NAR Professional Standards Procedures
Separating Ethics Complaints and Arbitration Requests
• Arbitration hearings must be separated from ethics hearings. An arbitration hearing must be held separately from an ethics hearing that arises out of the same factual situation, and must be held first. Any award rendered in arbitration cannot be made on the basis of an alleged or actual violation of the Code of Ethics, and may not cite any violation of the Code of Ethics as the basis for rendering the arbitration award (See Professional Standards Policy Statement #35).
Basis for Awards in Arbitration
• There can be no predetermined rule or standard that determines entitlement to an arbitration award.
– no “threshold” rules- no “contract in hand” rules
• All awards must be based on the facts and circumstances related to a particular transaction.
• “Procuring cause” may be defined as a series of events, unbroken in their continuity, that result in the desired objective (i.e., generally, the sale of property). Black’s Law Dictionary, Fifth Edition, defines procuring case as:
• A broker is regarded as the “procuring cause” of a sale, so as to be entitled to commission if his or her efforts are the foundation on which negotiations resulting in a sale begin. It is the cause originating a series of events which, without break in their continuity, result in the accomplishment of the prime objective of the employment of the broker who produces a ready, willing, and able purchaser to buy real estate on the owner’s terms.
“Suggested Factors” an Arbitration Hearing Panel May Consider
• In response to membership requests, the National Association has, on several occasions, seriously considered the question of procuring cause, and strives to develop a consensus opinion relative to a single rule or determining factor that would clearly establish, in all cases, entitlement to a commission or to subagency compensation when questions of procuring cause arise.
• Five times since 1976 special subcommittees or working groups of the Professional Standards Committee have been appointed to study the question of procuring cause. The groups’ recommendations resulted in the “Suggested Factors” now included in the Code of Ethics and Arbitration Manual [Appendix II to Part Ten].
• An arbitration worksheet has most recently been developed to assist hearing panels in identifying relevant issues and facts in determining questions of entitlement to disputed funds. The worksheet is intended to supplement, not replace, the Arbitration guidelines found in the Code of Ethics and Arbitration Manual. To view, go to, http://realtor.org/mempolweb.nsf/pages/arbitrationworksheet.
Suggested Factors,” reprinted from the Code of Ethics and Arbitration Manual [Appendix II to Part Ten]
Factor #1: No Predetermined Rule of Entitlement
Every arbitration hearing is considered in light of all of the relevant facts and circumstances as presented by the parties and their witnesses. “Rules of thumb,” prior decisions by other panels in other matters, and other predeterminants are to be disregarded.Procuring cause shall be the primary determining factor in entitlement to compensation. Agency relationships, in and of themselves, do not determine entitlement to compensation. The agency relationship with the client and entitlement to compensation are separate issues. A relationship with the client, or lack of one, should only be considered in accordance with the guidelines established to assist panel members in determining procuring cause.
This policy is reflected in Official Interpretation No. 31 of Article I, Section 2, Bylaws, NATIONAL ASSOCIATION OF REALTORS®, which states:
The Explanation of Interpretation No. 31 goes on to provide:
Factor #2: Arbitrability and Appropriate Parties
Factor #3: Relevance and Admissibility
Frequently, Hearing Panels are asked to rule on questions of admissibility and relevancy. While state law, if applicable, controls, the general rule is that anything the Hearing Panel believes may assist it in reaching a fair, equitable, and knowledgeable decision is admissible.
Arbitration Hearing Panels are called on to resolve contractual questions, not to determine whether the law or the Code of Ethics has been violated. An otherwise substantiated award cannot be withheld solely on the basis that the Hearing Panel looks with disfavor on the potential recipient’s manner of doing business or even that the panel believes that unethical conduct may have occurred. To prevent any appearance of bias, Arbitration Hearing Panels and procedural review panels shall make no referrals of ethical concerns to the Grievance Committee. This is based on the premise that the fundamental right and primary responsibility to bring potentially unethical conduct to the attention of the Grievance Committee rests with the parties and others with firsthand knowledge. At the same time, evidence or testimony is not admissible simply because it relates to potentially unethical conduct. While an award (or failure to make a deserved award) cannot be used to “punish” a perceived “wrongdoer,” it is equally true that the Hearing Panels are entitled to (and fairness requires that they) consider all relevant evidence and testimony so that they will have a clear understanding of what transpired before determining entitlement to any award.
