QUERIN LAW: Realtor Commission Disputes and Procuring Cause Issues

The “procuring cause” rule is simple in theory, but complicated in application. It is used to determine a buyer broker’s entitlement to the “offer of compensation” (i.e. a percentage share of the commission offered by the listing broker on the multiple listing service). All Realtors® must publish an “offer of compensation” in their listings, so that other members are informed, up-front, how much they will received, should they produce a ready, willing and able buyer, who closes the transaction.

To be clear, listing brokers do not have to prove they were a procuring cause of the sale – they have the written listing contract that essentially guarantees them a commission, even if they do nothing more than take the listing and place it in the MLS.

However, the buyer’s broker, who in most cases does not have a written service agreement with their client, generally must “prove” that their activity resulted in the sale, should a dispute arise between two buyer brokers claiming the percentage of commission offered in the MLS. If there is no dispute, the buyer’s broker simply informs escrow of the amount of commission they are entitled to, and – assuming there is no disagreement with the listing broker over the figures – waits for closing to collect their share of the commission.

When disputes occur between competing buyer brokers, it usually means that the buyer-client spent time first with one broker, who may have introduced them to the offered property, but then the buyer began working with a second broker (occasionally without the knowledge of the first buyer broker), who wrote up and submitted the offer that ultimately resulted in a closing of the sale.[1]

According to the NAR:

A broker is regarded as the “procuring cause” of a sale, so as to be entitled to a 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.[2]

Since commission disputes between NAR members must be heard and decided pursuant to its Code of Ethics and Arbitration Manual, Realtor® members need to understand these rules if they are to sit on an arbitration panel deciding between competing brokers as to which one is entitled to the “buy-side” commission.  Additionally, for rank-and-file Realtor® members, understanding the procuring cause rules are important to know, so they can protect themselves in an effort to avoid commission disputes.

Accordingly, here are the applicable NAR directives on dealing with procuring cause disputes[3]:

The nature and status of the transaction

1. What was the nature of the transaction? Was there a residential or commercial sale/lease?
2. Is or was the matter the subject of litigation involving the same parties and issues as the arbitration?

 The nature, status, and terms of the listing agreement

1. What was the nature of the listing or other agreement: exclusive right to sell, exclusive agency, open or some other form of agreement?
2. Was the listing agreement in writing? If not, is the listing agreement enforceable?
3. Was the listing agreement in effect at the time the sales contract was executed?
4. Was the property listed subject to a management agreement?
5. Were the broker’s actions in accordance with the terms and conditions of the listing agreement?
   1. Were all conditions of the listing agreement met?
   2. Did the final terms of the sale meet those specified in the listing agreement?
   3. Did the transaction close? (Refer to Appendix I to Part Ten, Arbitrable Issues)
   4. Did the listing broker receive a commission? If not, why not? (Refer to Appendix I to Part Ten, Arbitrable Issues)

 The nature, status, and terms of buyer representation agreements

1. What was the nature of any buyer representation agreement(s)? Was the agreement(s) exclusive or non-exclusive? What capacity(ies) was the cooperating broker(s) functioning in, e.g., agent, legally-recognized non-agent, other?
2. Was the buyer representation agreement(s) in writing? Is it enforceable?
3. What were the terms of compensation established in the buyer representation agreement(s)?
4. Was the buyer representative(s) a broker or firm to which an offer of compensation was made by the listing broker?
5. Was the buyer representative(s) actions in accordance with the terms and conditions of buyer representation agreement(s)?
6. At what point in the buying process was the buyer representation relationship established?

 The nature, status, and terms of the offer to compensate

1. Was an offer of cooperation and compensation made in writing? If not, how was it communicated?
2. Is the claimant a party to whom the listing broker’s offer of compensation was extended?
3. Were the broker’s actions in accordance with the terms and conditions of the offer of cooperation and compensation (if any)?
   1. Were all conditions of the agreement met?

 Roles and relationships of the parties

1. Who was the listing broker?
2. Who was the cooperating broker or brokers?
3. Were any of the brokers acting as subagents? As buyer brokers? In another legally recognized capacity?
4. Did the cooperating broker(s) have an agreement, written or otherwise, to act as agent or in another legally recognized capacity on behalf of any of the parties?
5. Were any of the brokers (including the listing broker) acting as principal in the transaction?
6. What were the brokers’ relationships with respect to the seller, the purchaser, the listing broker, and any other cooperating brokers involved in the transaction?
   1. Was the buyer represented by a party with whom the broker had previously dealt?
   2. Is the primary shareholder of the buyer-corporation a party with whom the broker had previously dealt?
   3. Was a prior prospect a vital link to the buyer?
7. Are all appropriate parties to the matter joined?

