The Importance of Side Agreement Disclosure

As the hot market continues, it is important everyone knows and understands how important it is to disclose any side agreements. A aide agreement is any circumstance when there are alternate commission agreements. For example: if the seller pays less commission if the buyer is brought by an agent in the listing firm; if the the seller pays different commission if there is no cooperating broker; if the listing agreement gives the seller a right to sell to certain buyers at a different commission; if the seller has a list of buyers excluded from the listing broker’s agreement; or any other circumstance that can affect the total commission paid by the seller.

In a nutshell – listing agents are OBLIGATED to disclose side agreements (that’s why the field is mandatory).  The buyer broker, in serving the fiduciary interests of their client, must tell their buyer client there is a such a side agreement… and should inquire of the listing broker what that differential would be.  The buyer’s agent has no right to know the terms of the side agreement other than the commission difference between their clients offer and someone covered in the agreement (in-house sale, sellers list of exclusions)

Standard of Practice 3-4:  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.

Following is a case study from the National Association of REALTORS.  These studies are taken from actual hearings that have taken place throughout the Country.

Code of Ethics Case Study #3-9: Realtor®’s Obligation to Disclose True Nature of Listing Agreement

Realtor® A listed the home of Seller X and filed the listing with the Board’s MLS categorizing it as an exclusive right to sell listing. Realtor® A did not disclose that there was a dual rate commission arrangement on this listing, even though the listing contract provided that, should the seller be the procuring cause of sale, the listing broker would receive a commission of $500, an amount intended to compensate Realtor® A only for his marketing costs.

Realtor® B, a cooperating broker, showed the property several times. Eventually, Realtor® B brought a signed purchase agreement to Realtor® A. Realtor® A returned the purchase agreement the next day, informing Realtor® B that the seller had rejected the offer. Several weeks later, Realtor® B learned that the property had been sold, and that the buyer was Seller X’s nephew.

Several months later, Realtor® B met Seller X at a fund-raising event. Seller X thanked her for her efforts, and told her that, under “normal circumstances,” he might have seriously considered the offer she had produced. When asked why the circumstances surrounding this transaction were “unusual,” Seller X responded telling her of his agreement “with Realtor® A to pay a $500 commission if Seller X found the buyer. And when my nephew decided to buy the house, I jumped at the chance to save some money.”

When Realtor® B learned of this arrangement, she filed a complaint with the Board of Realtors® alleging that Realtor® A had violated Article 3 of the Code of Ethics. The Professional Standards Administrator of the Board referred the complaint to the Grievance Committee, and, after its review, the Grievance Committee referred the complaint back to the Professional Standards Administrator indicating that an ethics hearing should be scheduled.

At the hearing, Realtor® B, in stating her complaint to the Hearing Panel, said that Realtor® A’s failure to disclose the actual terms and conditions of his listing with Seller X was a misrepresentation. She explained that, had she been aware of this arrangement, she might have decided not to accept Realtor® A’s offer of cooperation, since it might put potential purchasers she would produce in a possibly unfair position.

Realtor® A, speaking in his own defense, stated no commission differential would have resulted if the buyer had been procured by either the listing broker or a cooperating broker so whatever other arrangements he had with Seller X were personal and, as listing broker, it was his right to establish the terms and conditions of his relationship with his client.

After careful deliberation, the Hearing Panel concluded that while it was Realtor® A’s right to establish the terms and conditions of the listing contract, the existence of his “special” arrangement with Seller X should have been disclosed as a dual or variable rate commission, since without knowledge of it, cooperating brokers would be unable to make knowledgeable decisions regarding acceptance of the listing broker’s offer to cooperate.

The Hearing Panel concluded that Realtor A had in fact concealed and misrepresented the real facts of the transaction and was in violation of Article 3 of the Code of Ethics as interpreted by Standard of Practice 3-4.