Part One of Five: Compensation Agreement Between Brokers

The National Association of REALTORS® settlement in the Sitzer-Burnett class action lawsuit includes significant practice changes that will be implemented in mid-August 2024.  To assist its members prepare for practice changes and be successful in the new environment, the Arizona REALTORS® has created and revised eighteen (18) forms.[1]  This article and frequently asked questions (FAQs) is the first of a five part series that will introduce the forms prior to their publication on August 1, 2024.

Currently, buyer broker compensation is most commonly paid by the seller’s broker pursuant to an offer of compensation made through the Multiple Listing Service (MLS).  The offer is made to all other MLS participants promising to pay them the offered amount if the participant is the procuring cause of the sale.  Pursuant to MLS policy, if the seller’s broker fails to pay the amount offered in the MLS, the broker who procured the sale can resolve the dispute through a REALTOR® association.

One of the most significant practice changes of the NAR settlement is the prohibition of offers of compensation to buyer brokers in the MLS (New MLS Policy Statement 8.11, p. 8).  Offers to compensate a buyer broker who procures the buyer can still be made outside of the MLS but there would be no mechanism for such offers to be accepted or enforced.  The new Compensation Agreement Between Brokers form will provide a method for a buyer’s broker to be compensated by the seller’s broker.  The form removes the complexity and legal uncertainty of procuring cause and, importantly, provides an enforcement structure that REALTOR® associations have authority over.

The new Compensation Agreement Between Brokers (CABB) form can be found here.

It is worth noting that the Arizona REALTORS® will be publishing an additional form titled Seller Compensation Addendum, which will be addressed in a future article.  Pursuant to that Addendum, the seller can agree to directly compensate the buyer’s broker in a purchase contract.  If the seller is more comfortable with that arrangement, the Seller Compensation Addendum can be used in place of the Compensation Agreement Between Brokers.

Section 1 of the CABB identifies the parties to the contract.  On lines 1-3, the buyer/tenant broker (Buyer Broker), their agent, and the name(s) of the potential tenant or buyer (Buyer) are listed.  The seller/landlord broker (Seller Broker) and their agent are listed on lines 4-5.

Section 2 of the CABB identifies the premises listed for sale or lease.

Section 3 of the CABB identifies the compensation amount and terms that must be met for the Buyer Broker to be paid.  In addition to being fully signed, the CABB must be delivered prior to, or together with an offer to purchase or lease the Premises.  Furthermore, the buyer must enter into a purchase contract or lease for the Premises within ten (10) days or ________ days of the Seller Broker signing the CABB and the Buyer must close escrow on that purchase contract.

Next, Section 3 of the CABB identifies the compensation being offered.  For sales, the offered compensation must be ascertainable and can be a percentage of the full purchase price, flat amount or some other value.  The compensation is then earned and payable at the time the Buyer closes escrow when represented by the Buyer Broker as indicated on the purchase contract.  For leases, the offered compensation must be ascertainable and can be a percentage of the gross rental amount of the initial lease or flat amount.  The compensation is then earned and payable when the tenant executes a lease.

Section 4 of the CABB provides remedies if the Seller Broker fails to pay the compensation earned.  The brokers agree to mediate any dispute and, if mediation is unsuccessful, submit the dispute to binding arbitration.  The arbitration would be governed by the NAR Arbitration Manual and handled in a similar procedural manner through a REALTOR® association.

Section 5 provides space for the brokers to input additional terms agreed upon and standard contract terms found in many other Association contract forms.

Sections 6 and 7 provide for the signatures of the Brokers’ authorized signer and contact information.   

Frequently Asked Questions

Q1. The practice changes only apply to offers of compensation made to buyer brokers. Why are tenant brokers included in this form?

A1. Many MLSs are removing all offers of compensation, including listings offered for lease.  Therefore, if landlord brokers are offering cooperative compensation off the MLS, there would still need to be a mechanism for tenant brokers to accept the offer and enforce it if necessary.  The CABB addresses this need.  

Q2. I thought if I worked on a team that both myself and my team leader needed to be identified.  Why is there only one agent space available that is acting for the broker? 

A2. It is true that lines to identify both the team member and team leader are included in many Arizona REALTOR® forms but that is because those forms are seen and used by the public.  For example, it would be misleading for a form to only list the team leader when the client has never met them, and their only interaction is with the team member.  This is not an issue with the CABB because it is a broker-to-broker form.  Furthermore, the workgroup felt two spaces to identify agents would be confusing since only one signature to sign the CABB is necessary (see Q3).

Q3. If I work on a team, should the team leader or the team member’s name be inserted in the CABB?

A3. The designated broker should answer this question.  It is the brokers that are obligated to honor the agreement and they should designate the appropriate agent to be identified in Section 1 and decide who, if anyone, is authorized to sign on their behalf in Section 6 or Section 7.  In other words, the broker should set policies and procedures regarding which of their agents should be identified on the CABB.  Likewise, the broker should set policies and procedures for them to sign the CABB or designate who is authorized to do so.

Q4. Why are there so many contingencies for the Buyer Broker to meet to get paid?

A4. When using this form, it is the Seller Broker who is obligated to pay the offered compensation.  Therefore, the workgroup felt it was necessary to insert several protections to ensure the Seller Broker would not be obligated to pay unintended compensation out of pocket or to multiple Buyer Brokers.

Q5. Why is the first contingency that begins on line 9 necessary?

