WRA 02.01 Please Route to: ______Legal Update ______A WRA Publication Exclusively for the Designated REALTOR® ______

Inside This Issue Getting Paid Outside of the MLS In this era of larger companies and tions of the contract entered into expanding markets, an increasing with the other licensee for the pay - 2 number of REALTORS® may find ment of a fee in exchange for the Checklist for Referral themselves working outside of the referral of a client or customer. While Multiple Listing Service (MLS), a sta- some referral fee agreements are ver- Fee Agreements ple for residential brokers in many bal, many members have realized it is Wisconsin boards. Members may find better to have a written agreement themselves working with brokers who rather than discover there was no 4 are participants in other MLS sys- mutual understanding about the size MLS Compensation and tems, working with non-REAL- or timing of the fee payment. Cooperation TORS® (who are not MLS partici- pants), working in locations where This Legal Update discusses the there is no MLS, or engaging in com- agreements necessary for establishing 5 mercial transactions (which are typi- a licensee's right to be paid referral cally not entered in the MLS). fees and commissions in non-MLS Policy Letters transactions. The discussion begins In each of these situations, the offers with a discussion of referral fee agree- of cooperation and compensation, ments, including a referral agreement 7 standards of performance for earning drafting checklist. Next is an Non-MLS Policy Letters a commission, and other accompany- overview of the MLS system of coop- ing procedures and mechanisms are eration and compensation and the missing without the MLS safety net policy letters that brokers may use to 7 with which many members are used modify the compensation offered in Policy Letter Checklist to working. Outside of the MLS, the MLS. This is contrasted with a there are no automatic offers of coop- discussion of what cooperation and eration and compensation--brokers compensation agreements are needed 8 must make an offer to the cooperat- when a transaction is not governed by Policy Letter Provisions ing brokers who, by their words or the MLS. Checklists for drafting a and Examples deeds, may accept that offer and cre- non-MLS policy letter and a non- ate an agreement for cooperation and MLS compensation agreement also compensation. Procuring cause does are included. 10 not determine who gets paid unless the brokers have agreed that procur- Referral Fee Agreements Compensation ing cause is the standard of perform- Normally, a real estate licensee in the Agreements ance that determines the earning of United States expects to receive a fee commissions. In short, unless the after the licensee refers his or her brokers have a standing policy letter client or customer to another real 11 agreement or a compensation agree- estate licensee and the latter com- Conclusion ment for that transaction, the listing pletes a transaction involving the broker has no obligation to pay the referred customer, regardless of cooperating broker. whether that latter licensee is in the same state. The prospect of compen- There also is no MLS safety net estab- sation is an important incentive for a WISCONSIN lishing the terms and conditions of ® licensee in one region to make a REALTORS referral fee agreements. Licensees ASSOCIATION © 2001 referral of a client or customer to must establish the terms and condi- another licensee in a distant loca- true regardless of whether the agent Contacts tion. Typically, the referring licensee has a salesperson’s or a broker's will receive as a referral fee a share of license--what is determinative is that EDITORIAL STAFF the commission or fee earned by the the agent is associated with a bro- licensee to whom the referral was ker/company. However, a licensee Author made. with a salesperson's or a broker's Debbi Conrad license can make a referral and Production In the United States, referrals are directly receive a referral fee if the Sonja Penner considered common practice and licensee is not associated with a bro- Laura Connolly happen frequently between licensed ker/company. Rick Staff brokers or brokerage firms. They are Tracy Rucka typically based upon an explicit It is prudent practice to ask for a agreement between the referring copy of an agent's license or verify and receiving brokers. A referral the agent's license status before ASSOCIATION agreement names the client being entering into an agreement for a MANAGEMENT referred and spells out the referring paid referral. The agent’s license broker’s referral fee entitlement in must be valid and current, meaning Chairman the event of a sale, lease, exchange he or she must complete the contin- Matt Miller or other successful transaction. uing education requirements and President pay the renewal fee each biennium. Referral arrangements within the William E. Malkasian, CAE It is not necessary that the agent be United States seem to work on a rel- a local board or WRA member. ADDRESS/PHONE atively trouble free, self-executing basis, though interstate referral fee With respect to agents from other The Wisconsin collections can be difficult. Referrals states or countries, they must be REALTORS® Association, are also widespread in Europe. regularly and lawfully engaged in 4801 Forest Run Road, Needless to say, referral fees are a real estate brokerage. This means Suite 201, Madison, valuable source of income to the real that they must hold whatever cre- WI 53704-7337 estate licensee. dential is necessary and meet any (608)241-2047 other applicable standards that are 1-800-279-1972 Wisconsin law contemplates referral required in that state or country to fee arrangements being made with lawfully engage in real estate prac- LEGAL HOTLINE: licensees in other states and in other tice. They must also regularly countries. Wis. Stat. § 452.19 pro- Ph (608) 242-2296 engage in real estate brokerage. This vides that “No licensed broker may would seem to rule out persons with Fax (608) 242-2279 pay a fee . . . as compensation for a Web: www.wra.org credentials who actually work in referral . . . to any person who is not other fields and may rule out part- licensed or registered under this time agents, depending upon what chapter or who is not regularly and is judged to be “regular” within that The information contained herein lawfully engaged in the real estate jurisdiction. is believed accurate as of 01/10/02. brokerage business in another state, The information is of a general a territory or possession of the nature and should not be Checklist for Referral Fee considered by any member or United States or a foreign country.” Agreements subscriber as advice on a particular fact situation. Members should Wisconsin licensees may pay referral A recent Legal Hotline caller contact the WRA Legal Hotline fees to other Wisconsin licensees received a referral from an Illinois with specific questions or for who have a valid and current license. broker and agreed to pay a fee if the current developments. If the person making the referral is buyer purchased a property. What Reproduction of this material may an agent associated with a the Wisconsin broker did not realize be done without further permission broker/company, Wis. Stat. § was that the Illinois broker had if it is reproduced in its entirety. 