Co-Broker Agreement Basics
A co-broker agreement is an agreement between two different brokers and is commonly used in the real estate industry. A broker is a business or person that connects buyers and sellers and processes transactions involving sales of goods and services. A co-broker relationship typically springs from an existing, separate agreement with a client (often entitled "buyer-broker agreement" or "seller-broker agreement") between a broker and a buyer (or seller) of products and services or a vendor that will provide goods and services to a buyer and seller. A co-broker agreement provides the rules in the event a second broker had been engaged for the deal, such as a broker representing the buyer in a real estate transaction in addition to the broker representing the seller. Co-brokers are also utilized in sales transactions between manufacturers and wholesalers and between wholesalers and retailers.
The need for a separate agreement with additional parties arises because a broker or agent may owe fiduciary duties to the party engaging his or her services to find parties to enter into a deal or transaction. A co-broker agreement sets forth the terms of the agreement and the fiduciary responsibilities of the brokers, including the allocation of fees for various functions that the brokers undertake. Depending on the type of co-broker agreement entered into, co-brokers may divide or allocate compensation for finished sales which are the results of efforts from either or both brokers . By way of example, consider the plight of a real estate broker that agreed to represent a seller. As a seller’s agent, the broker has a fiduciary duty to protect the interest of the seller. The broker discovers an interested buyer during a caravan and schedules an appointment to show the property. The buyer cannot reach a mutually satisfying agreement with the current owner, but is willing to negotiate to purchase a neighboring property belonging to the seller. The seller requests that the broker arrange a meeting where the buyer and the seller can negotiate, and the broker agrees to do so. During the negotiation, the broker is embroiled in a dispute of dual loyalty: he is the seller’s agent, while the buyer does not have an agent and has assumed that the seller’s agent will also act on his behalf. Under a co-broker agreement, the broker is acting in conformity with his fiduciary duty; while he aids the buyer in arriving at a fair and just deal, he is also serving the seller by maintaining control and managing the negotiations.
Co-broker agreements are often used in various other industries such as the insurance industry where the concept of the broker is essentially the same. Co-broker agreements in that industry are entered into between insurance agents and brokers who refer customers to their peers who can provide a different type of insurance (e.g., life insurance).
Co-Broker Agreement Key Components
As with all legal contracts, a co-broker agreement should cover the essential elements that both parties expect under the terms of the agreement. These elements may differ somewhat based upon the nature of the transaction, the parties involved and the location of the property. In general, however, a co-broker agreement template should at least address the following items:
Parties: As with all legal contracts, a co-broker agreement should specifically identify the parties to the contract. Too many agreements are vague when it comes to indicating the parties. Where the parties’ legal names in a co-broker agreement differ from their business names, make sure that the legal names are given first, followed by the business names. If you are a designated broker, make sure to distinguish your legal name from your designated broker name and indicate your license number. This is mainly for clarity and is always a good idea.
Commission: The agreement must explicitly indicate the amount of the co-broker’s commission and how it will be paid. For example, some real estate transactions involve the sharing of a commission with the buyer’s broker and/or subagent. The amount of the commission, and how that commission will be divided among the various parties as appropriate, should be indicated. In addition, if a referral fee is to be paid, it should be indicated in the agreement.
Duties: Each party’s duties and obligations must be clearly spelled out so that there is no confusion over who is to perform certain tasks to perform under the contract. A co-broker agreement template will help both parties ensure that there is no misunderstanding about what must be done on both sides.
Confidentiality: Both parties should agree to keep each other’s confidential information confidential at all times. Again, a co-broker agreement template can help both parties understand what will be considered confidential, and how long that confidentiality will last.
Dispute resolution: If one of the parties to the agreement fails to meet his or her obligation under the contract, the other should have a clear and simple way to resolve the dispute. The agreement should spell out what the process will be, and what the parties can expect.
A co-broker agreement template can help you make sure that you’ve covered everything. While you can add whatever you want to the contract that you feel is necessary, a template can be an excellent starting point.
Co-Broker Agreement Advantages
For many real estate agents or brokers, the process of crafting a co-broker agreement from the ground up can be a time-consuming and frustrating task. This is especially true when both parties already have a standard agreement template that they utilize for all co-broker agreements. For those looking to save valuable time, a co-broker agreement template for real estate transactions can be invaluable.
Template co-broker agreements allow for agents and brokers to do the following: These tasks are typically time-consuming, and drawing up a customized co-broker agreement for each transaction can be a big barrier to doing business. Instead of creating a customized agreement just so one transaction can be completed, agents and brokers can simply use existing pre-written templates to complete agreements much quicker.
For all legal documents, a primary concern is ensuring that the transaction complies with any relevant laws or industry standards. While a co-broker agreement template cannot guarantee that an agreement between two parties will be enforceable in court, it can at least ensure that the contract isn’t thrown out by a court on a technicality. Most co-broker agreement templates are designed to ensure that they comply with general legal standards governing contracts and real estate transactions. For example, most templates clearly spell out contingencies that are common in real estate, such as the need for both parties’ brokers to sign the deal first. By ensuring that an agreement is written in a way that reflects these common contingencies, the parties can avoid mistakes that could derail a deal.
A co-broker agreement template also serves the practical purpose of ensuring that all parties understand the terms of the contract. For example, a co-broker agreement template typically includes a pre-written section that provides definitions of terms that are specific to the contract. Having this information in writing can also help prevent misunderstandings down the line.