A5. For a contract to be formed, an offer must be accepted in the manner specified in the offer.  Here, the workgroup wanted the CABB to be flexible so that either broker could initiate the offer whenever they chose to do so.  It was therefore difficult/impossible to draft a manner of acceptance to fit all possible situations and the CABB is silent on how to accept it. 

The first contingency mainly applies when the CABB is initiated by the Seller Broker.  For example, a Seller Broker could decide to sign numerous CABBs and deliver them to every other broker in the state.  Any Buyer Broker could then sign the CABB and believe it to be enforceable, even without delivering the CABB back to the Seller Broker.  The first contingency notifies the Buyer Broker that it must deliver the fully signed CABB to the Seller Broker either prior to, or with, an offer to purchase or lease the Premises.  Doing so ensures a fully formed contract exists and also ensures the seller/landlord and Seller Broker are aware that the advertised compensation will be due when evaluating the offer to purchase or lease the Premises.

Q6. Why is the second contingency that begins on line 10 necessary?

A6. The workgroup was concerned that a Seller Broker could be obligated to pay compensation after its listing contract expired.  It was therefore necessary to include a limiting timeframe in which the Buyer Broker must produce a buyer/tenant and consummate the sale or lease.  The CABB’s boilerplate language allows ten (10) days for the buyer/tenant to negotiate a fully executed purchase contract or lease.  The workgroup felt this was sufficient time if the CABB was being initiated by the Buyer Broker.  However, the time period can be adjusted.  Therefore, a Seller Broker may shorten or lengthen the period of time to produce a fully signed purchase contract or lease to match their listing contract.

Q7. Why is the second contingency timeframe based on the date that Seller Broker signs the CABB? 

A7. Again, the workgroup was concerned about the Seller Broker being obligated to pay unintended compensation.  The Seller Broker is in control of when it signs the CABB and can therefore minimize its liability. 

Q8. Why is the third contingency that begins on line 12 necessary?

A8. It may not be.  For a lease, the third contingency does not apply.  However, for purchase transactions, the CABB is contingent upon the Buyer purchasing the Premises pursuant to the purchase contract entered into during the time period identified in the second contingency.  Here, the workgroup was concerned that the purchase contract may terminate but the same parties may enter into a second purchase contract at a later date.  In such circumstances, the listing contract may have expired/changed or the Buyer may be represented by a different buyer broker.  To ensure the Seller Broker was not obligated to pay any unintended compensation, the CABB will terminate upon a failed purchase contract.  If the Buyer later attempts to enter into a second purchase contract with the seller, a new CABB must be signed.

Q9. What if I missed one of the contingencies?  Is there an addendum to the CABB that can extend the timeframes?

A9. There is no Arizona REALTOR® CABB addendum form.  Best practice would be for the brokers to execute a new CABB.  Please note that no compensation is due on the first CABB since there was an unmet contingency.

Q10. Why does the Buyer Broker have to be identified in the purchase contract to earn the compensation listed on the CABB?

A10. Again, the workgroup was concerned about the Seller Broker being obligated to pay unintended compensation.  The need to restrict compensation to a Buyer Broker identified on the purchase contract arises when two (2) Buyer Brokers obtain CABBs for the same Buyer.  Without the limiting language on line 17, both Buyer Brokers would be owed compensation.

Q11. Why not tie compensation offered in a CABB to the broker that procures the sale?

A11. The workgroup discussed that option but felt the ambiguity and confusion of who is the procuring cause of a sale should be avoided.  Identifying the broker in the CABB and purchase contract is easy and provides certainty to avoid disputes.  Furthermore, all buyer brokers will now have written agreements with their buyer to protect their interests and discourage buyers from abandoning the broker that procured their sale.

Q12. Can a Seller Broker still be obligated to pay a broker who procures the sale of a home even if a CABB is not entered into?

A12. To avoid any such scenarios, best practice is for Seller Brokers to advertise offers of compensation off the MLS in a manner that clearly indicates the offer is just an advertisement.  In other words, the Seller Broker is willing to pay compensation to a potential buyer broker, but the communication is not an offer that can be legally accepted by action.  It is also best practice for Buyer Brokers to request the Seller Broker to enter into a CABB rather than rely upon a communication that may just be an advertisement.

Q13. Why is the CABB compensation due if the Buyer, or any entity owned or controlled by Buyer, purchases the Premises?

A13. The language “or any entity owned or controlled by Buyer” was inserted to protect the Buyer Broker should the Buyer purchase the Premises in the name of their trust, LLC or another entity owned or controlled by the Buyer.  Many people choose to have their properties owned by a revocable living trust for estate planning purchases.  Investors often buy properties in the name of a limited liability company to  . . .well, limit their liability.  Legally, these entities are separate legal people, so the verbiage protects the Buyer Broker by ensuring the compensation is payable under these circumstances.  Identical language has also been included in Arizona REALTOR® buyer broker employment agreements.

Q14. Why are disputes related to the CABB required to be mediated and then arbitrated through a REALTOR® Association?

A14. Adjudication through the legal system is expensive and time consuming, which is one of the reasons REALTORS® associations offer alternative dispute resolution as a member benefit.  Furthermore, judges are unfamiliar with our industry and REALTOR® practices.  The workgroup felt it better to resolve member disputes in-house in a process that everyone is familiar with.       

Aaron M. Green, Esq., a licensed Arizona attorney, is the General Counsel for the Arizona Association of REALTORS®.  This article is of a general nature and reflects only the opinion of the author at the time it was drafted.  It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

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[1] Please note there are an additional two (2) Arizona REALTOR® forms that will also be released in August 2024, but they are not related to the NAR Settlement.

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