452.14(3)(f) requires that any refer- referred the buyer to a total of three Partial reproduction may be done ral fee be paid to the agent's bro- local agents. When the deal closed, with written permission of the Wisconsin REALTORS® ker/company. It is a license law vio- two of the agents were disputing the Association Legal Department. lation for that agent to accept the selling side and the Illinois broker referral fee from anyone other than was demanding fees from both the agent's broker/company. This is Wisconsin agents. This scenario

WISCONSIN REALTORS® ASSOCIATION © 2001 2 Legal Update 02.01 illustrates what may occur when bro- the basis for computing the fee. If ing referral fee agreements. kers do not use specific written refer- the fee will be based on a percent- An attorney from Illinois has a ral agreements. age of commissions actually col- client who is interested in property in lected, specify if this is the gross All referral agreements should be in Wisconsin. The attorney requested a commission received by the receiv- writing. Members may wish to enlist referral fee from the broker. Is this ing company or the net commis- the assistance of their company attor- legal? sion received by the receiving ney to develop a referral fee agree- agent. Business practices vary from ment format that is appropriate to the Wis. Stat. § 452.19 limits the pay - market to market, so it is necessary company’s marketplace and transac- ment of referral fees, finders fees and to spell out exactly how the fee will tions. The following points should be commission splits to persons licensed be determined. addressed in any referral fee agree- or registered in Wisconsin to practice ment: 8. State exactly who is responsible real estate, or persons regularly and to pay the fee, exactly to whom the lawfully engaged in real estate bro- 1. The full names and contact fee should be paid, and when the kerage in another state. This would information for the referred par- fee will be paid. exclude the attorney unless he has the ties. credentials necessary under Illinois 9. Performance standard that law to practice real estate and he reg- 2. The full names of the referring must be met before the fee is ularly engages in real estate broker- and receiving agents and compa- earned. For example, the fee may age. This would not likely be the case nies. be due if there is an accepted offer if his primary occupation is his law 3. Company addresses and contact that closes. It should also be stated practice. if there are any restrictions or limi- information. May a salesperson personally pay tations with respect to types of referral fees to active or inactive 4. The state of licensure and properties or transactions, geo- licensees? license number of the referring graphic areas, etc. agents. The receiving agent should As long as company policy permits a require written confirmation that 10. Agreement term - how long the referral agreement is good for. salesperson to do so, a salesperson the referring agent holds an active may pay a referral fee directly to an real estate license and/or seek writ- If the referred party buys or leases a property with the receiving agent individual who holds an active real ten confirmation of an active estate license, but is not employed by license from the appropriate state ten years after the referral was made, is the fee still due? a broker. If the individual’s license is real estate commission if there is under a broker, the referral fee must any question about the licensee’s Members who are the principal bro- be paid to that broker. status. ker should consider establishing a May a broker pay a referral fee to a 5. Whether the referral originated company policy that licensure confir- salesperson who isn’t currently with the other agent or the compa- mation be obtained as early as possi- licensed under a broker? ny. To put it another way, if the ble—definitely before closing. referring agent goes to another Company policy should also address Wis. Stat. § 452.19 permits a broker company before the referral fee is whether referrals and the fees they to pay referral fees and finders fees to paid, does the fee follow the agent produce are personal to the agents, other Wisconsin licensees as long as or stay with the company? This business income for the company, or that person’s license is active, regard- may depend upon the referring both. Referrals of friends and family less of the fact that the person holds a agent’s company policy - are refer- members might be personal referrals salesperson’s license and not a bro- rals personal to the agents in that and referrals involving contacts made ker’s license. The fact that the person company or are they considered from real estate practice on behalf of is not currently employed by a broker part of the company’s business? the broker/company might be com- is not relevant. pany referrals. Office policy may also 6. Whether the referral is exclusive provide for a different portion to be It may be prudent practice to ask for to the receiving company or refer- retained by the company for referral a copy of an agent’s license before rals are being made to other com- fees as opposed to commissions. entering into an agreement for a paid panies as well. If the latter is the referral. A license may also be verified case, specify which receiving Referral Fee Agreements-- on the DRL Web site at agents/companies are responsible Legal Hotline Q&A http://drlchq.state.wi.us/plsql/chq for paying the referral fee. The following questions were recent- /cred_holder_query or use the link on the WRA Web site. The agent 7. A clear and precise statement of ly asked of the Legal Hotline regard-

