What Constitutes a Co-Broker Agreement?
Co-broker agreements are used in a variety of different industries, but the way they work stays generally the same. A co-broker agreement is a contract made between two or more brokers, where each party agrees to share a commission for any sealed, signed deals that they successfully bring together. The commission compensation generally has a percentage limit – which is often set by regulatory bodies – and is usually calculated upon the closing of a deal, where sales commissions would be paid out of the funds brought in through the sale.
For example, if one broker brought together 40% of the investors necessary to close a deal, and the other broker successfully brought on 60%, the first broker would get 40% of the total commission, and the second would get 60%.
In general, commission splits are negotiated before the start of the co-brokerage relationship. But due to the fact that commission percentages can change hands when the deal closes, and sometimes even over time, resellers and brokers in finance, equipment leasing and real estate often use co-broker agreements to lay out their compensation split.
In the case of a real estate deal, if broker A made a deal with a home owner, and broker B makes a deal with a home buyer, the two brokers can then enter into a co-brokerage agreement in order to split their respective commissions for the eventual sale. In this example , broker A tends to be the listing agent for the home, while broker B is the selling agent. This is the most common real estate example of a tangible asset’s co-broker agreement, but there are a number of other situations in which brokers may choose to co-broker.
In the case of companies like LinkedIn and Uber, those businesses run on multiple streams of revenue (potentially including subscription fees and advertising revenue), and they would be at a massive disadvantage if every person who was interested in their services needed to go through the process of getting set up as a partner on an individual basis.
Instead, companies can opt to use a co-broker agreement to delegate operational and sales commissions to brokers who are already plugged in within the industry. For instance, Uber could use a co-broker agreement for each country or state that it operates in, assigning distribution rights and possibly even advertising rights to specific brokers or agencies.
Then, instead of delaying the unavoidable fact that every business needs sales representatives who are already within the market to start up virtually from day one, Uber can leverage those resources to build out their brand and hit the market all at once – and not when they can finally get through signing contracts with the hundreds or even thousands of third-party agencies that are already out there.
Crucial Clauses in Co-Broker Agreements
Navigating the intricacies of a co-broker arrangement requires more than just a handshake. A well-drafted co-broker agreement lays out key terms that will come into play once negotiations turn into agreements—and agreements into close. It gives the two brokers clarity as to their respective obligations and protects both from legal liability. The essential clauses in a co-broker agreement include:
Commission structure One of the most important—and contentious—elements of a co-broker agreement seeks to describe how commission proceeds will be divided between the participating brokerage houses. Until they are divided, no one can get paid. Thus, this clause is foundational to the entire agreement.
Duties of the co-brokers The obligation of the parties to identify their respective responsibilities is essential because it will often determine who is entitled to collect a commission. While most contracts require both parties to agree to act with "good faith" and "reasonable care" in the conduct of their duties, specific tasks should be spelled out. This will give each broker a clear understanding of his or her respective role in the transaction.
Confidentiality provision It is not uncommon for co-brokers to have access to information—the names of the principals, contact information, and personally identifiable data—that they are obliged not to share with anyone outside of the deal. A confidentiality clause should spell out when and how confidential information may be disclosed. For example, is broker-to-broker communication always confidential or does that confidentiality expire after the transaction closes? Will information that passes to a third-party in connection with due diligence be considered disclosed? A good co-broker agreement will answer these questions, or at least leave room for the parties to address them later in the life of the agreement.
Advantages of Co-Broker Agreements
For both the buyer broker and the seller broker, entering into a co-broker agreement provides numerous benefits. These include, but are not limited to, the ability for the buyer broker to provide its client with the entire scope of available properties because the buyer can search the MLS of not only his own broker’s company but also all brokers’ companies participating in the MLS and vice versa (seller’s MLS). The buyer broker can avoid being the ‘bad guy’ to his buyer client by advising him that no matter how good the commission split being offered is to the broker, she can’t change the percentage herself but must have her broker do so. A form agreement can be forwarded by whoever set up the agreement rather than having a lengthy discussion as to what is or is not acceptable to each party. And of course, for the broker doing a showing at a property, it is a quick phone call with the other broker to fashion a showing time convenient to all—the same time for all parties to see the property.
