, determine the relocation company’s referral fee policy and what benefits it offers to the employee.
  • If you agree to pay an after-the-fact fee, get the specifics in writing and signed by both parties.
  • Advise buyers and sellers in writing that you’ll be paying the referral fee, and specify the amount. Provide this disclosure when you begin representing the buyers or sellers or as soon as you agree to pay the fee. Such a disclosure is not only a good business practice, but also a way to ensure your compliance with applicable state laws or real estate commission regulations.
  • If you’re a broker, make your salespeople aware of the need for a written agreement with the relocation company or other broker and a written disclosure to the referred party.
  • Unless you have a blanket referral agreement with a relocation company or another broker, be sure you have a separate agreement for each transaction.

In light of the trend toward limiting after-the-fact fees, you should feel comfortable insisting that relocation companies have a fee agreement with you upfront. Then, if you’re surprised with an after-the-fact fee demand, consult with your attorney. You might just find that it’s illegal for the relocation company to collect.

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