Wisconsin REALTORS® Association 3 Legal Update 02.01 must have a valid, current license. It desired buyer, tenant or property. execution of a purchase agreement or is not necessary that the agent be a While REALTORS ® recognize a lease. (Amended 1/98)” local board or WRA member. responsibility to serve their clients, If no such disclosure is made, it is customers and the public under high A real estate licensee gave names to a assumed that the cooperating broker standards of ethics and integrity, they builder/broker, and the builder/bro- is a subagent. The MLS required a also have concerns about being fairly ker was planning on paying a refer- mandatory offer of subagency before compensated for their professional ral fee to the licensee. Now the buyer brokerage became widespread. endeavors. Compensation in real builder/ broker is concerned about This offer of subagency is presumed estate transactions may be established whether it is legal for him to pay the in a Wisconsin MLS unless notice is by the MLS, standing policy letters referral fees for names of building given that the broker is acting as a between broker/companies, com- prospects. buyer’s broker. pensation agreements pertaining to Under Wis. Stat. § 452.19, licensees single transactions, or a combination Using Policy Letters to Modify may pay referral fees only to other of these. MLS Offers of Compensation licensees. Since both the builder and In listing a property with the MLS of With respect to policy letters, the fol- the licensee hold real estate licenses, a board of REALTORS®, the listing lowing rules are derived from the the builder may pay the licensee. broker makes a unilateral offer of Article 3 Standards in the Code of If the builder did not hold a real cooperation and compensation to Ethics and MLS policy: estate license, he could still pay the other MLS participants. The listing • An offer to cooperate does not referral fee to the licensee. Wis. Stat. broker specifies on each listing mean that there must also be an § 452.19 does not apply to non- whether cooperation and compensa- offer to compensate. When filing a licensees who pay referral fees. tion are being offered to subagents, buyer’s brokers or both. The offer to listing with the MLS, the listing Re: Payment of a referral fee to a compensate is accepted by a broker broker may offer compensation to person in another state who does not who becomes the procuring cause of selling agents, buyer’s agents or have a Wisconsin license. The offer is the sale or lease. In other words, the both. The listing broker is not for the person’s daughter, who lives in listing broker extends a blanket invi- required to offer the same amount Wisconsin, and the property is locat- tation to other brokers to become the of compensation to all agents. ed in Wisconsin. procuring cause of the sale or lease. • The commission shown in the Wis. Stat. § 452.19 limits the pay- All MLS participants are potential MLS listing must be shown as a ment of referral fees, finders fees and cooperating brokers. When a listing percentage of the gross sales price commission splits to persons licensed broker lists a property on the MLS, or as a definite dollar amount. or registered in Wisconsin to practice the listing broker is offering to coop- • Listing brokers may unilaterally real estate, or persons regularly and erate with all MLS participants, pro- modify the compensation offered lawfully engaged in real estate bro- vided they are willing to cooperate as on the MLS so long as the modifi- kerage in another state. subagents or buyer’s brokers--what- cation is received by the cooperat- Prior to making a referral payment, a ever form of cooperation is being ing agent, in writing, prior to the broker may ask a person to show offered in that particular listing. If a time an offer to purchase is pro- proof that he or she is licensed and cooperating broker/MLS participant duced. If a listing broker chose to lawfully engaged in real estate bro- responds to the MLS listing by mak- offer one or more brokers a greater kerage in another state. It would be ing inquiry about the property on or lesser percentage of the sales prudent for the broker to enter into a behalf of a buyer or by asking to price, or a greater or lesser dollar written referral fee agreement with schedule a showing, the responding amount, the broker may simply the other person prior to submitting broker must disclose if he or she is send a unilateral policy letter con- any offers on behalf of the daughter. acting as a buyer’s broker. taining the desired compensation. Standard of Practice 16-10 provides As long as the modification was that “REALTORS®, acting as agents communicated before an offer to MLS Compensation and of, or in another relationship with, purchase or lease was produced, the Cooperation buyers or tenants, shall disclose that changed compensation will super- sede the compensation stated in the A critical part of every real estate relationship to the seller/landlord’s MLS. The listing broker cannot, transaction is establishing a REAL- agent or broker at first contact and however, unilaterally modify the TOR®’s right to be paid a commis- shall provide written confirmation of offered compensation after an offer sion if the REALTOR® successfully that disclosure to the seller/land- to purchase or lease has been pro- assists the party in obtaining the lord’s agent or broker not later than

Wisconsin REALTORS® Association 4 Legal Update 02.01 duced. This type of policy letter is referred to of cooperation and compensation is as a “unilateral policy letter.” accepted. This is also how a unilat- • MLS rules allow listing brokers to eral policy letter—modifying the modify offers of compensation in (2) Letters addressing all other types amount of the MLS offer of com- ways other than stating a new per- of terms and conditions of coopera- pensation by stating a different per- centage of the gross sales price or a tion. These letters are accepted by the centage of the purchase price or a new stated dollar amount, but this cooperating broker’s signature on the definite dollar amount—is accept- can be done only by mutual agree- policy letter and delivery of the ed. Brokers receiving this type of ment with the cooperating agent accepted policy letter back to the list- policy letter have three options: via a bilateral policy letter. The ing broker, or by any other actions accept the terms and proceed with cooperating agent receiving the required for acceptance under the showings, etc.; reject the terms and policy letter must accept the modi- terms of the policy letter. This type of refuse to show the property; or fication by signing the policy letter policy letter is referred to as a “bilat- contact the listing broker with sug- and returning it to the listing agent, eral policy letter.” gestions for an amended policy let- or in some other specified manner. Policy Letters Mechanics ter. If the cooperating agent does not accept the policy letter, the com- Several important points must be (2) Bilateral policy letter modifying pensation offer shown in the MLS remembered when writing and dis- the MLS offer of cooperation and will stand. tributing policy letters: compensation. If a bilateral policy letter modifies the MLS offer of • Any policy letter with the goal of • Policy letters must be clearly stat- ed. Any ambiguities in a policy let- compensation in terms other than a discouraging cooperation may vio- percentage of the gross sales price late