During negotiations, a listing broker created a dual (variable rate) commission arrangement on the fly and reached an agreement. But they didn’t have time to disclose that change to a potential cooperating broker. Does the Code require disclosure every single time, no matter what?
ORLANDO, Fla. – Dear Shannon: I’m a commercial broker and took a listing for a small commercial building. It was reasonably priced, and two offers came in quickly. One of the offers was from a client of mine and the other from another broker’s buyer.
The two offers were nearly identical – full-price, no contingencies – and I presented both to the seller. They considered making a counteroffer, but I said, in my experience, countering a full-price offer could result in one or both buyers walking away from the table. The seller didn’t want to take a chance of having buyers walk away. As a result, the seller said, “If you reduce your commission, I’ll accept the offer you procured.” I agreed.
The other buyer’s broker learned that I had reduced my commission to make the offer that I procured more desirable. They were very unhappy and told me that by reducing the listing commission for the offer I procured, I created a dual or variable commission arrangement that must be disclosed. And then they filed an ethics complaint against me claiming I violated Article 3 as interpreted by Standard of Practice 3-4.
I told the other broker there was no time to provide disclosure because the renegotiation of my commission was happening on the spot at the same time the seller was accepting an offer. What was I supposed to do? Stop the seller from accepting an offer and quickly disclose to the other buyer’s broker that I had reduced my commission?
Please explain to this other buyer’s broker that it was not practical for me to make this disclosure. – Not Practical
Dear Not Practical: Thank you for reaching out. You make an excellent point. The question is, under Article 3, as established in Standard of Practice 3-4, are you obligated to inform the other buyer’s broker that you modified the listing commission prior to the offer being accepted? Let’s think this through and look closely at what the code says about this situation.
Standards of Practice serve to clarify the ethical obligations imposed by various Articles. Under Article 3 we find Standard of Practice 3-4 which states: Realtors®, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements (i.e., listings where one amount of commission is payable if the listing broker’s firm is the procuring cause of sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/landlord or a cooperating broker). The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or in a sale/lease that results through the efforts of the seller/landlord. If the cooperating broker is a buyer/tenant representative, the buyer/tenant representative must disclose such information to their client before the client makes an offer to purchase or lease. (Amended 1/02)
By reducing the listing commission for the offer you procured, you created a “dual or variable rate commission arrangement” that you have an obligation to disclose. But keep reading. Notice Standard of Practice 3-4 goes on to say “The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers …” So, what does that mean?
In your situation, you were renegotiating your commission at the same time the seller was agreeing to accept an offer. Standard of Practice 3-4 says you have to disclose the dual or variable rate commission arrangement “as soon as practical.” Even though you might have created a dual or variable commission arrangement, providing the required disclosure to the other buyer’s broker right then and there might not have been “practical” given the situation.
Ultimately, a professional standards tribunal would determine whether or not, in your particular circumstance, disclosure was practical or not. You made an excellent point and if the other buyer’s broker files an ethics complaint, I would not be surprised if the professional standards tribunal found, given the situation you described, that you were not in violation of Article 3 of the Code of Ethics, as clarified by Standard of Practice 3-4.
So yes, you have an obligation to disclose a dual or variable rate of compensation to a potential cooperating broker. However, the Code requires such disclosure be done “as soon as practical.”
Shannon Allen is an attorney and Florida Realtors Director of Local Association Services
Note: Advice deemed accurate on date of publication
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