Insight | Winter 2014

A Tangled Web

BY: WILL MARTIN | GENERAL COUNSEL

DEAR FORMS GUY,

An agent in my firm named Wally had an exclusive buyer agency agreement with a buyer. After the agreement had been in effect for three months and Wally had shown the buyer umpteen different properties, the buyer called Wally and told him that she didn’t like the “vibe” and just felt like she needed to make a change. Wally tried to persuade the buyer to see the agreement through the 90 days remaining on the term of the buyer agency agreement, but the buyer wouldn’t change her mind.

A few weeks later, Wally noticed that one of the properties he had shown this buyer was under contract. Turns out, an agent with a different firm named Eddie was the buyer agent on the contract. Wally called Eddie for more details and Eddie revealed that the buyer who Wally had originally shown the property to had contacted Eddie about becoming her new buyer agent. Wally asked Eddie if he understood that Wally had not agreed to a termination of the exclusive buyer agency agreement, and Eddie said that he did. Wally then told Eddie that his refusal to recognize the sanctity of the agency agreement was a violation of Article 16 of the REALTOR® Code of Ethics, and that Wally was going to file an ethics complaint against Eddie with the local association.

In addition, I contacted the broker-in-charge of Eddie’s firm today. I told her that I think Wally is the procuring cause, and that if the sale closes and her firm is paid the compensation offered by the listing agency, I intend to file a request for arbitration with the local association to recover the fee from her firm. This BIC said that the buyer could work with whomever she chooses, and that since she had chosen to work with Eddie, her firm rather than our firm would be entitled to the compensation offered in MLS if the deal closes. What do you think about this, Forms Guy?

SINCERELY, June

DEAR JUNE: Wow—that’s some question! Lots of moving parts. I normally only answer questions about forms but what the heck— it’s a new year! I’ll give it my best shot. Sincerely, Forms Guy

JUNE: Thank you!

FORMS GUY: June, your question involves several related, but different issues. There’s a legal issue about a principal’s right to end the agency relationship with an agent. There’s an ethical issue about the circumstances under which a REALTOR® has the right to enter into an agency agreement with someone who has been represented by another REALTOR®. And there’s a contractual issue about entitlement to compensation offered in MLS. Let’s take them one at a time, okay?

JUNE: Okay.

FORMS GUY: First, regarding a principal’s right to end the agency relationship with an agent, there is an important distinction between the rights and duties of the parties under the law of agency and under the law of contract. Under agency law, either the principal or the agent has the power to terminate the agency relationship at any time, even though they have previously agreed that the agent’s authority will continue for a definite period. If the principal exercises this power, the agent has no right to continue acting for the principal, and could be subject to liability for continuing to hold himself or herself out as the principal’s agent if it causes loss to the principal.

JUNE: But if that’s so, what use is an agency agreement?

FORMS GUY: That’s a fair question, June. Just because a party has the power to terminate the agency relationship doesn’t mean they also have the right to terminate the contract by which the agency relationship was established. Under contract law, if either party’s termination of the agency agreement is a breach of the agreement, that party may be held liable for any damages that the non-breaching party may be able to prove.

JUNE: So what does that mean as far as Wally’s agency agreement with the buyer?

FORMS GUY: The way I see it, the buyer agency agreement between your firm and the buyer ended when the buyer clearly indicated to Wally that she didn’t want Wally to be her agent anymore. It doesn’t sound as though the buyer had any cause to terminate the agreement, and if that’s so, the buyer’s decision could be characterized as a breach of contract.

JUNE: So are you saying that my firm should go after the buyer for damages?

FORMS GUY: No, not necessarily. The point I am trying to make is that in my opinion, the buyer’s action in making a change of agents, even though it may well have been a breach of the agency agreement she had with your firm, effectively terminated the agreement.

JUNE: Why is that so important?