Article 3 of the Code of Ethics. ter will be interpreted against the drafting office. If the conditions for or a definite dollar amount, the Under these standards, it would be cooperation or compensation are modification is accepted only if the permissible for two brokers to mutu- too vague, the courts may hold that cooperating broker signs and ally agree to a change in compensa- no policy letter contract was creat- returns the letter to the listing bro- tion after an offer had been accepted. ed. ker, or accepts the policy in some A listing broker also may unilaterally other way specified in the policy modify the offer of compensation • To be effective, the policy letter letter. There must be some clear prior to an offer being submitted. must be delivered. Any office send- indication that there is a meeting of The listing broker cannot, however, ing a unilateral policy letter should the minds. If the cooperating bro- unilaterally modify the offered com- use some means to establish that ker is not happy with the terms and pensation after an offer has been pro- delivery has been accomplished (i.e. conditions of the policy letter and duced. The mechanism used by bro- registered mail, return of receipted refuses to accept the policy letter, kers for making these changes is typi- copy, affidavit of delivery). With the listing broker may consider cally a policy letter. bilateral policy letters, a cooperat- honoring the compensation origi- ing broker’s signature and delivery nally stated in the MLS listing or Policy Letters back confirms delivery. using a unilateral policy letter to change the compensation amount, A policy letter is a communication • According to MLS policy, policy at least until a bilateral letter can be from one broker to one or more letters must be accepted in some negotiated. other brokers, establishing the terms way to create a binding contract. and conditions upon which coopera- Following are the terms of accept- (3) Policy letter changing terms and tion and compensation is being ance for possible types of policy let- conditions of cooperation other offered. Policy letters can be used to ters: than, or in addition to, price. This establish the terms and conditions of type of policy letter will also require cooperative relationships in any trans- (1) Unilateral policy letter stating written acceptance and delivery or action. compensation as a percentage of some other unconditional accept- the gross sales price or a dollar ance action before it becomes a The terms and conditions established amount. When a cooperating bro- binding contract. in a policy letter may be divided into ker who has received a unilateral two categories: policy letter modifying an MLS • Policy letters are expressions of (1) Letters making an offer of com- offer of compensation procures a the independent competitive deci- pensation or modifying an MLS offer buyer for the property, the terms of sions of broker/firm. Each office’s of compensation. These letters are the policy letter have been accepted policy letter must be based on its accepted when the cooperating bro- by the cooperating broker’s own decisions, not a group’s ker produces an offer to purchase. actions. This is how an MLS offer attempt to influence the terms of

Wisconsin REALTORS® Association 5 Legal Update 02.01 competition. It may be a violation dollar amount.” Additionally, MLS A broker is working with a commer- of antitrust law for competing policy states that the MLS shall not cial buyer. The buyer identifies offices to agree on standard com- publish listings that include general Property X and the broker obtains an pensation terms or competitive invitations by listing brokers to other exclusive listing contract. Another policies. A number of offices in a participants to discuss terms and con- broker writes the offer. The property is local market may discuss a new ditions of possible cooperative rela- not in MLS nor is there a co-broke problem with fellow brokers and tionships. Therefore, the MLS should agreement. The offer states that the together formulate the best not accept listings with “call” as the listing broker is to split his commis- response to the situation, or fran- compensation offered by a partici- sion with the broker who wrote the chise offices may all be subject to pant. offer to purchase. The offer is accept- the same policies. Unfortunately, able to the seller. The broker with the If an MLS participant chooses to joint office responses may be con- listing refuses to co-broke because he offer a minimal amount of compensa- sidered a conspiracy under antitrust feels the he was clearly procuring tion, the entry should reflect that law. Parallel activities (several cause and a significant amount of offer. Under Wis. Stat. § 452.133(2), offices independently reaching the money is involved. Does the listing the listing broker has duties to the same result) do not necessarily con- broker have any obligation to co- client to disclose to the client all stitute a conspiracy, however, they broke with the other broker? information known by the broker can create a strong presumption of that is material to the transaction. In A cooperating agent’s right to com- an antitrust violation. this case, the seller should be made mission will be determined by an Accordingly, it may be prudent to aware of the minimal offer of com- offer of compensation from the list- document the internal develop- pensation if it will have a material ing broker or an amount negotiated ment of an office’s cooperation and affect on the marketability of the from the seller in an offer to pur- compensation policy. Include in property. chase. There generally three ways a office meeting minutes the details cooperating broker has a rightful of whatever discussion led to the A listing broker had a closing with a expectation of commission from the new policy. A classic mistake that cooperating broker. In the MLS, the listing broker: an MLS offer of com- has led to antitrust lawsuits is to commission was stated as a flat dol- pensation, a policy letter, or a sepa- simply take a competitor’s policy lar amount versus a percentage of the rate compensation agreement relat- letter that looks good, and copy the selling price. The cooperating broker ing to the specific transaction. Non- body of the letter onto office let- is trying to tell the listing broker MLS compensation agreements terhead. Office counsel should what the standard co-broke rate is. should be reduced to writing and review and approve content and Please advise. signed by the brokers to avoid com- procedures prior to issuance of a Because the MLS is a tool by which mission disputes. policy letter. the listing broker may make a unilat- If the broker is a REALTOR®, the MLS Cooperation and eral offer of compensation, it is the REALTOR® is prohibited from using listing brokers