Factor #4: Communication and Contact – Abandonment and Estrangement
Factor #5: Conformity With State Law
Factor #6: Consideration of the Entire Course of Events
Important Note: The preceding factors and the following questions are typical, but not all-inclusive of the questions and factors to be considered by the Hearing Panel in an arbitration.
Questions That May be Considered by the Arbitration Hearing Panel in Reaching a Decision, reprinted from the Code of Ethics and Arbitration Manual [Appendix II to Part Ten]
The nature and status of the transaction
The nature, status, and terms of the listing agreement
The nature, status, and terms of buyer representation agreements
The nature, status, and terms of the offer to compensate
Roles and relationships of the parties
Initial contact with the purchaser
Conduct of the brokers
Continuity and breaks in continuity (abandonment & estrangement)
Conduct of the buyer
Conduct of the seller
Sample Fact Situations with Analyses, reprinted from the Code of Ethics and Arbitration Manual [Appendix II to Part Ten]
Fact Situation #1
Listing Broker L placed a listing in the MLS and offered cooperation and compensation to subagents and to buyer agents. Broker Z, not a participant in the MLS, called to arrange an appointment to show the property to a prospective purchaser. There was no discussion of compensation. Broker Z presented Broker L with a signed purchase agreement, which was accepted by the seller. Subsequently, Broker Z requested Arbitration with Broker L, claiming to be the procuring cause of sale.
While Broker Z may have been the procuring cause of sale, Broker L’s offer of compensation and cooperation was made only to members of the MLS. Broker L never offered cooperation and compensation to Broker Z, nor did Broker Z request compensation at any time prior to instituting the arbitration request. There was no contractual relationship between them, and therefore no issue to arbitrate.
Fact Situation #2
Same as #1, except Broker Z is the buyer’s agent.
Same result, since there was no contractual relationship between Broker L and Broker Z and no issue to arbitrate.
Fact Situation #3
Broker L placed a listing in the MLS and offered cooperation and compensation to subagents and to buyer agents. Broker S (a subagent) showed the property to Buyer #1 on Sunday and again on Tuesday. On Wednesday, Broker A (a subagent) wrote an offer to purchase on behalf of Buyer #1 which was presented to the seller by Broker L and which was accepted. At closing, subagency compensation is paid to Broker A. Broker S subsequently filed an arbitration request against Broker A, claiming to be the procuring cause of sale.
Broker S’s claim could have been brought against Broker A (pursuant to Standard of Practice 17-4) or against Broker L (the listing broker), who had promised to compensate the procuring cause of sale, thus arguably creating a contractual relationship between Broker L and Broker S.
Fact Situation #4
Same as #3, except Broker S filed the arbitration request against Broker L (the listing broker).
This is an arbitrable matter, since Broker L promised to compensate the procuring cause of sale. Broker L, to avoid the possibility of having to pay two cooperating brokers in the same transaction, should join Broker A in arbitration so that all completing claims can be resolved in a single hearing. The Hearing Panel will consider, among other things, why Buyer #1 made the offer to purchase through Broker A instead of Broker S. If it is determined that Broker S initiated a series of events which were unbroken in their continuity and which resulted in the sale, Broker S will likely prevail.
Fact Situation #5
Same as #3, except Broker L offered cooperation and compensation only to subagents. Broker B (a buyer agent) requested permission to show the property to Buyer #1, wrote an offer which was accepted, and subsequently claimed to be the procuring cause of sale.
Since Broker L did not make an offer of compensation and cooperating to buyer brokers, there was no contractual relationship between Broker L and Broker B and no contractual issue to resolve.
