Introduction
Consider a situation where you are the prospective client looking to sell your property, and hence, you engage a real estate broker to conduct this task. You can do so by executing a real estate brokerage agreement with the concerned broker, who shall help you proceed. However, who is a broker, and how can the individual help you in the property sale? A person is known as a broker when they facilitate transactions between traders, sellers, and buyers. You can see a broker as an intermediary whose main responsibility is ensuring the transactions are completed smoothly between the parties. While brokers can exist in many industries, including insurance and finance, this blog shall mainly focus on real estate brokers. When it comes to real estate brokers, their main task is to negotiate and arrange real estate transactions between the parties. The main tasks of this licensed individual include overseeing transactions for sales and purchasing activities on homes, land, and commercial properties. They can work either for the real estate buyer or for the seller. While real estate brokers can be confused with real estate agents, there are material differences between the two. Real estate brokers are agents with material experience in the real estate field and have successfully passed the broker licensing examination. Through broker licensing, the individual can run a firm and have agents work under him to sell and purchase properties.
What is a Brokerage Agreement?
A Brokerage Agreement, is an agreement which legalises the relationship between a buyer or the seller and the broker. The main aim of this agreement is to come to a mutual understanding of the buyer wanting the assistance and services of the broker to search for and buy the required property. When the buyer signs this agreement, the buyer has legally agreed not to refer or work with any other broker for the search and purchase procedure. While the terminologies used in the agreement might vary depending on the jurisdiction involved, the overall roles and responsibilities of the parties involved remain consistent. Under the buyer-broker agreement, the broker is expected to fulfil specific duties for the buyer. Some common duties that the broker is expected to fulfil are:
- Finding suitable properties for the buyer
- Disclosing material facts related to the property
- Review paperwork during the entire process
- Prepare purchase offers
- Conduct inspections as required
On the other hand, the buyer also has some obligations to fulfil under the agreement. Some common obligations are:
- Consider the properties provided by the broker
- Act in good faith and trust the broker with the process
- Qualify the purchase of the property
- Read the relevant documents and consider their circumstances and situation accordingly
- Cooperate with the broker during the term of the agreement
As long as the parties agree to fulfil their obligations in accordance with the agreement, they will have a suitable relationship under the buyer brokerage agreement.
Difference between Brokerage and Co-Brokerage Agreement
While a Brokerage Agreement involves only one broker for the party, a co-brokerage agreement is executed to split brokerage commissions between multiple brokers. This means multiple brokers are vital in pushing the transaction through under the co-brokerage agreement. The parties can enter a brokerage or a co-brokerage agreement depending on the jurisdiction involved. For instance, co-brokerage agreements are more common in New York, wherein at least two agents help you purchase the property. The existence of a co-brokerage agreement can be found between the buyer’s agent and the seller’s agent, who decide to enter into this agreement to divide their respective commissions. While this might not be a regular occurrence, if both brokers belong to a common standard brokerage firm, it becomes mandatory for the brokers to enter into a co-brokerage agreement. This means that the entire commissioning of the deal from the sides of both the buyer and seller is done in accordance with the co-brokerage agreement only. However, if the brokers do not have any commonality, they can decide not to enter into a co-brokerage agreement and rather have a simple brokerage agreement with their respective parties (the buyer and the seller, respectively).
When to Use a Broker Agreement?
Some of the most common situations wherein you should prefer entering into a broker agreement are:
- If you have contacts and experience in a specific industry and can introduce buyers and sellers of certain goods and services for a commission.
- If you have a property that you wish to sell and you are willing to pay a commission to the broker for finding potential clients or customers.
- If you wish to purchase a property and are willing to pay a commission to the broker for finding the property according to your requirements.
Types of Broker Agreements
The following are some types of broker agreements that the parties can enter into:
Open brokerage agreement
Under this type of brokerage agreement, the seller/buyer of the property continues with their right to employ as many brokers as they want to. Therefore, this is a non-exclusive brokerage agreement, and the buyer/seller is not expected to follow any particular broker. The final commission is only paid to the broker who successfully finds the prospective buyer/seller of the property in accordance with the party requirements. Hence, no fixed commission is provided to all brokers involved.