choice to set compen- the offer to purchase to modify the Compensation - Legal Hotline sation amounts. Once the offer of Q&A listing broker’s offer of compensa- compensation is made, the cooperat- tion. Standard of Practice 16-16 of The following questions were recent- ing broker then knows the amount of the REALTOR® Code of Ethics pro- ly asked of the Legal Hotline regard- commission that will be paid if it is vides that “REALTORS®, acting as ing MLS cooperation and compensa- determined the cooperating agent is subagents or buyer/tenant agents or tion. the procuring cause of the sale. brokers, shall not use the terms of an Re: MLS offers of compensation. MLS Commissions offered to cooperating offer to purchase/lease to attempt to members are entering “call” in the agents are always negotiable. There is modify the listing broker’s offer of MLS as the offer of compensation for no industry or MLS standard rate. compensation to subagents or buyer agents. Is this permissible? Pursuant to MLS policy, the MLS is buyer’s agents or brokers nor make prohibited from fixing, controlling, the submission of an executed offer Per the National Association of recommending, suggesting, or main- to purchase/lease contingent on the ® REALTORS MLS Policy, “The taining commission rates or fees for listing broker’s agreement to modify compensation specified on listings services rendered by members. When the offer of compensation. (Amended published by the MLS shall be shown offering compensation, MLS rules 1/98)” in one of the following forms: 1. by allow listing brokers to enter either a The offer to purchase is an agreement showing a percentage of the gross percentage or flat rate in the MLS. selling price 2. by showing a definite between the parties, not the brokers, so the brokers cannot negotiate a

Wisconsin REALTORS® Association 6 Legal Update 02.01 binding compensation agreement property sought to the CIE even agents or brokers of sellers/land- there. However, the buyer may though the participant may not be lords, establish the terms and condi- request that the seller pay the cooper- the buyer’s exclusive agent. tions of offers to cooperate. Unless ating agent a fee in the offer to pur- expressly indicated in offers to coop- If a broker gets information from the chase. Any terms to this effect would erate, cooperating brokers may not CIE and approaches the broker who be negotiable between the buyer and assume that the offer of cooperation submitted the property information the seller. The parties should review includes an offer of compensation. to the CIE, there may be absolutely the contract language to determine Terms of compensation, if any, shall no underlying agreements or under- what is intended and if it is ambigu- be ascertained by cooperating bro- standings about how the two brokers ous, counter to clarify their under- kers before beginning efforts to will proceed. The approaching broker standing. Otherwise, they risk later accept the offer of cooperation. may disclose if he or she is working as litigation. (Amended 1/99)” Brokers who are a buyer’s broker, but that will not aware of the need to establish a basis necessarily be so if the broker is not a Non-MLS Policy Letters for compensation--or risk not being REALTOR® and the property is not In transactions where there is no paid at all--will likely pursue the issue one-to-four family residential. REAL- MLS or where neither broker with the other broker. A smart broker TORS® must disclose buyer/tenant involved is an MLS participant, poli- knows that an agreement on com- agency per the REALTOR® Code of cy letters and compensation agree- pensation should be reached, in writ- Ethics Standard of Practice 16-11, ments are often used to establish the ing, before any offer is submitted. and Wis. Admin. Code § RL terms of cooperative relationships 24.07(8) requires licensees to dis- What is often overlooked, however, is and offer compensation in a transac- close buyer agency if the property is that the broker should not be satis- tion. In these situations, the MLS used or intended to be used princi- fied with only an agreement for com- safety net is not there. There is no pally for one-to-four family residen- pensation. If there is to be an agree- automatic offer of cooperation and tial purposes. If the broker is not a ment, it should include an agreement compensation, and no pre-designated REALTOR® and the property is com- regarding cooperation and agency. A standard of performance for earning a mercial, the broker may have no duty listing broker may allow a broker to commission. Brokers must make an to disclose anything. show a property (because § RL offer to the cooperating brokers who, 24.13(2)(a) says he or she has to), by their words or deeds, may accept At this point, the brokers should try but that does not necessarily mean that offer and create an agreement for to reach an agreement about whether that the listing broker has agreed to agency relationships, cooperation and the brokers will cooperate with each otherwise co-broke. In addition to compensation. Procuring cause does other, what their agency relationship establishing cooperation and sub- not determine who gets paid unless will be, and what compensation will agency or buyer agency, the agree- the brokers have agreed that procur- be paid under what circumstances. ment should also establish the often ing cause is the standard of perform- Assuming that the other broker will overlooked point of standard of per- ance. Unless the brokers have a cooperate is not wise--nonmembers formance--what the other broker has standing policy letter agreement or a have only limited duties to cooperate. to do to earn the agreed upon com- compensation agreement for that Under § RL 24.13(2)(a), a listing pensation. These and other points transaction, the listing broker has no broker must permit access for show- may be addressed in a policy letter. obligation to pay the cooperating ing purposes unless the owner has broker. given specific written instructions to Policy Letter Checklist For example, if commercial brokers exclude the other broker. Under § Brokers using a policy letter agree- are using a Commercial Information RL 24.13(1), a listing broker must ment to establish cooperation, Exchange (CIE) rather than an MLS, submit offers to the owner unless the agency, compensation, and other no offers of cooperation or compen- owner has given specific instructions rules and standards often will use a sation are extended through the CIE. to the contrary. Other than that, a bilateral agreement. The listing bro- However, any information submitted nonmember has no obligation to ker may prepare an agreement and on properties for sale, lease or cooperate with a buyer’s or tenant’s submit it to the other broker. If the exchange must include the seller’s or broker, and no obligation to offer other broker is unhappy about any of lessor’s written authorization for the subagency. And without an agree- the provisions, the two brokers may participant to submit information on ment to compensate the other bro- be able to negotiate a modified agree- the property to the CIE. If the par- ker, a listing broker certainly has no ment that is mutually agreeable. ticipant is acting on behalf of a buyer, duty to pay the other broker. Sometimes the listing broker may be then the participant may submit Standard of Practice 3-1 states that unwilling to change the provisions information describing the type of “REALTORS®, acting as exclusive and may refuse to cooperate or pay

