Agent Can Sue Agent for Commission-Sharing Disputes

by / Monday, 04 May 2015 / Published in Articles

Increasingly, real estate agents are forming teams to work cooperatively on deals and agreeing to split commissions generated from the team’s deals. After a team breaks up, and sometimes even while agents are working as a team, disputes arise regarding an arrangement to share commissions. If the dispute is resolved neither by the supervising broker nor by a brokerage trade association, then the law was not clear whether an agent can sue another agent in court about commission-sharing arrangements without having the supervising broker join.

The ambiguity was created because California law provides that real estate agents cannot directly receive commissions. Rather, an agent can only be compensated by a broker who must initially receive the commission and then compensate the agent from the broker’s commission funds. The law was not settled as to whether agents can, without the involvement or approval of a broker, negotiate and agree to share their compensation and whether fee-splitting agreements between agents were legal.

In a recent California appellate decision, the court held that fee-splitting agreements between agents are legal and binding, and do not require the broker’s signature or approval. In this case, two licensed real estate agents were employed at the same brokerage firm and decided to work as a team together. These agents made a series of oral and written agreements to split equally any commissions they earned on certain deals. For a period of time, both agents complied with their agreement and shared their commissions.

In October 2010, the two agents signed a written agreement to split any commission earned on the sale of a particular house provided the sale occurred within two years of the date of their agreement. In April or May of 2012, this house had not yet sold and one of the agents (departing agent) left to join another brokerage company. The departing agent told the other agent who was remaining with the same firm (remaining agent) that he was not going to work on the sale of that particular house anymore. However, the very next day after the departing agent left, the brokerage firm which the departing agent had joined put the house in escrow for approximately $14,000,000. The escrow closed on July 16, 2012, and the departing agent received $210,000 as commission. The sale occurred within two year term of the fee-splitting agreement.

The remaining agent sued the departing agent, among other causes of action, to enforce their fee-splitting agreement and obtain his half of the commission. The departing agent asserted that the remaining agent could not sue because their fee-splitting agreement was illegal due to the fact that only a broker can receive commissions, and that the broker had not signed or approved the fee-splitting agreement. Since only the agents, not the broker, signed the fee-splitting agreement, the departing agent argued that the fee-splitting agreement was illegal and unenforceable.

The appellate court ruled that the remaining agent could sue since the law does not prohibit fee-splitting agreements between agents where they share their compensation after receiving it from the broker. The law only requires agents to receive compensation through a licensed real estate broker. What the agents choose to do with their money after they receive it (including splitting it with other agents) was not regulated. The court ruled that the law only restricts how agents are compensated, not whether the agents can agree to split that compensation. The law only addresses how licensed agents are paid initially, which must be through a licensed broker. It does not regulate, limit, or prohibit agents from entering into fee-splitting agreements.

So, now California agents can enforce commission sharing agreements against other agents, without having to drag in their broker. Oral agreements between brokers and agents to share or split commissions are legally enforceable since contracts among brokers or between brokers and agents are not subject to the statute of frauds. Nevertheless, it is critical for fee-sharing agreements to be in writing, which can even be in the form of an email or other electronic means showing the parties’ intent to be bound. “Getting it in writing” will save a lot of headache and unnecessary court battles.

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