Form-of-the-week: Broker Referral Fee Agreement – Form 114

During their careers, most licensees encounter prospective clients who need brokerage services beyond those the licensee can or is willing to provide. These situations often are about the location of property desired or an expertise outside the licensee’s area of practice. All professions experience this scenario.

What the prospective client needs is to be referred to another licensee who is known to be capable of providing the brokerage service sought by the prospective client. Thus, the licensee making the referral may ask for a fee from the licensee who is the recipient of the referral. The referral fee is earned if the prospective client enters into a transaction in which the other licensee is paid a fee.

However, documentation is needed to ensure collection of the referral fee promised to be paid by the other licensee. Here, first tuesday’s Broker Referral Fee Agreement is used to evidence the understanding. [See first tuesday Form 114]

The Broker Referral Fee Agreement is designed as a broker-to-broker referral form. It is not to be confused with a finder’s fee agreement as a finder is an unlicensed individual employed for the purpose of referrals. [See first tuesday Form 115]

An associate licensee, whether a salesperson or broker-associate, is to conduct their real estate activities requiring a license through their employing broker, as called for in their Independent Contractor Employment Agreement and mandated by state law. [Calif. Business and Professions Code §10137; See first tuesday Form 506]

The first section of the Broker Referral Fee Agreement identifies the licensees 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:

The referring broker will receive no other fees on transactions the referred prospective client enters into through the services of the recipient 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 participate in any negotiations with or advise 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. [See first tuesday Form 114]

Although an oral agreement between brokers for a referral is fully enforceable, a documented agreement clearly sets  the agreed conditions which must be met to establish when the fee has been earned, and the amount to 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 recalled or fully clarified in an oral agreement.114