This form is used by an agent when they employ an unlicensed individual to locate, solicit and refer or identify persons who need the services of the broker, to document the terms of the employment.
Beyond the agent’s scope of services
Brokers and their agents often encounter prospective clients who need brokerage services beyond those the agent can or is willing to provide. These situations are often about the location of property the client wants or an expertise outside the broker’s scope of practice — a common scenario experienced by all professions.
How agents best serve some clients is to refer them to another broker or agent known to them to be capable of providing the brokerage service the client needs. Thus, the agent making the referral properly asks for a fee from the brokerage office accepting the referral. The referral fee is earned when the client enters into a real estate transaction in which the other brokerage office is paid a fee.
Here, the referring agent needs to document the referral to ensure collection of the referral fee the other agent promises to pay. A referral fee agreement form is entered into as the best evidence of the arrangement. [See RPI Form 114]
Agency relationships in real estate transactions
Three classes of real estate agents have been established in California:
- licensed brokers;
- licensed sales agents; and
- unlicensed finders.
Licensed brokers and sales agents owe fiduciary duties to the principals they represent. Fiduciary duties require brokers and their agents to perform on behalf of their client with the utmost care and diligence, as a protective shield in transactions.
Conversely, an unlicensed finder has no such fiduciary duty to members of the public. A finder’s function as an “agent” is limited to soliciting, identifying and referring potential real estate participants to brokers, agents or principals in exchange for the promise of a fee. They are locators, period.
Limitations are placed on the conduct of a finder. A finder lacks legal authority to participate in any aspect of property information dissemination or other transactional negotiations. [Calif. Business and Professions Code §§10130 et seq.]
Although not licensed by the California Bureau of Real Estate (CalBRE) or accepted as members of any real estate trade association, finders are authorized by state codes to solicit prospective buyers, sellers, borrowers, lenders, tenants or landlords for referral to real estate brokers, agents or principals. Thus, they, as an occupation, provide leads about individuals who may become participants in real estate transactions.
When an agent refers a prospective client to another agent, a referral fee agreement is used to document the referral. The referral fee agreement is designed as a broker-to-broker referral form. A referral is between brokers and is not to be confused with a finder’s fee agreement, as a finder is an unlicensed individual employed for the purpose of soliciting and locating clients for a broker and their agent. [See RPI Form 115]
An associate licensee, whether a sales agent or broker-associate, conducts their real estate activities by authority of their license, but always through their employing broker as called for in their Independent Contractor Employment Agreement. [Bus & P C §10137; see RPI Form 506]
The Broker Referral Fee Agreement published by RPI (Realty Publications, Inc.)is used by an agent when agreeing with another broker or their agent for their payment of a fee in exchange for the referral of a client who needs the services of the other broker. Further, the Broker Referral Fee Agreement is used to identify the person referred and document the amount and terms for payment of the referral fee. [See RPI Form 114]
The first section of the Broker Referral Fee Agreement identifies the agents involved in the referral as the Referring Broker and the Recipient Broker, as well as their Associate Licensees. It also designates the prospective client as either a:
- landlord/lessor; or
- [SeeRPI Form 114]
The referring broker will receive no other fees on transactions the referred prospective client enters into through the services of the other broker. Further, the referring broker and their agents undertake no activities after making the referral that create a fiduciary duty owed to the prospective client. Their involvement is limited to the referral of the prospective client only. Accordingly, a provision in the referral fee agreement states the referring broker will not advise or participate in any negotiations with the prospective client.
The remaining sections of the form provide for:
- the identity of the prospective client;
- a description of the real estate involved, if applicable;
- the compensation to the referring broker;
- the conditions under which the referral fee is earned by the referring broker; and
- a mediation provision. [SeeRPI Form 114]
Although an oral agreement between brokers for a referral is fully enforceable, a documented agreement clearly sets:
- the agreed conditions for the fee to be earned;
- the amount to be paid; and
- when the fee will be paid.
Thus, the written Broker Referral Fee Agreement serves as evidence of the terms agreed to for payment of the referral fee earned, which otherwise might not be fully clarified in an oral agreement, or worse, later forgotten.
Soliciting clients on behalf of a broker
Similarly, a finder providing referral services in California for a fee may:
- find and introduce parties;
- solicit parties for referral to others [Tyrone Kelley (1973) 9 C3d 1]; and
- be employed by principals or brokers.
