Real estate brokers and agents: how do you prepare for the inevitable?
Writing up a will or living trust arrangement to designate who will benefit from your assets after death is standard practice. But what happens if you die while a real estate transaction in which you earned a fee has not closed and the fee not yet disbursed? Who receives the fee(s) you earned?
The answer depends on who has died: the employing broker or the sales agent (or associate-broker) employed by the broker?
Situation 1: the sales agent dies and is due a fee
A buyer or seller who deals with a sales agent to assist them with a real estate transaction actually employs that agent’s broker. That’s because only licensed brokers are authorized to represent members of the public to offer, contract and render brokerage services in exchange for compensation — sales agents are not. Rather, sales agents are agents of their employing broker.
Thus, a sales agent negotiating a transaction for a client may only receive compensation for real estate related activities from their employing broker — never directly from their client or even another licensee or service provider. The type and amount of compensation depends on the terms of the employment agreement between the employing broker and agent. [Calif. Bus. & Prof. Code §10137]
In most cases, a seller’s agent is entitled to a fee on locating a buyer ready, willing and able to purchase the client’s property. However, fee provisions in purchase, lease and financing agreements specify the compensable transaction is to close before the agent is entitled to payment of the fee they have earned. Thus, the agent needs to see the sale through to closing for their broker to receive a fee to be shared with the agent. In this case, when an agent dies during a pending transaction — before closing — their estate is entitled to the fee they have earned. [Calif. Prob. Code §5000]
When employment between a broker and agent is terminated partway through a transaction negotiated by the agent, a reasonable portion of the final fee paid to the broker is owed to the agent who originated the transaction as provided in the RPI (Realty Publications, Inc.) employment agreement between the broker and agent. [See RPI Form 505 §5.8]
Upon the death of a sales agent, the license is canceled and employment is automatically terminated. [Bus. & PC §7076(a)]
When employment is terminated during a pending transaction, a broker owes a reasonable portion of the fee resulting from the closed transaction to the agent (in this case, their estate), even though the deceased agent is not their employee on the broker’s receipt of the fee. But what happens to the sales agent’s fee when the employing broker dies?
Situation 2: The employing broker dies before the fee is disbursed
A sales agent is only authorized to collect a fee for real estate related services from their employing broker. What happens to the fee the agent earned when the employing broker dies before a pending transaction closes and the fee is disbursed by escrow?
Most large brokerages are corporations and have a contingency plan in place in case of the death of the employing broker — the broker-officer. In such cases, the broker-officer will have granted a person the legal authority, such as a spouse or other officer, to appoint an individual licensed as a broker to operate the corporation in case of death of the broker-officer.
When the designated officer who is acting on behalf of the corporation real estate licensee dies, they may be replaced by a qualified broker for the remainder of the corporation license period. The new broker needs to submit to the California Bureau of Real Estate (CalBRE):
- a complete Corporation License Application; [RE 201]
- a complete Corporation Background Statement; [RE 212] and
- a signed statement with the date of death of the previous designated broker-officer. [See 2010 CalBRE Reference Book: Chapter 1]
However, when a replacement broker-officer is not appointed the corporation license ceases to exist. When a corporation is no longer licensed, to complete the transaction the sales agent with a pending transaction needs to become employed by a new broker and write up a new contract under this new broker, with their client. The transaction will be unaffected as long as the new employing broker and client agree to the contract. In this rare case, the original brokerage may be entitled to a partial fee resulting from the new contract, but the fee amount is determined on a case-by-case basis.
Sales agents and brokers alike need to make preparations for how fees from their pending transactions will be distributed, in case of their death.
Agents need to write up a will to specify who will receive un-collected fees. Further, for those agents under employment agreements specifying the transaction needs to close before the fee is earned, they need to consider changing this agreement to call for a partial fee when the employment is terminated partway through a pending transaction, in case of their death before closing.
To keep the corporation licensed in case of the death of the current broker-officer, the designated broker-officers need to either:
- assign a substitute for the existing designated broker-officer;
- add an additional designated broker-officer to act on behalf of the corporation license; [See RE 201] or
- provide a method for a new broker to be the replacement designated broker-officer by assigning power of attorney to a trusted person.
This is an employing broker’s responsibility to their agents and broker-associates, their family and those named in the estate who will receive their fee split on any pending transactions.
Agents and brokers: have any of these situations happened in your brokerage? How did the brokerage handle it? Share your experiences and tips in the comments below!