Part Four of Five: Seller Compensation Addendum

The National Association of REALTORS® (NAR) 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.  The new/revised forms, redlines, videos and articles on their use are available here.  This article and frequently asked questions (FAQs) is part four of a five part series that will introduce the forms prior to their publication on August 1, 2024.  Specifically, this article will discuss the new Seller Compensation Addendum (SCA).  The SCA is an addendum to either a purchase contract or lease agreement whereby the buyer/tenant can request the seller/landlord to directly compensate the buyer/tenant broker.  

Given the introduction of the new addendum, minimal revisions were needed to the addendum sections of the Residential Resale Real Estate Purchase Contract, Residential Lease Agreement, Vacant Land/Lot Purchase Contract and Commercial Purchase Contract to add a click box identifying the new SCA (a redline of each form can be found by clicking on it above).  Furthermore, these forms were updated to comply with the NAR settlement to state that broker compensation is not set by law and fully negotiable. 

Click here for the new Seller Compensation Addendum (SCA).

Lines 1-5 identify which party originated the SCA, which contract/lease agreement it pertains to, the parties to that contract/lease agreement, and which property.

Lines 6-7 state that the SCA will add terms and conditions that will be included as part of the contract or lease agreement referenced.

Lines 8-12 state that the seller/landlord shall pay the broker representing the buyer/tenant compensation.  First, a click box will be checked to identify if the compensation pertains to a Sale or Lease (or potentially both).  For a Sale, compensation can be either ___% of the full purchase price or a $_______ amount due at close of escrow.  For a Lease, the compensation can be either ___% of the gross rental amount as calculated for the entire term of the initial lease or a $_______ amount due at execution of the lease agreement.

Line 13 states that the compensation is in addition to any seller concessions credited to the buyer in the contract.

Lines 14-16 include a click box to be checked if the seller/landlord’s broker and the buyer/tenant’s broker have entered into a separate agreement where the buyer/tenant broker would receive compensation.  If such an agreement between the brokers exists, the amount or rate of the compensation should be input which is independent of, and in addition to compensation in the SCA.

Lines 17-18 document the parties’ consent for the buyer/tenant broker to receive compensation from more than one party to the transaction.

Lines 19-21 document the parties’ intent for the brokers to be direct third-party beneficiaries of the contract or lease agreement whose provisions shall survive the close of escrow.

FREQUENTLY ASKED QUESTIONS

Q1. Why was the SCA created?

A1. A seller/landlord may choose to offer cooperative compensation to attract as many potential buyers/tenants as possible.  A buyer/tenant may wish for the seller/landlord to compensate their broker.  In either circumstance, a party can utilize the SCA to either document the cooperative compensation communicated by the seller/landlord or the contract term desired by the buyer/tenant.

Q2. Isn’t it unethical or illegal to include broker compensation in an agreement between the seller/landlord and the buyer/tenant?

A2. It is not illegal or unethical for the buyer/tenant to request the seller/landlord compensate their broker in the purchase contract or lease.

Q3. Why doesn’t the buyer just request seller concessions and use those funds to compensate the broker representing the buyer?

A3. With lender approval, buyers have the ability to use seller concessions to compensate their own agent should they choose to do so. Traditionally, seller concessions are used by the buyer to pay for their loan costs, prepaid items and other, non-broker compensation transaction expenses.  Seller concessions are interested party contributions (IPCs), which have limits (cap amounts) based on the buyer’s loan program.  Buyer broker compensation paid by the seller or seller’s broker is not considered an IPC and does not count toward the buyer’s IPC limits. For this reason, some buyers may choose to utilize seller concessions for purposes other than compensating their broker, which is perfectly acceptable. 

Q4. Why is the buyer/tenant broker compensation “in addition” to seller concessions?

A4. Some buyers may be unable to pay both their loan costs and the compensation owed to their broker.  Therefore, the buyer can ask the seller to provide traditional seller concessions in Section 2 of the purchase contract and buyer broker compensation on the SCA.

Q5. Why does line 9 state “any that apply”?  Doesn’t the SCA pertain to just a lease or purchase?

A5. Typically, yes.  However, the workgroup wanted to provide flexibility so that the SCA can be used to compensate the broker for both services under the lease/purchase agreement or the lease/option agreement.

Q6. Why are lines 14-16 necessary?  If the brokers’ agreement is separate and independent, why is there a need to reference it?

A6. Disclosing the existence of a broker-to-broker agreement (Compensation Agreement Between Brokers) provides transparency and reminds the seller and seller’s broker that compensation is already owed to the buyer broker via a separate agreement.

Q7. The seller broker and buyer broker have not signed a broker-to-broker agreement (Compensation Agreement Between Brokers).  Can the buyer fill in compensation on line 15 to obligate the seller broker to pay the buyer broker?

A7. No.  The seller broker is not a party to the purchase contract and cannot be obligated to do anything that they did not agree to.      

Q8. What is the purpose of lines 17-18?  Why is written consent needed for the buyer/tenant to receive compensation from the parties?

A8. Arizona law requires it.  Ariz. Admin. Code R4-28-1101(F) prohibits a licensee from accepting compensation from more than one party to the transaction without the prior written consent of all parties.

Q9. Why does line 20 reference “either Section 8f or Section 9g of the Contract?  There is no Section 9g of the Residential Purchase Contract.

A9. The SCA was designed to be an addendum available for use with all Arizona REALTOR® purchase contracts and lease agreement.  Section 8f governs compensation in the Residential Resale Real Estate Purchase Contract, Residential Lease Agreement, and Vacant Land/Lot Purchase Contract.  Section 9g governs compensation in the Commercial Real Estate Purchase Contract.

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.