If, on the other hand, Broker L had offered compensation to buyer brokers either through MLS or otherwise and had paid Broker A, then arbitration could have been conducted between Broker B and Broker A pursuant to Standard of Practice 17-4. Alternatively, arbitration could occur between Broker B and Broker L.
Fact Situation #6
Listing Broker L placed a listing in the MLS and made an offer of cooperation and compensation to subagents and to buyer agents. Broker S (a subagent) showed the property to Buyer #1, who appeared uninterested. Broker S made no effort to further contact Buyer #1. Six weeks later, Broker B (a buyer broker) wrote an offer on the property on behalf of Buyer #1, presented it to Broker L, and it was accepted. Broker S subsequently filed for arbitration against Broker L, claiming to be the procuring cause. Broker L joined Broker B in the request so that all competing claims could be resolved in one hearing.
The Hearing Panel will consider Broker S’s initial introduction of the buyer to the property, the period of time between Broker S’s last contact with the buyer and the time that Broker B wrote the offer, and the reason Buyer #1 did not ask Broker S to write the offer. Given the length of time between Broker S’s last contact with the buyer, the fact that Broker S had made no subsequent effort to contact the buyer, and the length of time that transpired before the offer was written, abandonment of the buyer may have occurred. If this is the case, the Hearing Panel may conclude that Broker B instituted a second, separate series of events that was directly responsible for the successful transaction.
Fact Situation #7
Same as #6, except that Broker S (a subagent) showed Buyer #1 the property several times, most recently two days before the successful offer to purchase was written by Broker B (a buyer broker). At the arbitration hearing, Buyer #1 testified she was not dissatisfied in any way with Broker S but simply decided that “I needed a buyer agent to be sure that I got the best deal.”
The Hearing Panel should consider Broker S’s initial introduction of the buyer to the property; that Broker S had remained in contact with the buyer on an ongoing basis; and whether Broker S’s efforts were primarily responsible for bringing about the successful transaction. Unless abandonment or estrangement can be demonstrated, resulting, for example, because of something Broker S said or did (or neglected to say or do but reasonably could have), Broker S will likely prevail. Agency relationships are not synonymous with nor determinative of procuring cause. Representation and entitlement to compensation are separate issues.
Fact Situation #8
Similar to #6, except Buyer #1 asked Broker S for a comparative market analysis as the basis for making a purchase offer. Broker S reminded Buyer #1 that he (Broker S) had clearly disclosed his status as subagent, and that he could not counsel Buyer #1 as to the property’s market value. Broker B based his claim to entitlement on the grounds that he had provided Buyer #1 with information that Broker S could not or would not provide.
The Hearing Panel should consider Broker S’s initial introduction of the buyer to the property; that Broker S had made early and timely disclosure of his status as a subagent; whether adequate alternative market information was available to enable Buyer #1 to make an informed purchase decision; and whether Broker S’s inability to provide a comparative market analysis of the property had clearly broken the chain of events leading to the sale. If the panel determines that the buyer did not have cause to NAR Professional Standards Procedures leave Broker S for Broker B, they may conclude that the series of events initiated by Broker S remained unbroken, and Broker S will likely prevail.
Fact Situation #9
Similar to #6, except Broker S made no disclosure of his status as subagent (or its implications) until faced with Buyer #1’s request for a comparative market analysis.
The Hearing Panel should consider Broker S’s initial introduction of the buyer to the property; Broker S’s failure to clearly disclose his agency status on a timely basis; whether adequate alternative market information was available to enable Buyer #1 to make an informed purchase decision; and whether Broker S’s belated disclosure of his agency status (and its implications) clearly broker the chain of events leading to the sale. If the panel determines that Broker S’s failure to disclose his agency status was a reasonable basis for Buyer #1’s decision to engage the services of Broker B, they may conclude that the series of events initiated by Broker S had been broken, and Broker B will likely prevail.
