The Division of Real Estate has become aware of an increase in the number of instances concerning real estate broker commission disputes between a seller and broker arising at the closing table wherein the seller decides for a number of reasons that they do not want to pay their listing brokers’ commission in full.
While this last minute decision by the seller can be very disconcerting, the situation also places the closer and title company in a problematic position. The title company’s role in the transaction is to take instructions from the parties to the transaction (buyers, sellers, and lenders), rather than the referring broker, in order to facilitate the real estate closing.
While oftentimes this is not an issue, the title industry has increasingly been receiving specific instructions from sellers (in both commercial and residential transactions) not to pay the agreed upon commission to the broker.
Below is an article from the Land Title Association of Colorado (LTAC) to provide some guidance regarding brokers’ options in terms of resolving seller-originated commission disputes.
- LTAC Article: Navigating a Commission Dispute as a Listing Broker
As a listing broker, your compensation comes in the form of a commission paid to your brokerage firm, typically through the closing of the real estate transaction pursuant to the Seller Listing Contract with your seller. In a perfect world, your seller signs a Seller Listing Contract agreeing to pay a certain percentage of the sale price as a commission. A buyer is found, and the commission is disbursed by the title company at closing. However, recently some sellers are challenging the commission and do not want it paid at closing. In some cases, the seller may provide the title company with specific instructions to remove the commission payment from the settlement statement. Unfortunately, the title companies may have an obligation to comply with those instructions over the listing broker’s objections. This article is intended to help brokers understand their options when there is a seller commission dispute that arises at the closing table.
It is important to remember that while the Seller Listing Contract is signed by the seller and the broker and is generally enforceable by each party, it is not signed by the title company that you use for your closing. Because the title company is not a party to the Seller Listing Contract, the title company is not bound by its terms. The agreement that binds the title company is the Closing Instructions. The Closing Instructions is the agreement that authorizes the title company to perform its closing duties, including the disbursement of funds consistent with the terms of the contract. Section 7 of the Commission-approved Closing Instructions indicate that the “Closing Company must disburse all funds, including real estate commissions, except those funds as may be separately disclosed in writing to Buyer and Seller by Closing Company or Buyer’s lender on or before Closing…”
The reason that the listing brokerage firm’s commission is disbursed by the title company through the closing is because it is instructed to do so by the seller through the Closing Instructions. Generally, the seller knows they have a contractual obligation to pay a commission to their listing brokerage firm, and instructs the title company to make the disbursement. But, if the seller instructs the title company to disburse the seller’s proceeds differently, perhaps by eliminating or reducing the commission, the title company may have to comply with the seller’s request as the proceeds belong to the seller and the commission is disbursed only at the seller’s instruction.
So, when a seller refuses to instruct the title company to disburse the listing brokerage firm’s commission at closing, what options does the brokerage firm have?
First, in many cases, the title company will agree to hold the amount of disputed commission in escrow until the parties work out the commission dispute. In many cases, escrowing the amount of commission (or at least the amount in dispute) with the title company is the option that may give you the highest chance of being paid in the future. If the seller is in agreement, the entire commission amount could be held with the title company until the listing brokerage firm and seller are able to resolve the commission dispute. If only a portion of the commission is in dispute, the seller may instruct the title company to disburse the amount that is agreed upon, and to hold the rest.
The terms of the escrow agreement will determine how long the proceeds will be held, and what triggering events will cause the funds to be disbursed. Often, a title company will only hold for a period of time, and then will disburse the funds to the seller if they don’t receive mutual instructions from the brokerage firm and the seller to disburse the funds differently before the prescribed time period has lapsed. An alternative is that the title company will hold the funds indefinitely, until it receives mutual instructions from the seller and brokerage firm (or a court order), and then it will disburse in accordance with those instructions or court order. Most escrow agreements will allow the title company to interplead the funds into court if a resolution between the parties is not reached. Please remember that in order for the escrow to be an option, the seller has to agree to it.
Enforce the terms of the Listing Contract
If the brokerage firm and seller are not able to come to terms regarding the commission, the Seller Listing Contract requires the parties to submit the dispute to non-binding mediation. If mediation is not successful, then litigation may be an option.
It is frustrating to have a contract with a party that is not honoring it. As you navigate this issue, please keep in mind that it is the seller’s obligation under the Seller Listing Contract to comply with its terms. The title company gets its instructions about how to handle the proceeds from the seller only - if the seller doesn’t comply with the terms of their Seller Listing Contract, the title company won’t be able to step in and force them to do so.