Pitfalls and Mitigation Strategies
Disputes over the deposit, the commission or other compensation are probably the most common source of contention. Most offices have their own departmental agreement regarding disposition of deposits and payment of commission that can be used to resolve disputes. For example, disputes can arise over who has a valid contract, title to the deposit, entitlement to the deposit as an expense or as part of a settlement, etc.
A common dispute is where the initial purchaser defaults and the more favorable contract of a second purchaser that is in a backup position is completed. A dispute over a deposit can occur when the cancelled agreement between the vendor and the first purchaser gives the deposit to the vendor, but the second purchaser pays a larger deposit to the vendor concurrent with signing the second agreement. As a result, there is now duplicate entitlement to the deposit by the first purchaser and the vendor. These disputes should be resolved by establishing which agreement is the superior agreement for purpose of the right of purchase, and then determining who then controls the deposit.
Another frequent cause of disagreement is the difficulties encountered by a co-broker from a residential office in accessing the property of a co-broker from a commercial office. Generally, offices should advise their REALTORS® that access is not a matter of rights, but rather a courtesy. Well-established rules of business etiquette require that REALTORS® seek permission before entering the office of another person. This is in addition to the permission required to cross the threshold of the property.
Co-brokerage does not always end amicably. Issues involving the conduct of the co-brokerage relationship can also affect the involvement of the co-brokers’ REALTORS® in the transaction. In some cases, the situation requires REALTOR® "mediation" over an issue affecting the co-brokers. The issue may be as simple as unfounded disparaging comments about either party to the co-broker agreement. In such cases, a direct conversation by a REALTOR® with their staff is all that is needed. Serious issues will require REALTOR® management to meet with the staff to address issues and respond to the concerns of the other office.
Unless the situation is particularly egregious, a direct approach to the offending party is the way to go. Addressing the concern(s) in confidence, particularly when the offending person is told their conduct is causing friction between the parties, usually resolves the matter. Whether the offending conduct is intentional or a misunderstanding is immaterial; the important thing is that it is addressed.
Most disputes over the conduct of a co-brokerage arrangement are resolved with a professional telephone call by management to the offending party. When there is a history of disagreements between the offices involved, however, the REALTORS® of both offices involved may be insufficient to the task at hand. In these situations, it may be necessary for principal brokers to meet in person and work together to maintain a successful relationship.
Legal Aspects of Co-Broker Agreements
While much of the co-broker agreement is oriented towards business terms and practicalities, it must also remain compliant with state and federal laws, regulations and licensing requirements. Brokers should approach the task of drafting a co-broker agreement by first checking state licensing issues and statutory obligations.
First things first: Licensing. Most real estate brokers are required to hold a real estate broker’s license issued by the state. While many states give a designated salesperson the ability to act on behalf of a client, including a percentage of their payment to another broker, certain states require that the commission be paid only to the licensed entity, which, in turn, then pays any other brokers involved after they have submitted their invoices. Furthermore, certain states have mandatory compensation disclosure laws, requiring that the relationship amongst the brokers be disclosed to the client and that all parties be made aware of their respective compensation, including information about any potential increases or decreases in compensation. Other states require that MLS data include the sharing of co-brokered compensation by default, unless the agent has opted out, meaning that the compensation can be publicly shared with and viewed by other MLS members. Texas, for example, requires that compensation be disclosed to clients and potential clients, unless it is otherwise prohibited in the listing agreement. Although the listing agent is not responsible for keeping track of any commission and payment obligations among other brokers, it does have an obligation to provide notice to clients when requested. In some states, any violations are subject to fines and/or imprisonment.
Not all co-brokered transactions are created equal. In some instances, the listing broker designation belongs to the MLS and is simply given to members for that transaction . One member of the MLS can then offer share compensation with their clients to another member of the MLS. State laws will vary as to whether the party that "brings the lead" (i.e., the buyer or tenant) is entitled to the co-broker fee. If the agreement is silent about compensation if the lead is provided by a third party, such as an unrepresented buyer, then the commission would generally be paid to the party who submits the invoice. However, this is a gray area that will vary by state. In states where it is illegal for a non-broker to receive earned commission, the fee will automatically go to the licensee with a broker’s license, but the broker can store the check for 30-90 days, and then cash it, as an exception to its rules.