Fact Situation #10
Listing Broker L placed a property on the market for sale or lease and offered compensation to brokers inquiring about the property. Broker A, acting as a subagent, showed the property on two separate occasions to the vice president of manufacturing for ABC Corporation. Broker B, also acting as a subagent but independent of Broker A, showed the same property to the chairman of ABC Corporation, whom he had known for more than fifteen (15) years. The chairman liked the property and instructed Broker B to draft and present a lease on behalf of ABC Corporation to Broker L, which was accepted by the owner/ landlord. Subsequent to the commencement of the lease, Broker A requested arbitration with Broker L, claiming to be the procuring cause.
This is an arbitrable matter as Broker L offered compensation to the procuring cause of the sale or lease. To avoid the possibility of having to pay two commissions, Broker L joined Broker B in arbitration so that all competing claims could be resolved in a single hearing. The Hearing Panel considered both brokers’ introductions of the property to ABC Corporation. Should the hearing panel conclude that both brokers were acting independently and through separate series of events, the Hearing Panel may conclude that Broker B was directly responsible for the lease and should be entitled to the cooperating broker’s portion of the commission.
Fact Situation #11
Broker A, acting as the subagent for an out-of-state corporation, listed for sale or lease a 100,000 square foot industrial facility. The property was marked offering cooperation and compensation for both subagents and buyer/tenant agents. Over a period of several months, Broker A made the availability of the property known to XYZ Company and, on three (3) separate occasions, showed the property to various operational staff of XYZ Company. After the third showing, the vice president of finance asked Broker A to draft a lease for his review with the president of XYZ Company and its in-house counsel. The president, upon learning that Broker A was the listing agent for the property, instructed the vice president of finance to secure a tenant representative to ensure that XYZ Company was getting “the best deal.” One week later, tenant representative Broker T presented Broker A with the same lease that Broker B had previously drafted and the president of XYZ Company had signed. The lease was accepted by the out-of-state corporation. Upon payment of the lease commission to Broker A, Broker A denied compensation to Broker T and Broker T immediately requested arbitration claiming to be the procuring cause.
The Hearing Panel should consider Broker A’s initial introduction of XYZ Company to the property, Broker A’s contact with XYZ on an on-going basis, and whether Broker A initiated the series of events which led to the successful lease. Given the above facts, Broker A will likely prevail. Agency relationships are not synonymous with nor determinative of procuring cause. Representation and entitlement to compensation are separate issues.
Fact Situation #12
Broker A has had a long standing relationship with Client B, the real estate manager of a large, diversified company. Broker A has acquired or disposed of twelve (12) properties for Client B over a five (5) year period. Client B asks Broker A to locate a large warehouse property to consolidate inventories from three local plants. Broker A conducts a careful evaluation of the operational and logistical needs of the plants, prepares a report of his findings for Client B, and identifies four (4) possible properties that seem to meet most of Client B’s needs. At Client B’s request, he arranges and conducts inspections of each of these properties with several operations level individuals. Two (2) of the properties were listed for sale exclusively by Broker C. After the inspections, Broker A sends Broker C a written registration letter in which he identifies Client B’s company and outlines his expectation to be paid half of any commission that might arise from a transaction on either of the properties. Broker C responds with a written denial of registration, but agrees to share any commission that results from a transaction procured by Broker A on either of the properties. Six (6) weeks after the inspections, Client B selects one of the properties and instructs Broker A to initiate negotiations with Broker C. After several weeks the negotiations reach an impasse. Two (2) weeks later, Broker A learns that Broker C has presented a proposal directly to Client B for the other property that was previously inspected. Broker A then contacts Broker C, and demands to be included in the negotiations, Broker C refuses, telling Broker A that he has “lost control of his prospect”, and will not be recognized if a transaction takes place on the second property. The negotiations proceed, ultimately resulting in a sale of the second property. Broker A files a request for arbitration against Broker C.
This would be an arbitrable dispute as a compensation agreement existed between Broker A and Broker C. The Hearing Panel will consider Broker A’s introduction of the property to B, the property reports prepared by Broker A, and the time between the impasse in negotiations on the first property and the sale of the second property. If the Hearing Panel determines that Broker A initiated the series of events that led to the successful sale, Broker A will likely prevail.