Member Legal Services Tel (213) 739-8282 Fax (213) 480-7724 May 28, 2004
Over the course of the past few years, many MLSs, as well as their brokers ("participants") and agents ("subscribers"), have had an increasing number of questions and concerns about what the National Association of REALTORS® ("NAR") terms "conditional offers of compensation," made through the MLS. This legal article addresses this subject and some of the related issues.
Q1.What is a "conditional offer of compensation?"
A A conditional offer of compensation occurs when the amount of compensation offered to cooperating brokers in a listing submitted to the MLS varies based on the performance or nonperformance of certain activities. Essentially, one rate is offered if "xyz" occurs and another rate is offered if it doesn't. A classic example would be when a listing broker offers to compensate the successful cooperating broker more if the cooperating broker shows the property to the buyer than if the cooperating broker does not show the property to the buyer. Other examples include conditioning the rate of compensation on close of escrow by a certain date or receipt of a full-price offer.
Q 2. May I make a conditional offer of compensation on my listing through the MLS?
A No. According to NAR, as long as NAR's MLS policy relies solely on the procuring-cause test as the basis for entitlement to a cooperating broker's share of a commission when such offer is made through the MLS, it will be a violation of NAR policy to condition or offer varying amounts of compensation through the MLS to other brokers based on whether they perform--or not perform--certain acts that are "sub-activities" under the umbrella of procuring cause or are additional acts beyond those necessary to qualify as procuring cause. NAR defines procuring cause as "the uninterrupted series of causal events which result in the successful transaction." So, if a cooperating broker is the procuring cause, she is entitled to the compensation.
Q3. Does this mean that I can't offer a bonus to create incentives for certain conduct such as close of escrow by a date certain or for a full price offer?
A Again, the listing broker may not condition her offer of compensation through the MLS on the performance of such conduct, however it would be permissible for a listing broker to offer compensation through the MLS and, in the appropriate MLS field, invite cooperating brokers to contact listing broker for terms of additional compensation that may be available. Listing brokers could also offer bonuses to cooperating brokers through some other method of communication outside the MLS.
Q4. What if my seller wants to offer a bonus to create incentives for certain conduct such as close of escrow by a date certain or for a full price offer?
A Sellers have no authority to convey offers through the MLS. That's not to say that such offers cannot be made outside the MLS, but offers of compensation made through the MLS are broker to broker.
Q 5. Does offering compensation through the MLS based on a formula or sliding scale violate the policy against conditional offers?
A No. While an offer of compensation in the MLS must be in the form of either a percentage of the gross sales price or a determinable dollar amount, the compensation offer may be calculated by a formula or sliding scale or by some similar approach. Use of this method would not, in and of itself, constitute a conditional offer.
Q 6. Is NAR's prohibition against conditional offers of compensation a new policy?
A No. NAR's policy prohibiting conditional offers of compensation is not new, but until recently it has just been a little hidden, requiring MLSs and practitioners alike to read between the lines in order to interpret the policy. (See Question 7 below.) This uncertainty has created some confusion out in the field about how to handle conditional offers of compensation that have found their way into the MLS.
Q 7. How has the issue of conditional offers of compensation been clarified recently?
A In addition to providing you with this nifty legal memorandum, the C.A.R. Model MLS Rules have been revised as of February, 2004 to expressly state that conditional offers of compensation made through the MLS violate the MLS Rules. This new language is set forth in C.A.R. Model MLS Rule 7.12, titled Unilateral Contractual Offer; Subagency Optional, and states, "The amount of compensation offered through the MLS may not contain any provision that varies the amount of compensation offered based on conditions precedent or subsequent or on any performance, activity or event." Furthermore, in the event a listing broker refuses to comply with this requirement in the way he or she makes an offer of compensation, the Rule also gives MLSs the authority to enforce the policy by removing the offending listing, if it should come to that. Again, please keep in mind that these revisions to the C.A.R. MLS Rules do not reflect an actual policy change but instead offer clarification on this issue.
Q 8.Where can I find a copy of the California (C.A.R.) Model MLS Rules?
A The California Model MLS Rules, with the revisions discussed in this article, are posted under "Multiple Listing Service" in the Legal section of C.A.R. Online.
Q9. Will I see the revised conditional offer of compensation language in the rules of my local MLS?
A As with all revisions to the C.A.R. Model MLS Rules, the changes only go into effect in each local area of the State once they have been actually adopted by the local REALTOR® association or MLS. You will have to check with your local REALTOR® association or MLS to verify whether it has adopted the new language.
Q 10. Where can readers get more information?
A This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 a.m. to 6:00 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail their questions to the Member Legal Hotline at 213.480.7724 or firstname.lastname@example.org. Written correspondence should be addressed to:
California Association of REALTORS® Member Legal Services 525 South Virgil Avenue Los Angeles, California 90020
The information contained herein is believed accurate as of May 28, 2004. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions, should seek the advice of an attorney.