Of course, no discussion of legal obligations in co-broker agreements would be complete without a tip to be smart about your intellectual property. Many co-broker agreements will refer to websites and other publications that contain information, such as industry standards knowing that the information may have copyright protection. Many brokers and associations have intended copyrights in their logos, business names and on other materials, and brokers should be careful about using these protected works without permission. A unique design in industry-standard profession colors, to use for a co-broke website page or advertisement, might be acceptable fair use, depending on the state. However, including proprietary material without first obtaining permission leaves a broker open to legal liability. Consulting with knowledgeable counsel can help in making the determination of what is fair use and what requires permission or a license. Shrewd brokers might avoid specifying any particular materials in the co-broker agreement, but rather use generic descriptions.
How to Create an Effective Co-Broker Agreement
In many instances the typical form or agreement is not well drafted, and fails to capture the important details necessary to effectively protect the rights of both parties. Those items which are missing or poorly worded, are the items that must be supplemented. It is therefore critical to review the agreement to ensure that it incorporates the specific details of the deal, including the commission to be paid, the events of its being earned, and the allocation of costs, expenses and net proceeds. Failing to adequately address such items may have a significant adverse financial impact on one or both brokers. For example, suppose that a broker was promised an 80% commission with no adjustment for expenses. Suppose further, that in fact the adjustment was 50,000.00, and that the listing broker required the co-broker to pay half of that cost, or 25,000.00. In that event, the co-broker would only receive 35,000.00, instead of the anticipated 40,000.00. That is indeed a significant difference.
The parties will need to ensure that the agreement covers the following topics:
• The co-brokerage agreement should adequately define the relationship of the parties; whether they are acting as co-brokers or have formed a joint venture.
• If an existing joint venture, the duties of the parties and their right to share the proceeds should be explored.
• The parties should consider whether their advertising will be joint or individual.
• The co-brokerage agreement should provide for a prompt accountings, which hold concurrent status with respect to payments for disbursements.
• The parties should incorporate key language that will bind them to the Nationwide Mutual Escrow Account for Buyer Funds and Seller Proceeds.
• The parties should carefully consider whether the agreement contains adequate non-circumvent language.
The above considerations are not exhaustive, and most importantly, they can vary from deal to deal, and broker-to-broker. Parties engaged in co-brokerage or joint ventures should always review the agreement to ensure protection of both brokers. In negotiating these arrangements, parties should carefully consider whether they will be successful in protecting their rights under the industry standard agreement used by the other party. In most instances the answer will be no, and that the agreement will need to be modified to suit your particular needs.
Co-Broker Partnership Success Stories
Co-broker agreements can result in success for all parties involved. For example, a major technology company needed to get thousands of servers to a new location with the right specifications and set up properly for large scale deployment. It contacted two separate brokers that specialize in this type of relocation, and both agreed to work together to manage the operation as one. The operation was a success, and it saved their client significant money on labor costs for the entire operation. The cooperation between two otherwise independent brokers paid off. In another industry, a large commercial real estate firm was looking to move its headquarters into a new complex a few miles away. It tapped several local commercial brokers to provide local assistance. When they did, the brokers reached out to one another to divide the clients and collaborate. This allowed them to complete the move in a fraction of the time and at a lower cost than if they each managed the operation independently. Their cooperation kept their client happy and resulted in more jobs for the brokers across the board. Importantly , a successful co-broker relationship does not require two independent brokers. Sometimes it is a combination of both in-house and outside brokers working together to move a client from one location to another, or to sell large assets before shifting focus to a new business model. For example, in one instance, a global technology company had its sights on acquiring a competitor. However, first, it had to unload needless overhead of both companies before the sale was official. It used some in-house personnel to identify locations of interest and to manage the sales effort. Then, once the company saw interest in a site, it brought in a real estate broker to help complete the transaction. The site representative and the broker collaborated on the sale of the property and completed the deal successfully, allowing them both to benefit from the sale.
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