What is required of brokers when they are compensated by more than one party in a transaction?
The legal hotline has seen a recent uptick in questions about what is required of brokers when they will be compensated by more than one party in a transaction.
Here is a common example: The buyer, per their buyer representation agreement, has agreed to pay their brokerage X. During the contract negotiations between the buyer and the seller, the seller agrees to pay Y to the buyer’s brokerage. For purposes of our discussion, Y is less than X. The seller’s agreement to pay the buyer’s brokerage Y is memorialized in the purchase contract between the buyer and the seller. Under this example, the buyer’s brokerage will be compensated by two parties: The seller will pay Y and the buyer will pay the difference between X and Y. The question: Is the buyer’s brokerage required to provide notice and/or obtain consent from the buyer or the seller about this compensation arrangement? The answer is found in the Real Estate License Act and the REALTOR® Code of Ethics.
Section 10-10(d) of the Real Estate License Act states
“If in any one transaction a sponsoring broker receives compensation from both the buyer and seller or lessee and lessor of real estate, the sponsoring broker shall disclose in writing to a client the fact that the compensation is being paid by both buyer and seller or lessee and lessor.”
Article 7 of the Code of Ethics states
“In a transaction, REALTORS® shall not accept compensation from more than one party, even if permitted by law, without disclosure to all parties and the informed consent of the REALTOR®’s client or clients. (Amended 1/93)”
If you are the buyer’s brokerage in this example, an argument could be made that you have fulfilled the disclosure and consent requirements with your buyer client because your client has signed both their buyer representation agreement and the purchase contract. Those documents lay out the total compensation that is due to the buyer brokerage. The buyer has acknowledged that their broker’s compensation will be paid by both the seller and the buyer, and the buyer has consented by signing both agreements.
As mentioned above, Article 7 of the REALTOR® Code of Ethics requires disclosure to “all parties.” How and when is that disclosure provided to the seller? The timing of any disclosure should be made when it is meaningful to the receiver of the disclosure. If the closing disclosure or closing statement signed at the time of closing shows that the compensation to the buyer brokerage is paid by both seller and buyer (seller pays Y and buyer pays X-Y), that might be sufficient. The seller’s out of pocket expense is not changed by the disclosure of this information, and it does not require the seller’s consent. It is only informational to the seller.
Illinois REALTORS® has a sample form titled “Disclosure and Consent For Compensation By Multiple Parties.” This might be helpful for those that prefer a formal method of disclosure and consent, while both parties could acknowledge disclosure by signing the form. The form is only required to be signed by the client of the brokerage that is paid by both sides. More often than not, it will be the buyer’s brokerage who is paid by both sides. Of course, there might also be a transaction where a broker is acting in disclosed a dual agency capacity and might be paid by both sides. In that scenario, both sides must receive disclosure and must consent to the brokerage receiving the payment from both seller and buyer since they are both the clients of the broker.*
*These concepts would also apply in lease transactions.
About the writer: Prior to joining Illinois REALTORS® in 2022, Victoria (Vicki) Munson was an attorney in private practice focusing on real estate and estate planning matters. She enjoyed assisting buyers and sellers in bringing their transactions to the closing table. Victoria earned her bachelor’s degree from Western Illinois University and her Juris Doctor from The John Marshall Law School.
