The Best of the Legal Hotline: Commission

The three "P"s of commissions: protected buyers, procuring cause and procurement


 Tracy Rucka  |    November 08, 2013
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PROTECTED BUYER
A buyer who personally, or through any person acting for such buyer during the term of the listing: 1) delivers to Seller or Broker a written offer to purchase, exchange or option on the Property; 2) negotiates directly with Seller by discussing with Seller the potential terms upon which buyer might acquire an interest in the Property; or 3) attends an individual showing of the Property or discusses with Broker or cooperating brokers the potential terms upon which buyer might acquire an interest in the Property, but only if Broker delivers the buyer’s name to Seller, in writing, no later than three days after the expiration of the Listing.

PROCURE
A buyer is procured when, during the term of the Listing, an enforceable contract of sale is entered into between the Seller and the buyer or when a ready, willing and able buyer submits to the Seller or the Listing Broker a written offer at the price and on substantially the terms specified in the Listing. A buyer is ready, willing and able when the buyer submitting the written offer has the ability to complete the buyer’s obligations under the written offer.

PROCURING CAUSE
‚ÄúThe proximate cause; the cause originating a series of events which, without a break in their continuity, result in the accomplishment of the prime object ‚Ķ‚ÄĚ from Black‚Äôs Law Dictionary.
Commission questions are a mainstay of the WRA Legal Hotline. Recently, a pattern of caller questions has developed in which the concepts of protected buyer, procuring cause and procure seem to have merged, leading to some confusion about how and when brokers earn commission in some complex transaction scenarios. 

The basic story sounds something like this: the seller had a listing, and the original listing expired. The buyers became protected buyers generally because a cooperating broker was working with them during the original listing. The property is now either listed with a new company or no longer listed, and a different broker begins working with the buyers and submits an offer to purchase. And this situation of course results in the question: who gets paid?

Confused? Well, let’s use the three P’s of commission to sort it out. To answer the question of who gets paid, the underlying questions are:

  • Who offered to pay commission or compensation?¬†
  • And who accepted that offer of commission or compensation?¬†
  • If someone offered compensation, did the broker do what was necessary to earn the offered compensation?¬†

In any given real estate transaction, there may be multiple contracts entered into with a real estate broker related to commission: the listing contract between a seller and a listing broker/firm, the buyer agency agreement between a buyer and buyer’s agent, the MLS offer of compensation between MLS participants, and/or another broker-to-broker compensation agreement if the brokers or the property is not in the MLS. Each of these contracts creates a standard of performance for the licensee to earn commission or compensation. 

Protected buyers

The listing agreement determines the listing broker‚Äôs compensation during the original listing term or during the extension of the listing term for protected buyers. Buyers may be protected for listing protection in one of four ways: if, during the term of the listing, (1) the buyer submitted a written offer to purchase; or (2) the buyer negotiated directly with the seller and the listing protection is automatic and the first listing broker would not have been required to perform any additional steps to protect the buyer for the override period. If, during the term of the listing, (3) the buyer attended an individual showing, or (4) ‚Äúnegotiated‚ÄĚ with a broker, the buyer will be protected only if the listing broker delivered the buyer‚Äôs name to the seller no later than three days after the expiration of the first listing contract. ‚ÄúNegotiated,‚ÄĚ for these purposes, means that the buyer discussed the potential terms in which the buyer might acquire an interest in the property.

The status as a protected buyer may be created by conduct of an agent in the listing company or in a cooperating company. When a buyer becomes a protected buyer per the first listing, the first listing broker has, in essence, a one-party listing for the protected buyer during the one-year override period. Any subsequent offer by the buyer is presented to the seller by the first listing broker, and the first listing broker would earn the commission as set forth in the listing if the offer is accepted and closes. Whether, in the extension period, the listing broker owes a cooperating MLS broker commission is based not on the protected buyer status but on procuring cause. 