Wisconsin REALTORS® Association 7 Legal Update 02.01 the other broker unless the other 1. Identify Brokers: State or provide Example 1: The commission or broker goes along with the listing spaces for the name, address, tele- buyer’s broker’s fee paid to cooperat- broker’s terms and conditions. phone number, fax number, e-mail ing brokers upon a successful closing address and any other contact infor- shall be the greater of the compensa- Cooperation and compensation may mation for each broker/company. tion offered in the MLS, if any, or the be offered to subagents and/or following: buyer’s brokers. Listing brokers and 2. Term of the Agreement: State sellers have some potential legal lia- the term or duration of the agree- a) __ percent of the final gross sales bility for the acts of their subagents. ment. price for vacant lots and parcels Therefore, some offices may wish to limit subagency to offices and Example: This policy letter agree- b) __ percent of the final gross sales licensees who are actively engaged in ment is entered into by the two bro- price for retail and commercial real estate practice. Appropriate poli- kers/companies identified and sign- properties ing at the conclusion of this letter. cies may include limiting subagency c) __ percent of the final gross sales to agents who are actively engaged in This agreement shall remain in force until such time it is terminated by price for new construction not pre- the real estate market in which the viously occupied listing is located and who carry errors written notice delivered to the other and omissions insurance. Whether broker. d) __ percent of the final gross sales price for residential properties these policies are appropriate for a 3. Territory/Property: State given office must be determined by whether the policy letter is specific to Example 2: The listing broker will the individual office, preferably with particular properties or a specific geo- pay a selling broker who is a REAL- assistance from counsel. graphic area. Make sure any descrip- TOR® __ percent of the total com- Policy letters are also an excellent tions are clear and precise. mission actually received by the list- vehicle for establishing the rules and 4. License Requirements: If work- ing broker from the owner. The list- standards with which a cooperating ing with brokers from out of state or ing broker will pay __ percent of the agent must comply in order to earn where otherwise prudent, have the total commission actually received to the offered commission. Failure to broker confirm that the company and a nonmember selling broker, provid- meet the listing broker’s standards all agents practicing in Wisconsin are ed the following conditions are met: could result in reduction of compen- licensed in Wisconsin, and that out- 1. The broker has an active sation or termination of subagency if of-state agents are regularly and law- Wisconsin real estate broker’s the policy letter is written to include fully engaged in the real estate bro- license. penalty provisions for noncompli- kerage business in another state, ter- ance. Failing to establish minimum ritory or possession of the United 2. The broker is actively engaged standards of practice is an invitation states or another country. in real estate brokerage. for other brokers to do things their own way. 5. Compensation Amount: The for- 3. The broker is not a principal mula for expressing the compensa- (buyer) in the transaction. There is a vast assortment of potential tion to be paid may vary widely, and Example 3: Tenant’s broker will be policy letter provisions. The follow- may be very complex in transactions paid __ percent of the annual gross ing checklist attempts to list the dif- like commercial leases. Different rent for the first __ years, and __ per- ferent types of provisions that might amounts may be offered, conditioned cent of the annual gross rent for each be used and give a few examples of upon the performance of specified year in the balance of the lease term each. Ultimately, a broker must tasks or dependent upon whether the and __ percent of the annual gross determine what terms and conditions cooperating broker meets certain rent in the event of any renewal or are best suited for the broker’s com- standards. It is critical that the extension. pany, the transaction, the parties and amount of compensation being the cooperating brokers. offered be expressed precisely using 6. Performance Standard: State Policy Letter Provisions clear terminology that can be readily what must be done to earn the com- understood by brokers from different pensation. The commission or fee The following provisions may be marketplaces. Many transactions are might be earned if the cooperating appropriate for different types of pol- so complex that compensation is sep- broker is procuring cause per MLS icy letters. Members may wish to arately negotiated between the bro- and local board standards, “procures enlist the assistance of their company kers later on, when transactional the buyer” as defined in the listing attorney to develop a policy letter for- details are taking shape. Thus, com- contract, writes an offer that success- mat that is appropriate to the compa- pensation language may or may not fully closes, etc. Again, this standard ny’s marketplace and transactions. appear in a policy letter agreement. must be clearly stated so the parties

