Compensation Disclosure in a Real Estate Transaction – Form 119

Professional and personal biases often arise for a broker or their agent as a natural consequence of marketing or locating a property or loan for a client. Some biases in a transaction confront the broker or their agent with a puzzle of competing interests. Occasionally, the bias is an opposing interest of a magnitude sufficient to hinder the broker’s ability to unhesitatingly fulfill their fiduciary duties of care and protection owed their client, called a conflict of interest. 

A conflict of interest is a professional or personal bias held by a broker or their agent about another person in a transaction, creating an agency dilemma for the broker and agent. Conflicts in an agency relationship are distinguished from issues of compensation or referrals to affiliated businesses arising out of the broker’s involvement in a transaction on behalf of a client.

Editor’s note – The referral of a client to a financially controlled business, owned or co-owned by the broker, must be disclosed by use of an affiliated business arrangement (ABA) form. [See first tuesday Form 519]

A conflict of interest exists in a client relationship when:

  • the broker or their agent has a positive or negative biastoward the opposing party or another person indirectly involved in a transaction they are arranging on behalf of the client; and
  • the bias might compromise the broker’s ability, to the detriment of the client, to freely recommend the most beneficial action and provide untainted guidance to their client in the transaction.

A bias that rises to the level of a conflict of interest is to be disclosed to the client. Here, the bias might disrupt the broker’s ability to make impartial decisions about the degree of care and protection they owe their client. When timely disclosed and the client decides  to continue to retain the broker to negotiate or arrange the transaction, the broker avoids breaching their fiduciary duty of good faith, fair dealing and trust owed to their client. [See first tuesday Form 527]

Related reading:

Brokerage reminder: Flipping for profit, fraud in the market

Conflict of interest disclosure: manage your ongoing agency conflicts

In a professional relationship, a broker’s financial objective of compensation for services rendered by the broker is not a conflict of interest.

In a transaction negotiated on behalf of a client, fees and benefits derived from professional courtesies, familial favors, and preferential treatment by others which the broker or his agents will receive are compensation the broker will disclose to the client. The compensation disclosure is in addition to the disclosure of any conflict of interest of the broker or their agent concerning these persons. Disclosure of any direct or indirect compensation to be received by the broker not previously disclosed or known to the client is made by preparing and handing the client a signed Compensation Disclosure form. [Calif. Business & Professions Code §10176(g); see first tuesday Form 119]