Why this matters: Learn the difference between exclusive and open client representation agreements and understand the use of exclusive representation agreements as best practice for client representation.

Authority to act on the client’s behalf

A representation agreement is a written employment solicited, negotiated and entered into by a licensed real estate broker and each client authorizing the broker to provide real estate services and act on the client’s behalf.

The broker entering an exclusive representation agreement agrees to exercise due diligence performing the services they were hired to provide for the client.

The broker’s services are rendered in exchange for the client’s promise assuring payment of an agreed-to broker fee when earned. [See RPI Forms 102, 103.1, 103.2, 104, 105.1, 105.2, 106 and 112]

A seller-client employing a broker holds a clientship interest in real estate, which the client seeks to:

Further, a buyer- or tenant-client employs a broker to assist with services to locate suitable real estate to:

The broker employed by a client provides real estate services in expectation of a fee. The representation agreement entered by the broker and client has fee provisions which state the fee amount and when the fee is earned. The representation agreement is the writing required not only to authorize the representation of the client, but to pursue collection when a fee is earned and unpaid.

Editor’s note — The use of “diligence” in an exclusive representation employment is distinguished from a “best efforts” standard for broker performance under an open representation type employment, as explained elsewhere in this article.

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Employed with duties as the client’s broker

The relationship created on entering into a representation agreement between a broker and a client has two distinct legal aspects:

  • an employment relationship for services and broker fees; and
  • an agency relationship for duties owed as an employed broker.

The representation agreement spells out the scope of services the broker agrees to perform and authorizes the broker to carry them out.

On the other hand, agency duties controlling conduct when rendering services are imposed on the broker by law, arising out of the employment authorized by a representation agreement. Agency duties owed a client are the specific fiduciary duties of loyalty, advice and full disclosure from the broker to their client, not the general duties owed all others in a transaction who are not clients. [See RPI Form 305]

The conduct of a broker with exclusive representation when marketing or locating property is equated to the fiduciary conduct of a trustee acting on behalf of a beneficiary. This fiduciary duty precedes commencement and survives the termination of the representation.

Related article:

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Exclusive representation agreements

All representation agreements fall into one of two categories:

  • exclusive; or
  • open.

An exclusive representation establishes the client’s broker as the sole representative who provides broker services on behalf of the client. Broker services range based on the type of client the broker represents:

  • a client of property to be marketed for sale or lease to a buyer or tenant to be located [See RPI Forms 102 and 102-1];
  • a buyer or tenant for property to be located and a fee or leasehold interest to be acquired [See RPI Forms 103.1 and 103.2]; or
  • a client of a property or a lender seeking a mortgage origination to be arranged. [See RPI Form 104]

An exclusive representation imposes a duty on the broker, and thus their agents, to diligently fulfill their employment to achieve the client’s objectives Ω— whether to sell, buy, lease or borrow. All representation agreements have a specified period of employment beginning on a commencement date and ending on an expiration date.

When the broker fails to include an expiration date in an exclusive representation agreement, they face disciplinary action by the Department of Real Estate (DRE) on a complaint. Specific to representation of individual buyers and tenants, not entities, the period of employment may not at any time exceed three months from the signing of the buyer or tenant representation agreement or its renewal. [Calif. Business and Professions Code §10176(f); Calif. Civil Code §1670.50(d)(1)]

Two types of exclusive employment agreements for buying and selling real estate exist:

  • an exclusive agency representation; and
  • an exclusive representation agreement. [See RPI Forms 102 – 104]

Both types of exclusive representation establish the broker and their agents as the sole licensed real estate representatives of the client. The distinction between the two is whether the broker is entitled to a fee when the client, acting alone or with other representatives, achieves their objective sought by employing the broker.

A fee is not earned under an exclusive agency representation when the client, acting alone and independent of any other brokers, accomplishes the objective of the employment. Here, the client’s broker is the sole representative. For example, a seller-client locates a buyer or tenant and negotiates and closes the transfer of their interest the buyer or tenant acquires — fee or leasehold.

The same holds for a buyer or tenant with an exclusive agency representation who, without using other agents, locates and acquires the sought-after interest in property. These situations are classic only to clients with vast knowledge and personal ability to fully manage their real estate acquisitions and disposals.

