Are closing attorneys required to disburse the brokers’ commissions at closing?

QUESTION: I have a closing coming up and my seller client has been increasingly difficult to deal with. What happens if my seller client demands that the closing attorney not disburse the broker commissions at closing?

ANSWER: As we stated at the end of last week’s Q&A, that is an interesting question. To answer it, we consulted with several closing attorneys we know across the state. One thing we heard from every attorney we spoke to: these types of requests are extremely rare. That is fortunate because, unlike commercial brokers, agents who list residential property cannot file a lien on the seller’s property to protect their right to their commission.

Like brokers, closing attorneys are fiduciaries. As such, they owe certain obligations to their clients. In a real estate transaction, although the closing attorney is generally hired by the buyer, that attorney also owes a fiduciary duty to the seller. One aspect of that duty is the obligation to abide by the seller’s direction regarding the proceeds from the sale. Because the closing attorney has a fiduciary duty to handle the seller’s proceeds as directed, most closing attorneys will honor a seller’s direction that he or she NOT disburse the listing agent’s commission at closing.

What if a seller is OK with paying the listing agent’s commission, but directs the closing attorney not to disburse the cooperating broker’s commission? Because the obligation to pay the cooperating broker’s commission is on the listing agent, not the seller, if a closing attorney receives this request, he or she will typically pay the entire commission to the listing agent, and let the listing agent and cooperating agent handle what, if anything, is owed to the cooperating agent.

The fact is that while brokers’ commissions are paid out of the seller’s proceeds in the vast majority of transactions, that is actually done as an accommodation to the brokers, not because of some obligation to do so. Brokers are often good referral sources for closing attorneys. While closing attorneys would prefer to keep those brokers happy by always disbursing their commissions at closing, that preference cannot override a seller’s specific instructions. Keep in mind that the transaction the closing attorney is hired to close is the one contracted for by the buyer and the seller. The contract between the seller and the listing agent (the listing agreement) and the contract between the listing firm and the cooperating broker’s firm are entirely separate. Closing attorneys are not required to ensure that the seller’s or the listing firm’s obligations under those contracts are met.

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Filed Under: Fees/Commissions,