Commission in Purchase Contract

I have an Exclusive Right-to-Buy (Buyer Agency) agreement with my buyers. Over the last three months, I have shown them approximately 30 homes. My clients now wish to make an offer on an unlisted property which is for sale by its owner. My buyers do not want to pay me my commission; they want the seller to pay my commission. Is it permissible for me to draft an additional provision which obligates the seller to pay me a cooperating commission at closing?

Yes. One of the myths of Colorado real estate license law is that it is not permissible for brokers to address commission issues in the additional provisions section of the sales contract. While it is true that the Real Estate Commission discourages brokers from addressing commission issues in the contract, and while it is also true that it is generally not appropriate to do so, brokers may address commission issues in the contract if they are doing so at the direction of one of the parties to the transaction.

    Colorado Real Estate Commission Rule F-2 reads as follows:
    F-2. Additional Provisions
    (a) The "Additional Provisions" section of a Commission-approved form must contain only those transaction-specific terms or acknowledgments that result from negotiations or the instruction(s) of the party(ies) to the transaction.
    (b) A broker who is not a principal party to the contract may not insert personal provisions, personal disclaimers or exculpatory language in the "Additional Provisions" section of a Commission-approved form.

The prohibitions in section (b) do not apply. The clause is not a personal provision for the broker. The Exclusive Right-to-Buy Agreement obligates the buyer to pay the broker if the selling broker cannot be compensated from some other source. The obligation for the seller to pay the broker a commission is a provision which benefits the buyer and is an agreement between the buyer and the seller. It is not a disclaimer, nor is it an exculpatory clause. Section (a) permits the clause so long as it comes from the instruction of the buyer client.

Another example where it might be appropriate is where a seller has a variable listing commission with the listing broker. The arrangement might provide that if a broker other than the listing broker procures the buyer, then the commission might be X %, but if there is no other broker which procures the buyer, the commission might be one-half of X %.

A seller might receive an offer from a buyer who doesn't appear to be assisted by another broker. The buyer has made an offer, written up by the listing broker, which the seller would not be willing to accept unless the seller can take advantage of the reduced listing commission. The seller does not want to be subject to the risks that some other broker may surface and claim to be a procuring cause. The seller wants this issue to be addressed in the contract. In such a situation, it would be appropriate for the listing broker to draft a clause in which the buyer represents that he is working without the assistance of another broker and addresses the consequence should that representation not be true.

Another example where such a clause might be appropriate is where the Exclusive Right-to-Buy Agreement specifies a commission rate which is higher than the cooperating commission rate offered by a listing company. The buyer may not want to pay the difference between the offered cooperating commission and the commission rate specified in the Exclusive Right-to-Buy Agreement. If it is material to the buyer, the broker can put a provision in the buyer's offer obligating the seller to require the listing broker to pay cooperating commission expected by the selling broker.

Such clauses may not be enforceable by the broker as the contract form and case law make it fairly clear that the brokers are not parties to the contract. However, the clauses would be enforceable by the buyer (in the first and third examples) and the seller in the second example.

While it is a good general rule to avoid addressing commission issues in the purchase contract, if it is done so at the direction of one of the parties, brokers may address fee issues in additional provisions.

Jonathan A. Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.   His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance.   He can be reached at contact Jonathan Goodman.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.