Conversely, under an exclusive representation agreement, a fee is earned no matter who produces the buyer or locates the property sought by the client. For example, a fee is earned whether the client, the client’s broker, or another broker or representative of the client produces the buyer or locates the property.

Related Client Q&A:

Client Q&A: What is the difference between an exclusive agency, exclusive right and open listings?

Exclusive representation

An exclusive representation agreement gives a broker the greatest fee protection for their efforts expended on behalf of the client. It is also the type of representation entered into by all brokers, except independent brokers in small communities with very few brokerage offices who use open representation agreements. The open representation avoids the broker’s due diligence obligation to actually make a concerted effort to meet the client’s objectives — imposition of the specific duty to diligently hunt for buyers or property is avoided.

A client of real estate under an exclusive representation agreement grants the broker the sole right to locate a buyer for the property within the representation period. The broker is entitled to the fee agreed to in the representation when:

  • the representation period has not expired;
    and
  • the property is sold on any terms, no matter who produces the buyer;
    or
  • the broker or their agent present their client-seller with a bona fide offer from a ready, willing and able buyer on the terms sought under the representation agreement — a match.

Exclusive representation agreements are incentives for the broker and their agents to fulfill their fiduciary duty. Under an exclusive representation, a broker is authorized to work without interference by other brokers and with full cooperation from the client to attain the client’s goal of locating a buyer, tenant, property or mortgage.

Here, the client’s broker does not compete with the client to meet their client’s objectives — sell, buy, rent, borrow. They work together to achieve their objectives as laid out in the representation agreement.

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Termination of representation by the client

Consider a seller of real estate who enters into an exclusive representation agreement with a broker to sell a property within, say, a three-month representation period.

The fee provision in the representation contains a termination-of-agency clause addressing seller interference with the broker’s employment. When the seller-client terminates the broker’s employment without good cause prior to the representation period expiring, the fee provision entitles the broker to a full fee. [See RPI Form 102 §3.1(c)]

The broker, as agreed in the representation agreement, promptly commences a diligent marketing effort to:

  • properly present the property for sale; and
  • locate a buyer who is willing to acquire the property.

However, during the representation period before a buyer is located, the seller-client terminates the agency by canceling the broker’s authority to further represent the seller-client.

The broker makes a demand on the seller-client for payment of a full broker fee. The broker claims the termination-of-agency fee provision in the representation earns a fee due from the client based on the asking price when the seller-client prematurely terminates the agency.

The seller-client claims the broker is not entitled to a full broker fee. However, they will pay for the broker’s money losses based on an accounting since a seller-client has the right to terminate a broker’s representation at any time.

The demanded accounting will set the value for the broker’s time, effort and costs incurred to market the property. This type of accounting for evaluating services is called quantum meruit — the amount of money one deserves for work completed.

Is the broker entitled to collect a full fee from the seller-client when the client exercises their right to terminate the representation at any time?

Yes! A client may terminate their broker’s representation at any time. However, when a termination-of-agency clause is a fee provision in the representation agreement, the seller may not exercise the right to prematurely terminate the agency and expect to avoid payment of the full fee for doing so.

The termination-of-agency clause in the representation agreement couples the permissible cancelling of the representation with the obligation to pay the agreed fee as earned.

Documenting the cancellation

A seller-client, by word or by conduct, may indicate they no longer want to sell the property or use the services of their broker. Here, the seller broker prepares a Release and Cancellation of Employment Agreement form for the seller-client to review and sign. [See RPI Form 121]

The release and cancellation agreement as prepared calls for payment of the full broker fee agreed to in the representation agreement, a broker fee earned by a cancellation of the representation.

To achieve a mutually agreed cancellation and close the client file, terms for payment of the fee might be altered to avoid mediation. Payment may be due when the property is later sold, exchanged, optioned, refinanced or leased within a specific time period. A compromise might be the payment of a partial fee with the balance due when the property interest marketed is transferred within a specific time period after cancellation.

This release and cancellation agreement is also used when a buyer wants to cancel an exclusive representation. On a cancellation, the broker is deprived of the opportunity they acquired under the representation agreement and relied on to diligently earn a contingency fee. That opportunity is now gone with a cancellation, an interference with the broker’s fee expectations.

