Why this matters: Learn why a seller representation agreement ensures the payment of a fee earned by the employment, how to prepare an exclusive seller representation agreement as the seller-client’s agent and explain the purpose of a seller representation agreement to a prospective seller-client.
Brokerage services performed in anticipation of earning a fee
A broker’s right to enforce collection of a fee in exchange for real estate services originates with a written employment agreement. The employment agreement entered into by brokers and clients is commonly called a representation agreement, formerly known as a listing agreement due to past multiple listing service (MLS)-Association of Realtors (AOR) control.
For example, a seller of real estate employs and authorizes a licensed broker as their sole representative to market the property, locate a buyer, negotiate a transaction and close it on behalf of the seller by entering into an exclusive seller representation agreement.
Likewise, a broker acts as the sole representative of a client under several sets of consumer service situations:
- a buyer of real estate employs and authorizes a buyer broker to locate and negotiate the acquisition of suitable property by entering into an exclusive buyer representation agreement [See RPI Form 103.1 and 103.2];
- an owner or buyer employs and authorizes a mortgage broker to locate a mortgage loan originator (MLO) and arrange and originate a mortgage by entering into an exclusive borrower representation agreement [See RPI Form 104];
- an owner of income property employs and authorizes a leasing agent to locate a tenant and negotiate a lease agreement by entering into an exclusive landlord representation agreement [See RPI Form 106]; and
- a commercial tenant employs and authorizes a leasing agent to locate space for occupancy and negotiate a lease agreement with the landlord by entering into an exclusive tenant representation agreement. [See RPI Form 105.1 and 105.2]
The seller under an exclusive seller representation agreement grants their broker sole authority to:
- market the property;
- locate a buyer; and
- negotiate a sale.
The representation agreement also specifies the:
- fee amount the seller agrees the broker receives when earned; and
- conditions met by the broker or the seller for the broker to earn the agreed fee.
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The performance of brokerage services
A seller broker earns the right to collect a fee from their seller-client under an exclusive seller representation agreement in several instances, including:
- the seller broker submits a full asking price offer to their seller-client from a ready, willing and able buyer;
- the seller-client accepts an offer submitted by the broker on terms other than the asking price in the representation agreement;
- anyone acquires the property following negotiations commenced with the seller client during the period of authorized representation;
- the seller-client withdraws the property from the market or otherwise interferes with the broker’s performance;
- the seller-client unjustifiably terminates the agency of the broker prior to expiration of the representation period;
- the client or their agent restarts negotiations during the safety clause period with a prospective buyer or the buyer’s agent who reviewed the property with the seller broker during the representation period and the buyer acquires the property;
- the seller acquires replacement real estate in an exchange transaction resulting from negotiations involving the broker during the representation period; and
- the seller grants a leasehold to a tenant or a purchase option to a buyer due to negotiations commenced during the period of authorized representation.
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An oral agreement to represent a client in a real estate transaction creates an employment and an agency relationship, as does a written and signed representation with the client. The client may be an owner, buyer or tenant. Both a writing and oral employment — authorizing representation — imposes on the broker fiduciary agency duties owed the client.
However, a client’s oral promise to pay their broker a fee when earned does not entitle the broker to enforce collection of the fee from their client. Agreements with a client for payment of a broker fee must be in a writing of some sort and signed by the client before the broker may enforce collection of a fee they have earned. [Calif. Civil Code §1624(a)(4)]
In the past, sellers always signed representation agreements before their broker started to market the seller’s property, and the agreement was not mandated. However, a buyer broker who expects a fee for acting on behalf of a buyer-client must obtain a written buyer representation agreement from the buyer before rendering services to acquire an interest in any type of real estate, residential or commercial.
The signed writing contains the client’s promise to either pay a fee or cause someone else to pay the agreed fee to the broker when earned. For example, a buyer on entering into a buyer’s exclusive representation agreement either pays a fee when earned by their buyer broker or arranges in a purchase agreement offer for the seller to pay the fee — the latter being the norm as in the past. [See RPI Form 103.1]
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The contents of a seller representation agreement
Each section in an exclusive seller representation agreement, such as RPI Form 102, has a separate purpose and need for enforcement. The sections include:
- Brokerage services: The employment period for providing brokerage services, the seller broker obligation to use due diligence in the representation, property reports to be ordered, and any advance costs deposit the seller-client hands to the broker.
- Seller broker fee: The obligation of the seller-client to pay their broker a fee, the amount negotiated as the fee, and when the fee is earned.
- Conditions: The broker is authorized to act on behalf of the seller-client, prepare and receive a buyer’s offer, and accept a good-faith deposit.
- Property description and disclosures: Identifies the real estate for sale and any personal property involved, the terms of existing mortgages and property conditions which have an adverse effect on the property’s value.
- Sales terms: The asking price and terms for payment sought by the seller-client for the sale, exchange, option or lease of the property.
- Signatures and identification of the participants: When prepared, the seller-client and the seller broker or their agent sign the agreement to consent to the employment.
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Representation and fee earned under California law
Consider a California-licensed real estate broker entering into an exclusive seller representation agreement with a California resident in California. However, the property for sale is located outside the State of California.
The broker locates a buyer through an advertisement published in the out-of-state location, whether with or without involvement of a locally licensed broker. A purchase agreement is prepared in California, mailed to and signed by the buyer, and returned to the broker. The broker submits it to the seller in California, which the seller accepts. The buyer is notified of the acceptance.
All aspects of the transaction are handled from the broker’s California office. The purchase agreement includes a broker fee provision stating the seller broker fee is earned on entering into a purchase agreement, payable on closing.
Later, the seller cancels the transaction without excuse or justification. The California broker makes a demand on the seller-client to pay the fee the broker earned under the seller representation agreement and the purchase agreement. The seller claims the broker is barred from collecting a fee since the broker is not licensed in the state where the property is located.
May the California-licensed broker collect a fee under California law without also holding a real estate license in the state where the property is located?
Yes! The seller signed the exclusive seller representation agreement in California and the broker performed all significant licensed brokerage services in California. Here, the seller is obligated to pay the fee as called for in the seller representation agreement and set out in the purchase agreement. [Consul LTD. v. Solide Enterprises, Inc. (9th Cir. 1986) 802 F2d 1143]
Editor’s note – Brokers involved in negotiating interstate real estate transactions need to confirm a choice-of-law provision is included in their representation and purchase agreements. A California choice-of-law provision mandates decisions in broker fee disputes be based on California law, even when litigated in federal or out-of-state courts. [See RPI Form 102 §4.8]
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