Exclusive right to sell brokerage agreement
This type of brokerage agreement is the most common type of brokerage agreement used by the parties. Unlike the open brokerage agreement, the parties enter into an exclusive arrangement under this agreement. This means that the broker appointed is the sole broker for the buyer/seller. Hence, the broker is authorised to present the relevant property options to the buyer/seller. Therefore, the final commission is also received by that particular appointed broker only.
Broker agreement (Between Seller and Broker)
This type of agreement is also known as the ‘seller representation agreement’ or the ‘listing agreement’. Under this agreement, detailed information about the property being sold is included. Therefore, the description of the property and the expectations of the buyer serve as the ground of negotiations between the seller and the buyer through the agent (broker) involved. The agreement includes the details related to the start and end date of the agreement, along with the amount of compensation that the broker shall receive, subject to the terms and conditions of the agreement. The agreement might also include details about the list price at which the seller is willing to sell the property.
Broker agreement (between buyer and broker)
This type of agreement is also known as the ‘Buyer Representation Agreement’. It outlines the broker’s duties and obligations to the property buyer. The agreement includes the understanding that the buyer wishes to utilise the help of the broker to search for and buy a property according to their specifications. The agreement includes the details related to customer preferences, along with the start and end date of the agreement and the compensation to be provided to the broker, subject to the terms and conditions of the agreement.
Loan brokerage agreement
A Loan Brokerage Agreement is when a third party acts in the roles of both the lender and the broker by providing funding for home mortgages or other types of loans. The lender is the financial institution providing money in exchange for collateral, such as property or stock shares. Therefore, under this agreement, along with providing the required loan on the property, the agency also helps the buyer to buy their preferred property or the seller to sell their property in accordance with the terms of the agreement.
Important Clauses in Brokerage Agreement
A real estate brokerage agreement consists of multiple clauses that cover different aspects of the agreement. These clauses address key areas, including property description, broker responsibilities, payment terms, property access, confidentiality, dispute resolution, and termination. A standard real estate brokerage agreement typically covers the following important clauses:
Title
The title of the contract should be specified as “Real Estate Brokerage Agreement”, as is customary in any contractual agreement.
Parties
The parties involved in the agreement should be identified by their names and relevant details, such as their addresses and jurisdiction. For example; – “This real estate brokerage agreement is entered into between (the Buyer/Seller’s name) of (address and jurisdiction) on one part; and (the Broker’s name) of (address and jurisdiction) on the other part.”
Specifics of the property
This clause relates to the specific property/properties subject to the agreement. It outlines the details and characteristics of the property that the broker will be assisting the buyer or seller with. Typically, it includes a list of personal property to be included with the property upon sale and a separate list of personal property the seller intends to remove.
Exclusive listing
This clause stipulates that the property owner grants exclusive rights to the broker to represent and market the property for a specific duration. It prevents the owner from hiring other brokers during the listing period. For example; – “Throughout the duration of this agreement, Broker will hold the exclusive privilege to connect potential sellers/buyers with the buyer/seller.”
Broker’s duties and responsibilities
This clause outlines the broker’s responsibilities, such as marketing the property, finding potential buyers and negotiating offers. It clarifies the scope of services the broker will provide. For example; – “When the Buyer is involved in evaluating, negotiating, or moving forward with a property purchase, the Broker will assume the fiduciary duties and responsibilities commonly associated with a ‘buyer agent.’ This includes coordinating property inspections with seller representatives on behalf of the buyer. Furthermore, the broker will assist in granting access to the properties, including obtaining keys and arranging entry for buyer’s consultants, to facilitate property evaluation for purchase and provide necessary additional services.”
Legal compliance
This clause guarantees that the broker will follow the laws of the applicable jurisdiction and possess the required licenses to offer their services. For example; – “In accordance with legal requirements, the broker is obligated to adhere to all applicable laws and holds the appropriate licenses to provide brokerage services.”