Exclusive buyer representation agreements

For brokers and their agents, an exclusive buyer representation agreement parallels the representation of a seller-client for marketing a property for sale and locating a buyer.

A broker soliciting a prospective buyer-client enters into a buyer representation agreement:

  • after they have negotiated the buyer broker fee amount; and
  • to comply with mandates for a written employment agreement with any buyer or tenant they represent.

The representation agreement employs and authorizes a buyer broker to locate qualified properties of the type the buyer seeks to purchase. The same representation agreement treatment is carried out with a tenant-client seeking space to lease for housing a family or business.

An exclusive buyer representation agreement benefits a buyer-client and tenant-client due to the greater likelihood the broker will find the property sought. Buyer brokers also act as a safeguard guiding the buyer and tenant toward a well-informed decision since the buyer broker who is exclusively employed:

  • has continuous access to all available properties;
  • investigates and qualifies properties as suitable before presenting them to the buyer- or tenant-client; and
  • advises the buyer- or tenant-client on the pros and cons of each property presented.

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Exclusive agency representation agreements

The exclusive agency representation is a hybrid of the open representation and an exclusive representation. The variation is rarely used by brokers as a practical matter and seems best suited to academic discussion.

Under an exclusive agency representation agreement, the client employs the broker as their sole agent, as in an exclusive representation agreement. Also, the broker is entitled to a fee on any transaction in which the broker, a finder or another broker produces a buyer. (A finder is an unlicensed agent with no authority to negotiate, advise or represent.)

However, under the exclusive agency representation, a seller-client retains the right to sell the property to any buyer the client locates without becoming obligated to pay the broker a fee. This is the same for a buyer under an exclusive agency representation who finds the property on their own.

As with open representations, brokers who enter into an exclusive agency representation agreement are reluctant to spend much time and energy to achieve the client’s real estate needs. The bottom line is an obstructed brokerage effort with diminished benefits to both the client and broker since the client is entitled to compete with the broker to avoid payment of a broker fee.

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Open representations

An open representation, also called a nonexclusive representation, employs a broker to either sell, buy or lease property. However, the client’s broker does not earn a fee when the client:

  • sells, buys or leases property themselves; or
  • hires other brokers who sell, buy or lease property for the client.

Thus, a client employing a broker under an open representation agreement competes against the very broker they employed to sell, buy, lease or mortgage property. When the client or another broker retained by the client locates the buyer or property the client seeks, the broker does not earn a fee under any open representation.

A broker is due a fee under an open seller representation agreement when:

  • an offer is submitted before the representation expires or is revoked by withdrawal of the property from sale or termination of the agency;
  • the broker or agent procures a ready, willing and able buyer;
  • the broker presents the client with an offer from the buyer to purchase the listed property;
  • the offer is submitted to the client before the property is sold to a buyer located by the client or other client representative; and
  • the terms of the offer are substantially the same as the terms for sale in the representation to earn a fee; or
  • other terms are offered by a buyer and accepted by the seller-client.

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An open representation is a unilateral contract

A seller broker employed under an open representation agreement is not obligated to exercise diligence in their efforts to locate a buyer. The seller broker’s obligation to the client is only a best-effort activity to market and locate a buyer. The result is the broker earns a fee only when they meet the objective of locating a buyer for the property.

Thus, an open representation is legally classified as a unilateral contract. However, the agency duties of a fiduciary exist at all times under an open representation. Further, on locating a buyer, the broker is to perform their due diligence efforts to make disclosures and close the transaction.

Further, an open seller representation agreement is not required to contain an expiration date, unlike an exclusive agency representation agreement or exclusive representation agreement. However, an open buyer representation agreement entered into by an individual consumer must, by real estate law, have a termination date no later than three months from the date of signing the representation agreement or any renewals.

