Although often anxiety-riddled, the conversation regarding the payment of commission is expected in every real estate transaction for consumers and licensees alike. And regardless of whether it is a buyer’s or a seller’s market, procuring cause commission questions come into the WRA Legal Hotline in a regular stream.
Typically, these Legal Hotline conversations begin and end with the REALTOR® asking the attorney, “Who is procuring cause?” This is a challenging and frustrating conversation for both the legal hotline attorney and REALTOR® member because, frankly, the attorney cannot determine which broker is procuring cause or decide which broker an arbitrator, mediator or judge will determine is deserving of the cooperating compensation.
What is procuring cause? Generally, procuring cause is a standard of performance to the entitlement of cooperative compensation established between brokers by the Multiple Listing Service (MLS). It is also commonly used as the standard of performance in standing policy letters between brokers/companies, compensation agreements pertaining to single transactions, or a combination of these. The real trick with procuring cause: there is not one single act that determines procuring cause. Therefore, the legal hotline attorney does not get to say that activity “X” always creates procuring cause.
Below, this discussion highlights the most common misconceptions relating to procuring cause. For more information, please review the April 2010 Legal Update, “Cooperative Commissions and Procuring Cause” at www.wra.org/LU1004 and the April 2002 Legal Update, “What is Procuring Cause?” at www.wra.org/LU0204.
Urban Legend #1: The Licensees’ Commission Comes First
The Truth: The first and most important thing is to serve the buyer and seller by closing the transaction. Basically, licensees cannot place their commission issues and needs before the needs of the parties. There is plenty of time afterward to determine who gets what part of the commission.
Urban Legend #2: Showing the Property or Writing the Offer Establishes Procuring Cause
The Truth: The issue of procuring cause comes down to one concept: who caused the sale of the property? Determination of procuring cause is a conclusion drawn from a full, knowledgeable consideration of all of the facts of the case.
In an MLS transaction, entitlement to compensation is determined by the cooperating broker’s performance as procuring cause of the sale or lease. Procuring cause is the MLS standard of performance to earn a commission. Procuring cause looks at the uninterrupted series of events that result in the sale of the property to the buyer. There are no black and white rules that determine entitlement to commission.
Therefore the privilege of automatic procuring cause is not granted to the broker who drafts the offer or the broker who first shows the property, commonly called the threshold rule. Also, there are no actions that in and of themselves preclude a broker from being procuring cause. For instance, the fact that no agency disclosure is given or signed, or that the broker did not inspect the property, does not necessarily mean the broker is not procuring cause. A case-by-case review of all facts and circumstances must be conducted to determine who is procuring cause.
The preeminent written authority explaining procuring cause, as applied in REALTOR® arbitration hearings, is the Code of Ethics and Arbitration Manual, specifically “Appendix II to Part Ten – Arbitration Guidelines (Suggested Factors for Consideration by a Hearing Panel in Arbitration),” which may be viewed online at www.realtor.org/CEAM.nsf/1ea4bd9041b3346c862569a6006f7c75/448362d102506f1086257234006f6ea6?OpenDocument.
That document indicates:
“While a number of definitions of procuring cause exist, and a myriad of factors may ultimately enter into any determination of procuring cause, for purposes of arbitration conducted by boards and associations of REALTORS®, procuring cause in broker to broker disputes can be readily understood as the uninterrupted series of causal events which results in the successful transaction. Or, in other words, what ‘caused’ the successful transaction to come about. ‘Successful transaction,’ as used in these Arbitration Guidelines, is defined as ‘sale that closes or a lease that is executed.’”
If the brokers cannot agree as to the entitlement and/or division of the selling commission, the dispute should be submitted to the local REALTOR® association for resolution. According to Article 17 of the Code of Ethics, REALTORS® agree to arbitrate their contractual disputes arising out of their relationship as REALTORS®.
Arbitration panels will consider whether, under the circumstances and in accord with local custom and practice, the broker made reasonable efforts to develop and maintain an ongoing relationship with the purchaser. Did the first cooperating broker actively maintain ongoing contact with the purchaser? Or did the broker’s inactivity, or perceived inactivity, cause the purchaser to reasonably conclude that the broker had lost interest or disengaged from the transaction, known as abandonment? In other instances, a purchaser, despite reasonable efforts by the broker to maintain ongoing contact, may seek assistance from another broker. The panel will want to consider why the purchaser “abandoned” the first broker and whether the broker’s conduct caused the purchaser to terminate the relationship, known as estrangement. This can be caused, among other things, by words or actions. Panels will want to consider whether such conduct caused a break in the series of events leading to the transaction and whether the successful transaction was actually brought about through the initiation of a separate, subsequent series of events by the second broker.
REALTORS® also may consider local association mediation to resolve the contractual disputes regarding commission.
Urban Legend #3: Brokers with Buyer Agency Create Automatic Procuring Cause
The Truth: The fact that the buyer has a buyer agency agreement does not automatically make the buyer’s broker procuring cause of the sale. A buyer agency agreement does not supersede or dictate procuring cause.
Urban Legend #4: Procuring Cause is Always the Standard Even When it’s Not an MLS Transaction
The Truth: Procuring cause is not the universal standard of performance in all real estate transactions, as licensees often assume. Procuring cause is the automatic standard in MLS transactions. If a property is not listed in the MLS and sold by another MLS participant, then the listing and cooperating brokers must affirmatively agree on cooperative commissions and select a performance standard whereby the cooperating broker may earn that commission. That standard of performance may or may not be procuring cause.
Outside of the MLS, there are no automatic offers of cooperation and compensation. In each of these situations, the offers of cooperation and compensation, standards of performance for earning a commission, and other accompanying procedures and mechanisms are not provided by the MLS safety net with which many members are used to working.
It is difficult to determine how to handle the commission when there is no standard of performance – neither broker knows what must be done to earn the commission. Procuring cause automatically applies only with MLS properties.
Outside of the MLS, brokers may agree to whatever performance standard they believe is appropriate. They may decide that whoever writes the offer or whoever first shows the property should be paid. They do not have to determine entitlement to compensation according to procuring cause. Therefore, the listing broker and potential cooperating brokers need to agree to cooperate with one another and determine the amount of commission that the listing broker will pay, what the cooperating broker must do to earn the commission, who will pay the commission, to whom it will be paid, when it will be paid and any other terms and conditions of the compensation agreement.
Cori Lamont is Director of Brokerage Regulation and Licensing for the WRA.