Fees for services and payment
This clause defines the broker’s compensation for their services, usually in the form of a commission based on the property’s sale or lease price. It outlines the commission percentage, any additional fees, and how and when the broker will be paid. For example; – “The Buyer/Seller will provide full compensation to the Broker for all services that the Broker is required to perform under this Agreement.” “The calculation of the broker’s fee shall be determined based on (method of commission calculation), and the acceptable forms of payment shall include (form of payment)
Site access
This clause outlines the conditions and terms under which the broker is granted access to the property/properties for various purposes, such as property evaluation, showing to potential buyers, conducting inspections, or fulfilling other responsibilities related to the agreement. It may also specify the procedures for obtaining access and any restrictions or limitations imposed by the property owner and the broker’s responsibilities while on the premises. For example; – “If the broker needs to access properties not controlled by the buyer/seller, they must get the necessary approvals and permissions. The buyer/seller will help the broker obtain access to these properties at reasonable times but cannot guarantee access. However, the broker acknowledges that access to certain properties may be subject to specific terms and conditions outlined in the access agreement mentioned in this agreement.”
Confidentiality
This clause ensures that both the broker and the property owner will keep any private information obtained during the agreement confidential, including sensitive information about; the property, financial details, or any proprietary information shared between the parties. For example; – “The broker is obligated to protect and maintain the confidentiality of the information provided and must refrain from disclosing any confidential information to any third party.” “Before disclosing any confidential information, the broker must seek approval from the seller. Failure to comply with this requirement will be considered a significant violation of the contract, leading to the termination of the entire real estate agency agreement.”
Dispute resolution
This clause outlines the process for resolving disputes during the agreement, including procedures for employing mechanisms such as mediation or arbitration before pursuing any legal action, specifying the jurisdiction and applicable laws. For example; – “This agreement will be governed by and interpreted in accordance with the laws of the United Kingdom, regardless of any conflicting choice of law principles.”
Term
This clause specifies the duration or period for which the agreement is valid and in effect. It stipulates the start date and end date of the agreement. The term can vary depending on the agreement between the parties involved and may be for a fixed period, such as six months or one year, or it can be open-ended until certain conditions are met or terminated by either party. For example; “The agreement will take effect on (effective date) and remain in effect as outlined within the terms of this agreement.”
Successors and assigns
This clause specifies that any part or aspect mentioned in this agreement cannot be transferred to another party. For example; “This Agreement is legally binding for the parties involved and their respective successors and assigns. However, the broker cannot assign or transfer this agreement, any part of it, without the written consent of the Seller/Buyer. Any assignment or attempted assignment without the Seller/Buyer’s consent will be considered invalid.”
Governing law
This clause identifies the state or country laws that will govern the interpretation and enforcement of the agreement. It helps establish the legal framework under which the agreement operates. For example; – “This Agreement is subject to and shall be interpreted in accordance with the laws of the United Kingdom. In the event of any unresolved dispute arising from or related to a breach of this agreement, the matter shall be resolved in a state court located in (jurisdiction), which possesses the appropriate jurisdiction.” If you are facing any breach as a buyer or a broker, it is essential to discuss with an experienced commercial attorney what relief is available to you based on the damage caused by the disclosure of confidential information.
Termination
This clause stipulates the conditions under which either party can terminate the agreement before expiration. It may include provisions such as notice periods, reasons for termination, and any penalties or fees associated with early termination. “Seller/Buyer has the right to terminate this agreement and the broker’s services at any time by giving written notice. Such termination can be done for cause or convenience. If this agreement is terminated as stipulated herein, the broker must stop all work and expenses immediately and give the Seller/Buyer all the data, reports and any other information or materials related to the work done under this agreement. This includes both finished work and any ongoing projects.” Or; “If this Agreement or the Broker’s services are terminated due to a breach of the Agreement or fault on the part of the Broker, the Broker’s compensation will be limited to either; the reasonable value of the work completed for the buyer/seller; or payment based on the rates specified in this agreement for the services satisfactorily performed before the termination date whichever is lower of these two options will apply.”
Conclusion
To sum up, a real estate brokerage agreement defines the relationship between a buyer or seller and a real estate broker. The broker acts as a mediator, facilitating real estate transactions and using their expertise to negotiate deals. Depending on the circumstances, the agreement can take different forms, such as a buyer brokerage agreement or co-brokerage agreement. The key clauses in a brokerage agreement include the broker’s duties and responsibilities and their legal compliance, fees and payment terms, term and termination, and governing law. In summary, these clauses ensure clear expectations, protect confidential information, establish compensation terms, and provide a framework for resolving disputes between parties. Ultimately a brokerage agreement is essential for establishing a professional relationship and setting expectations between the buyer or seller and the broker, ensuring a transparent and efficient real estate transaction process.