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Cancellation of an open representation

The client revoking an open representation agreement with a broker which has an expiration date and a safety clause owes a fee to the broker when:

  • the client later closes a sale with a prospective buyer located by the broker before the representation is revoked; or
  • the client revokes the representation in an attempt to escape liability for the agreed fee. [Heffernan Merrill Estate Co. (1946) 77 CA2d 106]

Conversely, an open representation without an expiration date may be terminated by the client at any time without becoming obligated to pay a fee. Also, no fee is due under an open representation on the:

  • good-faith withdrawal of the property from the market; or
  • premature termination of the employment before the broker has submitted a full representation offer. [Tetrick Sloan (1959) 170 CA2d 540]

Fees for other services

An open representation agreement may call for the client — seller, buyer or tenant — to pay their broker specific fee amounts for services other than procuring an interest in property or a buyer. These services relate to the preparation of disclosures the seller owes to buyers of the property, such as:

  • property disclosures (a Transfer Disclosure Statement (TDS), natural hazard disclosures, an Annual Property Operating Data sheet, water tank disclosure, etc.) [See RPI Forms 304, 314 and 352];
  • carryback financing disclosures [See RPI Form 300];
  • multiple listing service publications;
  • property profiles [See RPI Form 306];
  • termite/well/septic clearances; and
  • occupancy certificates. [CC §1089]

Again, a broker employed by a seller, buyer or tenant under an open representation agreement owes no due diligence duty to the client to market or locate property. However, the broker does owe a general duty owed to prospective buyers and tenants for a property to fully disclose property conditions.

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Net representation agreements

A net representation agreement is used only with sellers, not buyers. The representation is an open or exclusive type of representation agreement. The net representation agreement is distinguished from all other representation arrangements by the formula used to compensate the broker.

A net representation agreement broker fee is not negotiated as a percentage of a purchase price nor negotiated as a fixed-dollar fee amount.

Instead, the seller-client’s net sales price (excluding broker fees and all closing costs) the seller-client receives on closing is stated in the representation agreement. The seller broker fee earned is the sum remaining from the purchase price the buyer funds after disbursement of the agreed net sales price to the seller and closing costs — which costs might include a buyer broker fee.

As a duty owed the seller-client, the seller broker advises the seller of the full sales price paid by the buyer and the dollar amount the seller broker receives as their fee. The timing for making the fee disclosure is before the seller accepts a buyer’s purchase offer when the seller broker is employed under a net representation agreement. Failure to disclose to the client the financial benefits the broker receives on any transaction involving the client exposes the broker to loss or refund of the entire fee. [Bus & P C §10176(g)]

For example, a seller-client enters into a net representation agreement calling for the client to receive a set amount of net sales proceeds on closing a sale. The broker earns a fee only when the property sells for a price greater than the net sales price the seller is to receive and closing costs.

On the other hand, when the property sells for a purchase price exceeding the net sales price and closing costs, the broker’s fee is the amount of the excess sale proceeds.

Net representations tend to be unpopular with the DRE and consumer protection organizations. Some states have outlawed their use, but not California, since mandated disclosure for fees to a client is the remedy.

Net representations are particularly prone to claims from buyers and sellers that the broker has been involved in misrepresentations and unfair dealings. These fraud claims typically result from:

  • an improper and unsubstantiated property evaluation when entering into a net representation agreement; or
  • the broker’s failure on a sales transaction to disclose the specific fee amount the broker is receiving.

When using a net representation agreement, document written disclosures signed by the seller-client stating:

  • the property’s value;
  • the price paid by a buyer;
  • any dual representation with the buyer; and
  • the broker fee amount earned.

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Option representation variation

An option representation agreement is only entered into by a seller-client and the seller broker. It is a variation of an exclusive representation agreement which includes the additional provision of the client granting the seller broker an option to buy the property on expiration of the representation.

The seller broker may exercise the option and buy the client’s property when the property is not sold during the representation period.

Here, the seller broker dons two hats:

  • one as a principal holding an option to buy the client’s property; and
  • one as the seller broker representing the seller-client to locate a buyer and sell the property.

The concurrent status of the seller broker as the seller-client’s agent, and a principal with an interest in the property (the grant of an option to buy) is a patent conflict of interest for the seller broker. Here, the conflict is the temptation for misrepresentation when taking two positions with a client.

The seller broker might fail to diligently market the property while harboring a profit motive for buying it themselves to keep or resell. Likewise, the broker may fail, by intent or neglect, to inform the seller about all inquiries or offers, written or oral, by potential buyers.

A dilemma exists for the seller broker who exercises their option to buy in a recovery period. Prices rise in a business cycle approaching boom times, but on the seller-client’s discovery of a resale by the broker, the client is prone to believe and claim their seller broker profited on the flip at the expense of the seller-client. Then, they may demand the seller broker turn over the profit taken on the resale to the seller-client.