FORMS GUY: The status of the buyer agency agreement is important in considering the second issue I identified, which is the ethical issue about whether Eddie had the right to enter into a buyer agency agreement with the buyer.

JUNE: Okay.

FORMS GUY: Article 16 of the Code makes it unethical for a REALTOR® to engage in any practice or take any action inconsistent with the exclusive representation agreement that another REALTOR® has with his or her client. In reading the various Standards of Practice under Article 16, I would say as a general proposition that so long as a REALTOR® doesn’t do anything to induce the client of another REALTOR® to terminate the representation agreement the other REALTOR® had with their client, it’s okay for the second REALTOR® to enter into an exclusive agreement to provide the same type of service after the agreement between the first REALTOR® and the client has ended.

JUNE: So what does that mean in our situation?

FORMS GUY: As stated above, in my opinion, the buyer agent agreement between your firm and the buyer had been terminated by the buyer prior to the time that she contacted Eddie. Since Eddie does not appear to have had anything to do with inducing the buyer to terminate the agreement, I do not think it was unethical for Eddie to have entered into an exclusive buyer agency agreement with the buyer.

JUNE: You’re kidding! Wally worked his tail off for that buyer and you’re telling me that she can just kick him to the curb and go get another agent who’ll get paid to write a contract on a property that Wally had already shown to her? That’s not fair!

FORMS GUY: Hold on, that’s not what I ‘m telling you. The issue about entitlement to compensation offered in MLS is a different issue altogether. As it says in the “Arbitration Guidelines” in the NAR Code of Ethics and Arbitration Manual, “[a]gency relationships, in and of themselves, do not determine entitlement to compensation. The agency relationship with the client and entitlement to compensation are separate issues.”

“Procuring cause shall be the primary determining factor in entitlement to compensation” according to the Manual Therefore, even though the buyer terminated the buyer agency agreement with your firm, your firm may well have a good claim to recover the fee from Eddie’s firm if the transaction on the property closes and the listing agent pays Eddie’s firm rather than yours. But you should understand that just because Wally introduced the buyer to the property doesn’t necessarily mean that your firm would be the procuring cause of the sale. There is no “predetermined rule of entitlement.” A hearing panel of your association’s Professional Standards Committee would consider the entire course of events in making a decision about which firm was entitled to the cooperative compensation. The “Arbitration Guidelines” in the Manual contain an excellent summary of the factors that an arbitration hearing panel should consider, and is available on the NAR website at www.realtor.org under Law, Ethics & Policy/NAR Code of Ethics/2013 Code of Ethics and Arbitration Manual/ Part Ten, Appendix II.

JUNE: If it went to a hearing and my firm was awarded the commission as procuring cause, would Eddie’s firm have any rights to recover anything from the buyer under the buyer agency agreement?

FORMS GUY: Possibly, depending on how the compensation section of the agreement was filled out. That’s a good question and it raises another point I should make. When the buyer contacted Eddie about becoming her buyer agent, I think Eddie had an ethical obligation to recognize the potential for a commission dispute if the buyer bought a property that had already been shown to her by Wally, and have a discussion about it with the buyer. If Eddie expected the buyer herself to pay him for his services if his firm did not receive the MLS commission offered by the listing agent, the buyer needed to understand that in order to make an informed decision about whether to buy that property.

JUNE: I’m beginning to understand what you said about there being a lot of moving parts to my question! Any other words of wisdom, Forms Guy?

FORMS GUY: One last thing. Notwithstanding everything I’ve said, I would encourage you to make a good faith effort to work these issues out with Eddie’s firm. It’s almost always better to reach a compromise if at all possible. That will enable both parties to put the matter behind them and move on to the next transaction, rather than getting involved in a difficult dispute that will take up precious time and resources, and potentially generate bad feelings between the firms and the agents involved.

JUNE: Okay, thanks Forms Guy!

FORMS GUY: You’re welcome, June. Give my best to Ward. Happy New Year!