Procuring cause

Per the MLS, procuring cause is the standard of performance to earn the MLS offer of compensation. Procuring cause relates automatically to the contract between MLS participants. For non-MLS offers of compensation between brokers, the brokers may, but are not required to, use procuring cause as the standard of performance. 

Protected buyer status may be created by the involvement of a cooperating MLS broker, however, it does not follow automatically that the cooperating broker is the procuring cause. Unless the cooperating broker remains involved in the uninterrupted series of events resulting in the sale of the property to the buyer, the broker may not earn the MLS offer of compensation. This may be true even though the cooperating broker may have been instrumental in creating listing protection for the listing broker. If, however, the first cooperating broker maintains the series of events, and there is a successful transaction, the cooperating broker would earn the MLS offer of compensation offered during the original listing. 

For additional information about procuring cause, see Legal Updates ‚ÄúCooperative Commission and Procuring Cause‚ÄĚ at www.wra.org/LU1004 and ‚ÄúWhat is Procuring Cause?‚ÄĚ at www.wra.org/LU0204 as well as the article ‚ÄúUncovering the Truth: Procuring Cause,‚ÄĚ in the April 2012 edition of Wisconsin Real Estate Magazine at www.wra.org/WREM/Apr12/ProcuringCause.¬†

For more information about the contracts involved in a real estate transaction and how they relate to procuring cause, see the Code of Ethics and Arbitration Manual, Appendix II to Part Ten, ‚ÄúArbitration Guidelines (Suggested Factors for Consideration by Hearing Panel in Arbitration)‚ÄĚ pages 153-154 at www.realtor.org/mempolweb.nsf/pages/ceam.

Enter the second cooperating broker

If the property is no longer listed in the MLS at the time the second offer is drafted, there is no offer of cooperative commission made by the listing company ‚ÄĒ unless there is a compensation agreement between the listing company and the second cooperating company. The second cooperating broker may approach the listing broker to negotiate compensation. When the original listing broker is approached to pay cooperative commission to the new cooperating company, before entering into an offer of compensation, the listing broker would take into consideration whether the first company could or would make a claim to the originally offered MLS offer of compensation.

Procurement

The listing brokers may earn compensation, even in the event the seller does not sell the property based on the procurement provisions of the listing contract. According to the listing, if the seller enters into an enforceable contract for the sale of the property ‚ÄĒ and it does not close ‚ÄĒ listing commission is earned. Alternately, if a ready, willing and able buyer submits an offer at the price, and substantially the terms specified in the listing, the listing commission may be earned. As previously discussed, in either of these scenarios, the cooperating agent‚Äôs expectation for MLS commission is realized only if there is a successful transaction.

What if the cooperating agent moves from one company to another? 

An agent’s real estate brokerage activity is undertaken on behalf of the broker/employing company. The actions of the agent will be attributed to each broker the agent worked for, according to the pertinent time periods. Procuring cause looks at whether there is an uninterrupted series of events that result in the sale of the property to the buyer. In a transaction where the agent changes brokerage companies during the series of events, prior to the acceptance of the offer, some of the agent’s conduct will be attributed to the previous broker and some to the new broker. 

While with Broker A, the agent’s work with the buyer may result in payment of commission to Broker A if the brokerage company continued to work while with the buyer. On the other hand, Broker A may have abandoned the buyer after the agent left, opening the door to a situation where Broker B may be procuring cause based on the agent’s conduct while with the new firm. Thus one key factor is whether or not Broker A maintained the series of events in the transaction after the agent’s departure.

The agent’s transfer to another broker is not determinative of procuring cause.

When an agent changes companies, the buyer may choose to continue to work with the agent to complete the transaction. However, unless Broker A has abandoned or estranged the buyer, Broker A may still be successful in its procuring cause claim, based in part on the agent’s work with the buyer while with Broker A.

As with all procuring cause issues, the first and most important thing is to serve the buyer and seller by closing the transaction. If the dispute is between REALTORS¬ģ, it can be resolved by negotiation or, failing this, by local association mediation or arbitration.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.

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