Guaranteed sale variation

A guaranteed sale representation agreement is another variation of the exclusive representation agreement. Seller brokers might use the guarantee feature to boost their sales activity during cyclical periods when inventories of available properties are excessive.

These periods are difficult times for owners who need to dispose of a property. Examples include real estate recessions, increased mortgage foreclosure-related real estate owned (REO) resales, high levels of unemployment, vacancies forcing owners to sell, and an excess of unsold new construction.

A guaranteed sale representation agreement is distinguished from an exclusive representation by the added feature of the seller broker’s grant to the seller-client of an option the client may exercise to sell their property to the broker. Here, the broker agrees to buy the listed property when the seller-client exercises the option they hold to sell, called a put or put option.

When the property does not sell during the representation period, the seller has the right, called an exercise, to make a demand on their seller broker to buy the property at a predetermined price.

The difference with the guaranteed sale representation agreement compared to the option representation agreement is the seller, not the broker, has the right to exercise the option by accepting the broker’s promise to buy the listed property.

The guaranteed sale variation is attractive to seller clients who are motivated to sell at all costs, such as job loss, job relocation, health issues or family demands. The benefit to the seller is the assurance of a back-up, last-resort sale during recessionary periods. Sometimes seller brokers are willing to take this risk.

The seller broker under a guaranteed sale representation may tend not to work diligently to market the property and locate buyers. This tendency increases when the purchase price set for the broker to pay under the put option guarantee is significantly below the net sales proceeds at current market prices. Thus, the seller broker stands to acquire the property at a price with a handsome profit on a flip or retention as income property when it does not sell during the representation period.

Unimproved real estate, business opportunities and mobile homes are also the subject of broker employment. These employment variations may be used with the open or exclusive type of representation agreements.

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Agency relationships in real estate transactions

Again, a broker employed by a client owes that client special fiduciary duties when acting on behalf of the client and advising the client. Individuals and corporations must be licensed by the DRE to offer most real estate services.

However, an unlicensed finder has no such fiduciary duty. But a finder does not act in the capacity of a licensed broker and their agents. A finder is an individual who limits their real estate related activities to identifying and referring potential real estate buyers, sellers and tenants to a broker or a principal in exchange for a fee. Thus, they may work with a buyer or seller of real estate directly to refer an owner or buyer of real estate to the broker.

The conduct of a finder is limited. A finder lacks the legal authority given to licensees to disseminate property information, negotiate the terms of a real estate sale or lease transaction, or arrange mortgage originations. [Bus & P C §10130 et seq.]

Further, the DRE prohibits finders from continually soliciting lead information on behalf of another. This permits a finder to occasionally provide contact information on individuals who may become participants in a real estate transaction. [Tyrone v. Kelley (1973) 9 C3D 1; 78 Attorney General Opinion 71 (1995)]

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Finder referrals and limitations

A finder in California may:

  • introduce participants;
  • provide referrals on an occasional and nonrecurring basis; and
  • enter into a Finder’s Fee Agreement with principals or brokers for compensation. [See RPI Form 115]

For example, a past client of a real estate broker may act as a finder by providing the broker with the contact information of a prospective buyer known to the finder. Here, the former client may enter into an agreement with the broker for a finder’s fee.

However, a finder may not:

  • actively solicit participants for a real estate transaction;
  • take part in any negotiations [Bus & P C §10131(a)];
  • discuss the property;
  • discuss the price; or
  • discuss the terms or conditions of the transaction. [Spielberg Granz (1960) 185 CA2d 283]

A finder may provide a broker with contact information of a prospective client they know. However, the finder may not be employed to constantly work to locate prospective clients for the broker. Further, their involvement is limited to introducing the buyer or client to the broker and nothing more.

Unless licensed, an individual who enters negotiations (supplying property or sales information) may not collect a fee for services rendered — even when they call it a finder’s fee.

The finder is subject to a penalty of up to $20,000, and/or a six-month jail term for engaging in these licensee activities without a license. [Bus & P C §§10137, 10139]

In addition, a broker who permits an unlicensed employee to continually solicit clients or perform any other type of “licensed” work may have their license suspended or revoked. [Bus & P C §§10131, 10137]

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Finders