 Initial contact with the purchaser

1. Who first introduced the purchaser or tenant to the property?
2. When was the first introduction made?
   1. Was the introduction made when the buyer had a specific need for that type of property?
   2. Was the introduction instrumental in creating the desire to purchase?
   3. Did the buyer know about the property before the broker contacted him? Did he know it was for sale?
   4. Were there previous dealings between the buyer and the seller?
   5. Did the buyer find the property on his own?
3. How was the first introduction made?
   1. Was the property introduced as an open house?
   2. What subsequent efforts were made by the broker after the open house? (Refer to Factor #1)
   3. Was the introduction made to a different representative of the buyer?
   4. Was the “introduction” merely a mention that the property was listed?
   5. What property was first introduced?

 Conduct of the brokers

1. Were all required disclosures complied with?
2. Was there a faithful exercise of the duties a broker owes to his client/principal?
3. If more than one cooperating broker was involved, was either (or both) aware of the other’s role in the transaction?
4. Did the broker who made the initial introduction to the property engage in conduct (or fail to take some action) which caused the purchaser or tenant to utilize the services of another broker? (Refer to Factor #4)
5. Did the cooperating broker (or second cooperating broker) initiate a separate series of event, unrelated to and not dependent on any other broker’s efforts, which led to the successful transaction – that is, did the broker perform services which assisted the buyer in making his decision to purchase? (Refer to Factor #4)
   1. Did the broker make preparations to show the property to the buyer?
   2. Did the broker make continued efforts after showing the property?
   3. Did the broker remove an impediment to the sale?
   4. Did the broker make a proposal upon which the final transaction was based?
   5. Did the broker motivate the buyer to purchase?
6. How do the efforts of one broker compare to the efforts of another?
   1. What was the relative amount of effort by one broker compared to another?
   2. What was the relative success or failure of negotiations conducted by one broker compared to the other?
7. If more than one cooperating broker was involved, how and when did the second cooperating broker enter the transaction?

Continuity and breaks in continuity (abandonment & estrangement)

1. What was the length of time between the broker’s efforts and the final sales agreement?
2. Did the original introduction of the purchaser or tenant to the property start an uninterrupted series of events hindered or interrupted in any way?
   1. Did the buyer terminate the relationship with the broker? Why? (Refer to Factor #4)
   2. Did negotiations break down?
3. If there was an interruption or break in the original series of events, how was it caused, and by whom?
   1. Did the seller change the listing agreement from an open listing to an exclusive listing agreement with another broker?
   2. Did the purchaser’s motive for purchasing change?
   3. Was there interference in the series of event from any outside or intervening cause or party?
4. Did the broker who made the initial introduction to the property maintain contact with the purchaser or tenant, or could the broker’s inaction have reasonably been viewed by the buyer or tenant as a withdrawal from the transaction?
5. Was the entry of any cooperating broker into the transaction an intrusion into an existing relationship between the purchaser and another broker, or was it the result of abandonment or estrangement of the purchaser, or at the request of the purchaser?

Conduct of the buyer

1. Did the buyer make the decision to buy independent of the broker’s efforts/information?
2. Did the buyer negotiate without any aid from the broker?
3. Did the buyer seek to freeze out the broker?
   1. Did the buyer seek another broker in order to get a lower price?
   2. Did the buyer express the desire not to deal with the broker and refuse to negotiate through him?
   3. Did the contract provide that no brokers or certain brokers had been involved?

 Conduct of the seller

1. Did the seller act in bad faith to deprive the broker of his commission?
   1. Was there bad faith evident from the fact that the difference between the original bid submitted and the final sales price equaled the broker’s commission?
   2. Was there bad faith evident from the fact that a sale to a third party was a straw transaction (one in which a non-involved party posed as the buyer) which was designed to avoid paying commission?
   3. Did the seller freeze out the broker to avoid a commission dispute or to avoid paying a commission at all?
2. Was there bad faith evident from the fact that the seller told the broker he wouldn’t sell on certain terms, but did so via another broker or via the buyer directly?

See Procuring Cause Worksheet: https://www.nar.realtor/about-nar/governing-documents/code-of-ethics/procuring-cause-arbitration-worksheet

[1] Lest one conclude that the procuring cause rules create a “wild-wild west” atmosphere, where buyer brokers can steal clients from one another, it is important to know that both the NAR ethical rules, and the Oregon state licensing statutes, prohibit intentional interference with another broker’s client.

[2] One might liken the process to the falling of an entire row of dominos from the first to the last. If there is a break in the process it interrupts the “continuous” nature of the series of events leading up to the agreement to sell.

[3] From: 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]