Customizing a Co-Broker Agreement Template
To customize a generic co-broker agreement template, it should be downloaded from a reputable source, such as a lawyer or national real estate broker. Depending on the type of transaction being undertaken, it may be necessary to consult with an attorney about legal requirements, such as how long it takes for contractually-mandated contingencies to be lifted, even when the terms of the deal have been agreed upon. In addition, the custom co-broker agreement should contain unique terms that are relevant to the parties involved in the transaction.
Some items that should be included in the unique terms of a custom co-broker agreement template include:
Although the above items are certainly not exhaustive, they may be a useful starting point for customization. Negotiating points between the cooperating brokers, however, may be the most critical portions of a co-broker agreement, so the only limit should be the cooperation of the parties. Arguments can include who will pay closing costs and how much they will be, who will buy title and what its coverage will be, what commissions will be paid and to whom, who will cover the costs and possible future commissions of any contingencies and whose name will be used to place future listings on the property, for example.
Co-Broker Agreement Text Pitfalls
The most frequent mistake that occurs during the drafting stage of a co-broker agreement is failing to clearly define the role of each broker. Without a defined role, there may be disputes when payment of the referral fee is due. Clearly defining the referral fee should also be included in the agreement so there are no issues in the future. Some brokers will stipulate that they will not pay the referral fee until they actually receive it, while others will always pay their referral fee within a specific period of due diligence or closing, regardless of whether the other broker has yet to receive their referral fee. Depending on how comfortable each merit , you can ensure that the agreement contains specifics regarding the referral fee. Another frequent source of conflict is the signing of the co-broker agreement. It is all too common that one party signs the co-broker agreement and then does not send a copy to the other party for their signature, thereby leaving the matters open-ended. However, the co-broker agreement template we have provided clearly states that only the signing of both parties will create a binding contract. Lastly, some brokers erroneously state that they will pay the referral fee out of their own share of the commission for the transaction. Unless the contract expressly states otherwise, this may be a legally enforceable contract to the extent of the referral fee entitled to the broker. Therefore, before deciding what your share of the referral fee is, make sure that the contract directly states what your intentions are so there are no misunderstandings later on.
Co-Broker Agreement Legal Issues
In general, put in the context of legal agreements between brokers, a co-broker agreement serves to require compensation to one broker for referring the other a party requiring services of a broker. You may have seen quite a few of these when buying or selling a business.
Co-broker agreements are legal in most states, and can be enforced at court if one broker refuses to pay the other their agreed upon commission. However, there are a couple things to consider. First, it is relevant to know the relevant jurisdiction as state laws (or even city laws) vary, and this could impact how the agreement is enforced, on what basis, and ultimately the outcome. Second, the parties involved should conduct an informed due diligence search, or consult with an attorney about issues relating to business broker licensing requirements.
In most states and jurisdictions, such agreements are upheld primarily due to the broad-term nature that they can be applied to many services not limited to real estate and/or commercial real estate. For example, most co-broker agreements outline a commission payment schedule for work performed after negotiated closing time, with payments staggered over certain periods of time (e.g., one-third upon closing, and upon quarterly intervals over a 12-month period after closing).
If, for example, you are seeking to purchase a business, the broker you are working with may have had another broker source a business that they would then receive a cut of the "founder’s fee" along the way.
The co-broker agreement can be used in many instances to charge compensation for a variety of services in association with the process of helping the buyer purchase the business. It can also charge the seller of the business, or post-closing commissions if the broker or both brokers are providing ongoing services.
It’s important that the agreed upon terms of performance are clearly set out in the co-broker agreement, and that all parties have the opportunity to review the agreement before execution. The co-broker agreement should also state the existence of any other agreements or negotiations amongst the parties, as well as the timeline for when the co-broker is required to perform their obligations in order to receive compensation. With these provisions added to the co-broker agreement, there are less chances for misunderstandings which ultimately holds true for any contract agreement between individuals or entities.
Lastly, it is advisable for the agreements to be in writing, as opposed to verbal. Having signed agreements provides a more tangible evidence of what the parties agreed to, and leaves less room for confusion about who gets what, and when.
Where to Locate a Trusted Co-Broker Agreement Template
The first and foremost place to look for a co-broker agreement template is the National Association of Realtors (NAR) website. One can access a large directory of contract forms on the site for a one-time fee or pay an annual fee for access to unlimited numbers of forms. In addition to templates, the program offered by the NAR provides each member with up-to-date legal commentary and updates on the agreement. These templates can also be easily modified to meet the needs of each individual broker.
All state bar associations maintain online databases of state-specific forms that are free to access by all state residents. Many of these forms are co-broker agreements and cover the entire United States. Fill-in-the-blank forms are available for download. Some websites allow brokers to create their own co-broker agreements by answering questions about the proposed transaction and the program automatically generates the formal document. The only cost associated with such a program is the nominal fee of $10 or less charged for sending the transaction agreement via email to the other party.
The American Bar Association also offers a variety of downloadable contract forms , including those used in real estate transactions. All members of the ABA qualify for a free 14-day trial for content searches on their main website. This gives users an opportunity to evaluate the various products offered before registering. One such product is a library of 16 real estate contract forms, which are intended for professional use. Users can even have the forms sent directly to a recipient via email through the main website.
Directly on your broker’s Multiple Listing Service website, there are generally sample contracts that can be downloaded. However, your broker may not be able to provide you with a form in your state, so it is best to consult with a local association of realtors or search through the agreements offered by the state bars.