Wisconsin REALTORS® Association 8 Legal Update 02.01 know when the compensation is vided to the buyer per Wis. Stat. § buyer’s incentive may be negotiated earned. It should also be stated when 452.135. The agency disclosure form with the listing broker prior to the compensation will be paid. must conform to § 453.135 and any submission of the offer to purchase. other applicable legal requirements. Example 1: Compensation will be 11. Procedures for Presentations The copy of the agency disclosure paid to the broker who wrote the of Offers and Counteroffers: form must be given to the listing offer, but only after a successful clos- REALTORS® working in non-MLS office no later than the time that an ing has occurred. Payment to be areas may consider addressing the offer to purchase is submitted. Any within 48 hours of closing. issues covered in the model MLS confidential information stated on rules, such as a cooperating broker’s the agency disclosure form may be Example 2: The broker who is the right to attend the presentation of removed from the copy provided. procuring cause of a transaction that offers. closes will earn the cooperative com- Example 2: Buyer’s brokers must dis- pensation to be paid at closing. close their status as a buyer’s broker 12. Showings: The listing broker may want to establish a process for Example 3: Compensation will be upon first contact with the listing identifying parties attending show- earned if a tenant procured by the office, prior to setting up an appoint- ings. A cooperating broker may be buyer/tenant’s broker enters into a ment to show any listing. required to disclose the name and lease with a minimum term of two 9. Property Condition Reports, capacity of the party to the listing years. LBP, and Other Disclosures: broker upon initial contact. The list- 7. E & O Insurance: If the listing Receipt of a copy of any real estate ing broker may also want to regulate broker is going to cooperate with a condition report furnished by the how showing appointments are subagent from out of the broker’s listing broker or owner to the coop- scheduled and who will attend show- area or state, the listing broker may erating agent or buyer must be ings. acknowledged by the buyer in the want to require that the cooperating Example 1: All showings must be offer to purchase. A copy of any lead- broker have errors and omissions arranged through the listing broker’s based paint addendum furnished by (E&O) insurance to help protect the office. The listing broker will record the listing broker or owner to the listing broker if the listing broker the name of the agent showing the cooperating agent or buyer must be becomes liable for some action or property and the name of the party. omission by the cooperating broker. signed by the buyer and incorporated into the offer to purchase, if applica- Example 2: All showings must be Example: Any cooperating broker ble. Any offers for non-exempt target arranged with the listing broker’s shall have a current errors and omis- housing built before 1978 must office, not the seller. The cooperating sions insurance policy with at least include a lead-based paint disclosure agent scheduling a showing shall give $______minimum liability coverage addendum that conforms to federal his or her name, the firm name, and per claim and at least $______law. the name of the buyer (unless the minimum aggregate liability cover- 10. Buyer/Tenant/Licensee: A list- buyer’s name is confidential informa- age. Each agent must be covered tion). Buyer’s agents are also under the office E&O policy or have ing broker may wish to state a policy with respect to licensees who act as required to give the name of the his or her own E&O policy meeting buyer when scheduling showings. these minimum requirements. parties in a transaction. 13. Policy Letter Enforcement: 8. Agency Disclosure: Because a list- Example 1: The listing broker will Many policies that a listing broker ing broker has potential legal liability not, as a matter of policy, share com- wants to establish will mean little if for undisclosed dual agency, listing missions with brokers who are acting there is also not an enforcement brokers may insist that all cooperat- as a principal in the purchase or leas- mechanism or a penalty that may be ing subagents provide a copy of a ing of a listed property. If a licensee imposed if the cooperating broker signed agency disclosure form no purchases or leases a listing as the breaks the policy letter agreement. later than the time that an offer is buyer/tenant/licensee, the listing submitted. Listing brokers may also broker will pay an incentive equal to Example: In the event that a cooper- want to be notified as soon as possi- ___. The buyer/tenant/licensee ating broker fails to comply with any ble if a broker is acting as a must be actively engaged in the prac- of the terms and conditions of this buyer’s/tenant’s broker. tice of real estate. policy letter agreement, the listing broker may reduce the compensation Example 1: Any subagent must fur- otherwise due to that broker by __. nish the listing broker with a copy of Example 2: With respect to offers to In the event that the same cooperat- the agency disclosure that was pro- purchase submitted by licensees, a ing broker fails to comply with any of

Wisconsin REALTORS® Association 9 Legal Update 02.01 the terms and conditions of this poli- the assets of one of the companies, only. Outside of the MLS, brokers are cy letter agreement a second time, etc. shall cause the policy letter to well advised to not assume or pre- the listing broker may reduce the become immediately null and void. sume anything and specifically and compensation otherwise due to the plainly state if a subagency relation- broker by __. Notwithstanding any Compensation ship is being agreed upon as well as other provision of this policy letter Agreements confirming the agreement for coop- agreement, any further breach of this Whereas policy letters, particularly eration and compensation. policy letter agreement by the same bilateral policy letters, are often used Compensation agreements may con- cooperating broker will entitle the to create long-term cooperation and tain many or all of the same elements listing broker to give written notice compensation agreements, compen- of a policy letter, so members may terminating this agreement. This sation agreements generally are used also review the various provisions notice shall be effective immediately for a single transaction. sometimes used in policy letter agree- upon receipt by the cooperating bro- ments to see if any of those are appro- ker. A broker’s compensation agreement priate for the immediate transaction. may be used in many different situa- 14. Resolution of Commission Members may wish to enlist the assis- tions, including commercial transac- Disputes: The parties may wish to tance of their company attorney to tions, when there is no applicable establish a method of resolving dis- develop a compensation agreement MLS at that location, when the MLS putes other than going to court. format that is appropriate to the com- offer of compensation has been pany’s marketplace and transactions. rejected, when one of the brokers is Example 1: All disputes regarding A compensation agreement should: compensation or other provisions not an MLS participant so the MLS under this agreement will be settled does not apply, or when the brokers 1. Describe or identify the property; by arbitration. desire to negotiate a different com- pensation rate than what is on the 2. Name the parties; Example 2: Any dispute will be set- MLS. In the last situation, it may be 3. Give the names, addresses and tled by mediation per NAR policy advisable to state that the agreed contact information for the agents and procedures. commission or fee is in place of, not and brokers; 15. Acceptance: The most tradition- in addition to, any compensation al way for the cooperating broker to offered in the MLS or elsewhere. 