However, a finder may not:
- take part in any negotiations [Bus & P C §10131(a)];
- discuss the price;
- discuss the property; or
- discuss the terms or conditions of the transaction. [Spielberg Granz (1960) 185 CA2d 283]
A finder who crosses into any aspect of negotiation which leads to the creation of a real estate transaction needs a real estate license as they are both soliciting and negotiating. Unless licensed, an individual who enters into negotiations (supplying property or sales information) may not collect a fee for services rendered, even if they call it a finder’s fee. Also, the finder is subject to a penalty of up to $20,000 and a six-month jail term for engaging in brokerage activities without a license. [Bus & P C §§10137, 10139]
In addition, a broker who, directly or through their agents, permits a finder or anyone else in their employ to perform any type of “licensed” work beyond solicitation for a referral may have their license suspended or revoked. [Bus & P C §§10131, 10137]
Employment of finders by the broker
Brokers hire all employees under written contracts of employment, including:
- licensed agents; and
- administrative staff.
Written contracts are entered into to delineate the responsibilities each has undertaken and the scope of their duties as an employee. Provisions limit their conduct to what regulations allow for their licensed or unlicensed status. [See RPI Form 115, 505, 506 and 510]
Employed individuals generate business for the broker and their agent and thus are paid for that activity. However, the finder employed by a broker is limited to locating and soliciting new clientele for the broker or their agents.
Referral fees to other fiduciaries prohibited
Anyone may be a paid finder, unless barred by professional regulations, codes of ethics or conflict-of-interest policies controlling an individual’s conduct.
For instance, a licensed agent registered with the CalBRE as an employee of a broker may not directly act as a finder for a principal or another broker or that broker’s agents. The agent is employed to solicit clients on behalf of their broker, not others. In turn, their broker, not the agent, receives a fee generated by the agent’s real estate licensed activities. On the employing broker’s receipt of a fee (generated by the efforts of their agent), the fee is split with the agent under their written employment agreement. [Bus & P C §10132; Calif. Bureau of Real Estate Regulations §2726]
A finder who advertises to locate leads that will be referred to a broker or principal may not hold themselves out as also rendering services which require a broker license. [Bus & P C §10139]
Thus, when not employed by a broker, a finder may advertise as a “referral service.” The finder may state they will place an interested party with a broker or principal, or refer a principal to a match sought for a real estate transaction.
Entitlement to a fee under California law
A finder is entitled to a fee as an unlicensed individual if the finder solicits, locates, places, introduces or delivers names of prospective clients to a broker or principal. [Tyrone, supra]
A finder’s fee agreement entered into between a finder and a principal regarding the finder’s referral services must be evidenced in a writing signed by the principal who employed the finder. If not, the finder may not enforce their fee agreement with the principal. [Calif. Civil Code §1624(a)(4)]
However, when a principal benefits from a finder’s referral under an oral finder’s fee agreement, such as closing a sale with an individual referred by the finder, the principal’s benefit will substitute for a written agreement. [Tenzer v.Superscope, Inc. (1985) 39 C3d 18]
Conversely, oral fee agreements between a broker (or their agents) and a finder are enforceable. No written agreement is required between a broker (or their agents) and a finder. However, as a matter of prudent practice, a writing memorializes the agreement as documentation against memories to the contrary, and is in conformance with CalBRE regulations. [Grant v. Marinell(1980) 112 CA3d 617; see RPI Form 115]
The distinction exists between the sharing of fees by brokers — also known asfee-splitting — and the payment of a finder’s fee to an unlicensed employee of the broker.
When a broker shares fees with an individual who is not in the employ of the broker, the broker may only share their fee with another licensed real estate broker. For a broker to pay a finder’s fee for an unlicensed referral service, the individual must be under contract with the broker as an employee. This may be a one-off situation based on a single referral by the referral service.
The Finder’s Fee Agreement published by RPI is used by an agent when they employ an individual to locate, solicit and refer or identify persons who need the services of the broker, to document the terms of the employment. [See RPI Form 115]
The Finder’s Fee Agreement provides for:
- the identity of the prospective client;
- a description of the real estate involved, if applicable;
- the compensation due to the finder; and
- the conditions under which the referral fee is earned by the finder. [SeeRPI Form 115]
Form updated 05-2016 to include the Form Description at the top, white header/footer convention and RPI branding.
Form navigation page published 09-2016.