By Brett M. Woodburn, Esquire

(Brett M. Woodburn, Esquire is the principal and founding member of Woodburn Law. He serves as general counsel to several local Associations of Realtors^® across Pennsylvania. All rights reserved. This article may not be re-printed or reproduced, in whole or in part, without Mr. Woodburn’s express written consent.)

As a Realtor^®, you made a conscious and intentional decision to join the local, state, and National Association of Realtors^®. In doing so, you also make the decision to hold yourself to a higher Ethical standard than that which applies to real estate agents who chose not to join the Associations of Realtors^®. By choosing to comply with the National Association of Realtors’^® Code of Ethics, you decided to do things differently, to expect more of yourself and your colleagues who also joined the Associations of Realtors^®. These higher expectations may, if you are being compensated by a listing broker, impact how you negotiate your compensation.

Realtors^® across the United States are still trying to come to terms with the MLS rule changes that were imposed as part of settling some of the seller-driven class action lawsuits, including navigating what practices look like now that offers of compensation are no longer communicated through the MLSs. While there are a growing number of practitioners, brokers, and states that are moving away from business models that support broker-to-broker compensation, there are still a significant number of Realtors^® who continue to ascribe to that practice. Locally, the Pennsylvania Association of Realtors^® has published the Cooperating Broker Compensation Agreement (CBC) to memorialize the contractual agreement whereby the listing broker agrees to compensate the selling broker.

Whether you use the PAR form CBC, or a different broker-to-broker compensation agreement, it is critical that you remember the obligations and prohibitions included in Article 3 and Article 16 of the Code of Ethics and understand how they can impact negotiating your fee. In 2004, Article 16 was amended to provide, “Realtors^® shall not engage in any practice or take any action inconsistent with the exclusive representation or exclusive brokerage relationship agreements that other Realtors^® have with clients.” Standard of Practice 16-16 was updated at the same time and provides, “Realtors^® acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.” Applying this to ‘real life,’ if a listing broker makes a formal offer of compensation to a buyer’s broker, then the buyer’s broker cannot use the terms of an offer to try to renegotiate that offer of compensation. This was easy to apply and easy to understand when offers of compensation were communicated through the MLS. If a buyer broker attached a CBC to the buyer’s offer that confirmed the offer of compensation that was in the MLS, that use was consistent with Article 16. However, if the CBC reflected compensation higher than what was in the MLS, then the buyer broker could be defending a claim that Article 16 was violated. This is one reason why, historically, Realtors^® were taught NOT to attach the CBC to an offer.

Things are more complicated now. The rules that governed offers of compensation in the MLS made it clear that such offers were unilateral offers of compensation, and that also made it clear that Article 16 was relevant. If a listing broker sends you a signed CBC, or other broker-to-broker compensation agreement, then the listing broker has made a clear offer of compensation, and Article 16 is relevant. What if the listing broker or listing agent publishes an amount that they are willing to offer as compensation to a buyer’s broker? Does this constitute an actual “offer of compensation” by the listing broker? What if the offer of compensation was only conveyed through a telephone call? What if the buyer broker called the listing broker and did not get a return call until after the offer was submitted?

To add to further muddy the waters, Article 3 was amended in 1995 to read, “Realtors^® shall cooperate with other brokers except when cooperation is not in the client’s best interest. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker.” This is a clear statement that the duty to cooperate with other Realtors^® is completely unrelated to any willingness to compensate other Realtors^®. In 1999, NAR adopted Standard of Practice 3-1 as an official interpretation of what Article 3 means and how Article 3 should be applied. “Realtors^®, acting as exclusive agents or brokers of sellers/ landlords, establish the terms and conditions of offers to cooperate. Unless expressly indicated in offers to cooperate, cooperating brokers may not assume that the offer of cooperation includes an offer of compensation. Terms of compensation, if any, shall be ascertained by cooperating brokers before beginning efforts to accept the offer of cooperation.”

Buyers’ brokers were very capable of ascertaining any terms of compensation being offered by a listing broker before accepting offers of cooperation when the terms of compensation were listed in the MLS. What does it mean to set the terms and conditions of cooperation? Under the current MLS Rules and Regulations, cooperation is defined as, “the obligation to share information on listed property and to make property available to other brokers for showing to prospective purchasers and tenants when it is in the best interest of their clients.” It is safe to say that when a property is listed in the MLS, the listing “establish[es] the terms and conditions of offers to cooperate.” Now that offers of compensation are prohibited from being communicated in most MLSs, does that mean the offer of cooperation (made by listing the property in the MLS) does NOT, by rule, include an offer of compensation? Possibly. According to some studies, it takes a listing agent an average of 36 hours to return a call; can you realistically “ascertain” offers of compensation prior to accepting the terms of cooperation in today’s competitive market?

NAR has shared that it is reviewing the Code of Ethics and Standards of Practice in light of the practice changes imposed by settling the class action lawsuits. Perhaps we will have some new guidance following the business meetings in November, but it is more likely that we will not see anything from NAR on this topic until the May legislative meetings in Washington DC. In the meantime, what can you do?

Paragraph 3(A) of the PAR Standard Agreement of Sale is where buyer and seller can negotiate what amount (if any) the seller is willing to pay the buyer’s broker. Asking the seller to pay the buyer’s broker directly on behalf of the buyer does not implicate Article 16. Is Article 3 implicated? Arguably it is not because the negotiations relative to compensation are between the buyer and seller and not Realtors^®. Here are some important factors to consider:

1. Using the terms of an offer to try to secure compensation from a listing broker is never a good idea and may violate the Code of Ethics.
2. Using the listing broker’s willingness (or refusal) to pay compensation as a factor in deciding whether to show a property or submit in offer is a problematic decision at best and may violate the Code of Ethics and the law.
3. It is critical that you take time to understand what the CBC says and does, how it defines when and if you get paid.
4. It is critical that you take time to comprehend how the Code of Ethics factors into how and when you negotiate when, how, and by whom you get paid.

There are still a lot of ‘unknowns’ relative to the consequences and effects on the practice of real estate from the NAR Settlement. What I do ‘know’ is that continuing to focus on getting paid the ‘way you have always done it’ is something you should reconsider.