4. Identify the agency relation- ship--offer and accept subagency, indicate his acceptance of a bilateral With respect to a compensation or acknowledge buyer brokerage policy letter is to have the broker sign agreement, the only necessary parties or another relationship; the agreement and deliver it back to are the listing broker and the cooper- the listing broker. Other methods ating broker. The seller and the buyer 5. Offer and accept cooperation as may be designated in the policy letter, might, however, acknowledge this a subagent or buyer’s broker; provided that there is a clear indica- agreement for the purpose of con- tion that the brokers have a meeting senting to a buyer’s broker receipt of 6. State the amount of the com- of the minds. compensation from someone other mission or fee to be paid by the than the client, if that consent has not listing broker to the cooperating Example: Duplicate originals of this already been given elsewhere. This is broker in clear, specific terms; policy letter have been enclosed for necessary for compliance with Wisc. your convenience. Please sign and 7. Indicate when compensation Admin. Code § RL 24.05(1). date one copy of this letter in the shall be paid; and space provided and return it to A broker’s compensation agreement 8. State the standard of perform- [address] or fax it to [fax number]. If should indicate that the listing broker ance or what must be done to earn we do not receive your reply by noon is offering cooperation and compen- compensation. on [month/day/year] compensation sation, and that the cooperating bro- to all agents from your firm will be ker is accepting this offer. The agree- A cooperating broker should always limited to __ percent of the gross ment should also indicate whether attempt to enter into a compensation sales price on all transactions. the brokers will cooperate via a sub- agreement before submitting any offers to purchase or lease to the list- 16. Binding Effect: Some brokers agency relationship or buyer broker- ing broker. The listing broker may may want to specify that the policy age. Subagency is presumed within lose incentive to agree to the cooper- letter is binding only upon the cur- the MLS due to the historical fact ating broker’s compensation propos- rent broker/companies and that any that brokers once offered coopera- al once the listing broker has an offer sale of one of the companies, a sale of tion and compensation as subagency in hand.

Wisconsin REALTORS® Association 10 Legal Update 02.01 Compensation - Legal Hotline Whatever the standard for earning a Q&A commission might be, it must be clear- Subscribe ly identified. The commission or fee The following questions were recently might be earned, for example, if the asked of the Legal Hotline regarding a cooperating broker (a) is procuring broker’s entitlement to compensation: This Legal Update and other cause per MLS standards, (b) “pro- Updates beginning with Re: Whether or not a co-broke commis- cures the buyer” as defined in the list- 92.01 can be found in the sion was earned. One broker had a ing contract, or (c) brings in an offer listing and another broker submitted that successfully closes. Compensation members-only legal section an offer. The seller countered with agreements should be in writing and of the WRA Web site at: signed by the brokers to avoid com- respect to the financing contingency http://www.wra.org. deadline and the disposition of the mission disputes. earnest money if the closing did not The selling broker in the described A subscription to the Legal occur on time. The buyer rejected that scenario arguably has no basis for an Update is included in all counter and countered back, assuring action against the listing broker Association designated the funds were there and that every- because there simply is no compensa- REALTOR ® dues. thing was in place. tion agreement or standards. The sell- Designated REALTORS® The selling broker is claiming that his ing broker also has no cause of action receive a monthly publica- co-broke commission has been earned against the seller because there is no tion package including the because he produced a ready, willing contract between the seller and the Legal Update, and other and able buyer. This is not an MLS- selling broker, so there is no contrac- industry-related materials. listed property, there are no policy let- tual privity. ® ters between these brokers, and no other Conclusion REALTORS and Affiliate compensation agreement other than a members may subscribe to gentlemen’s agreement that commis- Policy letters, compensation agree- the Designated ments and referral fee agreements sion is split 50-50 if a property is sold. REALTOR ® publication allow REALTORS® the flexibility to package for $30 annually. Listing brokers are obligated to pay structure cooperative relationships commission if there is an agreement to with other brokers, both within and Non-member subscription pay, typically based upon either an outside of the MLS, and inside and rate for the package is MLS offer of compensation, a com- outside of Wisconsin. These agree- $130 annually. Member pensation agreement or a policy letter. ments will further the interests of subscription price for the If the property were listed on the clients and customers as well as the Legal Update is $25, MLS, the listing broker would be obli- business interests of the brokers non-member price is $75. gated to pay the MLS offer of com- involved. Each subscription includes pensation to the broker who procured 12 monthly issues. the buyer in a successful transaction, i.e., a closed sale. However, MLS stan- Contact the Wisconsin dards and procuring cause analysis REALTORS® Association apply only in MLS listings or when to subscribe: those standards have been specifically adopted in a policy letter or compen- 4801 Forest Run Road, sation agreement. Suite 201, Madison, A broker’s compensation agreement WI, 53704-7337 should identify the property, name the parties and the brokers, state the (608) 241-2047 amount of the commission or fee to be (800) 279-1972 paid by the listing broker to the coop- www.wra.org erating broker, indicate when the com- mission or fee will be paid, and state what must be done to earn it. There is no automatic “flow-through” applica- tion of the listing contract standards to the relationship between the listing broker and the selling broker. WISCONSIN REALTORS ® ASSOCIATION © 2001 Wisconsin REALTORS® Association 11 Legal Update 02.01