How should agents’ agreements to reduce their commissions be documented?

QUESTION: As BIC of my firm, I was recently reviewing the paperwork on a closed transaction where our firm acted as a dual agent, and I noticed a discrepancy between the commissions paid at closing and the commissions set forth in the listing agreement. The amounts paid at closing to our firm on both the listing and selling sides was one-half of one percent less than was specified in the listing agreement. I asked the listing agent about it and he said that the buyer’s agent and he had agreed to cut the total commission by one percent (one-half of one percent each) to make the transaction work. There isn’t anything in the file documenting this. Is that something I need to be worried about?

ANSWER: In answering your question, it is helpful to keep in mind the several contractual relationships that are in effect in a brokered real estate transaction. In addition to the sales contract between the seller and the buyer, there are contracts between the listing firm and the seller, the buyer agent and the buyer, and the listing firm and the selling firm. All of those contracts other than the sales contract are affected in a direct way by the agents’ agreement to reduce the commission. The question is, what paperwork, if any, is needed to reflect a change in the terms of those three contracts?

We will start with the agreement between the listing firm and the selling firm. Oral agreements between brokers for the payment of commissions or referral fees are legally enforceable, so an agreement by a buyer agent to take less than what the listing agent offered in MLS isn’t required to be in writing. Having said that, such an agreement certainly should be in writing to avoid a potential dispute. The Confirmation of Compensation, Agency, and Appointment (Form 220) would work well in this situation (or the Commission Split Agreement—Sales Transactions (Form 541) for commercial transactions).

How about the agreement between the seller and the listing firm? To properly amend the listing agreement’s compensation provisions, and to be in compliance with Real Estate Commission rules, the commission reduction must be in writing. It’s not necessary to change the firm’s fee or the compensation the seller authorized the firm to offer to other brokers in the listing agreement. You could document a reduction of the brokerage fees in a specific transaction by completing and having the seller sign the Agency Agreement Renewal and/or Amendment (Form 710) (or Form 575 for the amendment of a commercial listing agreement). The reduction could also be documented through an exchange of emails with the seller.

Lastly, what about the agreement between the buyer agent and the buyer? Again, to be in compliance with the Commission rules, and to properly amend the buyer agency agreement’s compensation provisions, the reduction must be in writing. Note that paragraph 16(f) of the Exclusive Buyer Agency Agreement (Form 201) requires that if the total fee the firm will receive in a transaction as a dual agent is different than the amount disclosed in paragraph 16, the firm will disclose the fee being paid and confirm it in writing. As on the listing side, there is no need to amend the buyer agency agreement. The reduction for a specific transaction can be accomplished by using Form 710 or by an exchange of emails with the buyer.