What is a Broker Fee Agreement?
A broker fee agreement is a critical legal document used in financial and real estate transactions. This document outlines the precise terms between brokers (or brokers and clients) for services rendered. The agreement primarily defines the scope of work, clarifies the payment of fees, and lays out the expectations between all parties involved . Regardless of the type of transaction, this agreement proves to be an indispensable tool in establishing a clear understanding of what services are to be performed, and how and when brokers will be compensated for those services.
Typical Elements in a Broker Fee Agreement
The complexity of a broker fee agreement will vary from one transaction to another. This is based on the scope of services being provided and the party who will be the payor. When structuring this type of agreement, it is best to require it to be in writing. The broker needs to have a clear understanding of the services they are to provide and which parties are liable for payment. In the most basic terms, the parties that are involved in a purchase contract, such as a buyer and seller, agent and sublicensor, master broker and property owner, tenant and landlord, will enter a broker fee agreement. In many cases, the scope of services will require more than one agreement. Essential elements of a broker fee agreement include the parties to the agreement, the scope of services to be provided by the broker, the payment structure (e.g. hourly, flat, commission), provisions for an advance fee and reimbursement of certain costs, due diligence fees, expense reimbursements, and the rental commission. Other important elements include the basic listing agreement and the procurement of service agreement that sets the commissions and bonus fees involving the sub-broker or outgoing master broker. The cost of sub-broker commissions is a negotiable item. The broker fee agreement should also address the qualification of the lessee, lender, vendor or buyer and the specific requirements of the transaction.
Broker Payment Methods
When considering the fee structure in a broker fee agreement, the parties can use various types of fees. The three most common forms of fee are: fixed fees, percentage-based commissions, and retainer fees.
● Fixed fees: These fees are typically paid for certain tasks, such as expected consulting tasks. In the case of a real estate lease, this may cover the time the broker spent looking for a property before compiling the final listing used. These may serve as the "consultation fee" due for listing the property the first time.
● Percentage-based Commission: Percentage based commissions are the most common type of fee paid to brokers and includes paying a percentage of gross sales, although this fee may also apply to net sales, depending on the industry. For instance, in a commercial lease agreement, the broker may receive 2% of gross sales during the term of the lease, while residential rental agreements may only involve a one time 10% commission of the annual value of the lease. The percentage based commission is expected for most standard or traditional broker agreements, includes commercial or residential transactions. This is the fee that most clients understand and expect when enlisting the help of a broker.
● Retainer Fees: Retainer fees may come in many forms, including upfront payments, phased fees or later commissions over the course of the relationship. The payments may cover specific types of sales or be phased into different trigger milestones that are associated with the project or the expected length of the project. For example, retainer fees may be staggered with an initial payment at the beginning of a project, then payments every month or few months. Other ways to pay include phased payments that are made in stages, sometimes based on the status of the project or the expected length of the project. Retainer fees may be set aside with the understanding that those funds will be paid to the broker over time. In any case, the retainer fee, or schedule of fees, should be clearly defined in the broker fee agreement template, including the terms of the retainer, such as how it may be paid, phases, interest earned, the length of the retainer, etc.
How to Personalize a Broker Agreement Template
While customizing your Broker Fee Agreement template, every real estate agent and broker should consider the following steps:
Use a Reputable Template Provider Most broker fee agreement templates can be customized easily, however, it is important to use a broker that has been in business for at least 5 years; that way, you know they are reputable. Check if the broker fee agreement templates available on the provider’s website have been reviewed by an attorney.
Review Other Broker Fee Agreement Templates There are several types of professionally designed a broker fee agreement template online. For example, consider checking out other real estate agents and brokers’ websites who are similar to your own and find out what types of forms they are using. This way, you can have a better understanding of what the industry average is. You can even ask them to send you a copy of their Broker Fee Agreement template so you can tailor your own.
