Use Caution When Attempting to Reduce Commissions in the Contract

 

Every once in awhile I see handwritten clauses added to Section 20. Additional Terms of the Contract that attempt to reduce the commission that will be paid by the Seller to the Realtors at the Closing of the transaction. This typically happens when Brokers agree to a reduced commission as an enticement for the Seller to accept an offer for less than the asking price. Agreeing to a reduced commission can certainly be a useful tool to get the parties across the negotiation finish line, but the parties should be careful with respect to the enforceability of the additional term that was added to the contract.

For example, the typical language I see added is as follows:

“Listing agent and Selling agent agree to a combined reduced commission of 5% of the purchase price.”

In my opinion, this clause would not be enforceable by the Seller against the Brokers involved in the transaction as the Contract does not govern the commission due to the Broker but, instead, the commission due to the Broker is set out by a separate brokerage/listing agreement with the Seller. Additionally, the Brokers involved in the transaction do not execute and/or join in the Contract between the Buyer and the Seller and the Contract specifically includes the following sentence: “This Contract shall not modify any MLS or other offer of compensation made by Seller or Listing Brokers.”

The prudent course for the Seller, under circumstances requiring the Brokers to agree to a reduced commission, would be to add such a clause as a contingency to the Seller’s obligations required under the Contract.

For example,

“Seller’s obligations under this Contract are contingent upon Listing Broker and Cooperating Broker each accepting a reduced commission of 2.5% of the Purchase Price, for total compensation to Brokers of 5% of the Purchase Price.”

The Seller should also obtain a separate written confirmation signed by both the Listing Broker and Cooperating Broker confirming the agreed-upon reduced commission.

Remember, adding any additional terms and/or modifications to the Contract could be considered the unauthorized practice of law(“UPL”). Please see our past blog on this topic if you have any questions with respect to UPL, which can be found here. Should you have any questions with regard to an agreement to a reduced commission or other specific modifications to the contract, we urge you to consult with your local real estate attorney, for additional guidance.

Sincerely,
Berlin Patten Ebling, PLLC
Article Authored by Will McComb, Esq. wmccomb@berlinpatten.com

This communication is not intended to establish an attorney-client relationship, and to the extent, anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

www.berlinpatten.com

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