Be Flexible Some real estate agents and brokers may believe that Broker Fee Agreement templates should be used strictly according to the laws and regulations in their state or country. However, it is important to remember that everybody has different needs and wants. This means that your Broker Fee Agreement template may need to be flexible so it can be tailored to fit these needs and wants.
Tailor to Individual Clients’ Agreements In some cases, you may be required to sign a separate Broker Fee Agreement with each client that hires your services. To avoid any unnecessary confusion, make sure that you customize your template for every individual client you take on.
Legal Matters Surrounding a Broker Contract
When crafting an agreement governing the relationship between a broker and a client, it is important to keep in mind regulatory compliance. In other words, do not draft a broker agreement that violates applicable laws. For instance, we have encountered broker agreements that attempted to define "Client" too narrowly, such that it appeared to violate the Equal Credit Opportunity Act ("ECOA"). ECOA prohibits discrimination in credit transactions. Among other things, if a broker uses only one lender, but still wants to show a potential debtor and get paid for his/her efforts, careful attention to the legal description of the agreement is required .
Further, anti-kickback rules must be adhered to in complying with the Real Estate Settlement Procedures Act, 12 U.S.C. §2607 ("RESPA"). RESPA Section 8 prohibits the payment or receipt of any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, with the referral of settlement business. Kickbacks are payments made to a loan officer or real estate broker in exchange for sending the customer to a particular lender or realtor.
Additional legal problems can arise related to advertising, unfair competition, fraud, unauthorized practice of law, vicarious liability, contract disputes, and the like.
Advantages of Using a Broker Fee Agreement Template
A broker fee agreement template is a beneficial tool that can be furthered tailored to meet your specific needs while taking off the pressure of having to create an entire document from scratch. Having a template in place can help expedite the process and allow you to focus on negotiating the important aspects of the agreement. Using a template, as opposed to drafting a new agreement, provides a couple benefits you might not have considered. A broker fee agreement template helps ensure all the relevant areas of a broker fee agreement are included. Even if you are experienced in creating such agreements, it is possible you might forget to include something because, over time, they start to flow together. Using a broker fee agreement template also saves time. Retaining a broker to assist you with your real estate needs usually comes on a short timeline. You might not have a few weeks to draft such an agreement and await the response from the involved parties. Instead of trying to draft a broker fee agreement from scratch, you can find a broker fee agreement template and then add specific language that relates to your situation. There are many broker fee agreement templates available on the Internet, but we have a broker fee agreement template below that should provide a great starting point. A broker fee agreement template might not be perfect for your situation, but it provides a good foundation where you do not have to worry about missing any language or making a mistake that could come back to haunt you in the future.
Locating and Selecting the Best Template
A place to begin looking for workable templates is by simply searching "Commercial Real Estate Broker Fees Agreement sample or template".
You want a template that has been vetted by actual practitioners and has been used in a varying number of transactions, particularly if you are new to the business. Your marginal benefit from having a bespoke agreement may not justify your time. Additionally, the time you spend trying to draft your own agreement could detract from your ability to close the deal. Even if you already have an agreement, you may want to consider a template that a third-party can review, both for conformity with the requisite laws and for additional insights useful in your industry.
There are a number of ready-made forms available online for download or that you can obtain through diligent searches of archives and/or online purveyors of these materials. Non-legal sites do not carry the same liabilities for bad content. You must be diligent whether you are relying on a webpage full of forms or downloading the form to know where it came from , its pedigree, and the process used to draft the form.
There are many sites that offer customizable broker fee agreements specifically tailored to your state. If you are going to use an out-of-state template, it may be useful to have the template reviewed by your local counsel.
There are also a number of brokers and law firms around the country that publish their own templates. These templates are often overlooked but will be ready to go and written by someone who understands the issues and your business.
We will be exploring how to write your own broker fee agreement in a later blog, addressing when a broker must use his or her own form, and what the repercussions are if you have the wrong Agreement or if you are not using one at all.