The legal definition of “procuring cause” is, as legal definitions are wont to be, a little on the arcane side. An abstract definition commonly used by courts defines the standard as: “The proximate cause; the cause originating a series of events, which, without break in their continuity, result in the accomplishment of the prime object.” Courts apply this abstract procuring cause definition to real estate commissions by saying that procuring cause is “a cause originating a series of events which without break in their continuity result in the accomplishment of prime objective of the employment of the broker who is procuring a purchaser ready, willing and able to buy real estate on the owner’s terms.”
Legal definitions have not, of course, prevented disputes over procuring cause. The “cause originating a series of events which without break results in the accomplishment of prime objective” part of the definition is far from self-explanatory. There are endless court cases in which the actions of the broker are tested to see whether they were sufficient to “cause” the buyer to purchase. Invariably these fights involve some variation of the one broker shows and another broker writes theme. These kinds of procuring cause fights are about whom among competing brokers actually “caused” the buyer to enter the contract. This subject is covered in depth in the Applying Procuring Cause to Real Estate section of this topic.
The other part of the procuring cause definition most tested in court cases is the buyer’s actual readiness, willingness and ability to purchase. In such cases what is being fought over is not just who caused the buyer to enter the contract, but when that buyer is actually “procured.” When, exactly, is the buyer “procured?” Is it when they enter a binding contract? It is when the seller actually gets the money? Is it somewhere in-between?
We are fortunate here in Oregon to have had both the “caused” and “procured” parts of “procuring cause” worked out by the Oregon Supreme Court. Here, in the Court’s own words, is the legal standard in Oregon:
“When a broker is engaged by an owner of property to find a purchaser for it, the broker earns his commission when (a) he produces a purchaser ready, willing and able to buy on the terms fixed by the owner, (b) the purchaser enters into a binding contract with the owner to do so, and (c) the purchaser completes the transaction by closing the title in accordance with the provisions of the contract. If the contract is not consummated because of lack of financial ability of the buyer to perform or because of any other default of his, * * * there is no right to commission against the seller. On the other hand, if the failure of completion of the contract results from the wrongful act or interference of the seller, the broker’s claim is valid and must be paid. In short, in the absence of default by the seller, the broker’s right to commission against the seller comes into existence only when his buyer performs in accordance with the contract of sale.”
The Court’s statement makes clear that in Oregon a commission is not due until the buyer takes title in accordance with the contract. The single exception is a sale that is not completed because of the “wrongful act or interference of the seller.”
Requiring a closed transaction before a brokerage fee can be earned makes the buyer’s performance of the contract part of procuring cause. That goes a long way toward explaining why the work of real estate agents does not end with the acceptance of the sale agreement. Although often cast in terms of “agency duty,” the continuing efforts of the agents to close the sale after the parties have a contract is really just an artifact of being paid commissions under a procuring cause standard.
If continuing efforts on the behalf of the client is an artifact of procuring cause, one would expect changes in what agents do or are expected to do for clients when commissions give way to fee for service arrangements. The beginnings of such changes can be seen in the industry today. MLS only and Limited Service brokerage models are fee based. It is hardly surprising that these fee based relationships significantly change the continuing efforts of the agents. It really doesn’t have anything to do with agency duties or providing minimum services. Click here for detailed discussion of working with MLS Only and Limited Service listings.
Being clear on what it means to “procure” a buyer in Oregon is useful in dealing with procuring cause issues. We know as a result of the clear standard that no commission is due any agent if the buyer for whatever reason does not close the transaction. Entitlement to a commission is less clear when the deal fails because of the seller’s actions instead of the buyer’s. Although a commission can be due if the buyer’s failure to close is the result of the “wrongful act or interference of the seller,” it is not clear exactly what acts a court might consider “wrongful” or what kind of seller “interference” would justify a commission on a failed deal.
Two reoccurring patterns emerge from the legal standard of procuring cause used by Oregon courts. In one pattern, competing brokers fight over who “caused” the sale. In the other pattern, the dispute involves whether the seller wrongfully prevented or interfered with the buyer’s performance. Both of these patterns are discussed in the following Applying Procuring Cause to Real Estate section of this topic.
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Procuring cause is a legal standard. It is really just the judicial gloss that has accumulated over the years around the clause in a listing agreement that says the seller will pay the listing broker a commission if the listing broker procures a buyer ready, willing and able to purchase the property. If you look at the listing agreement you use, you will see a “compensation” clause of some kind that contains a “ready and willing buyer” provision entitling the broker to the commission. Understanding “procuring cause” means understanding what the simple clause means legally.
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Commissions based on a percentage of the purchase price of the property sold have always been the most common form of compensation in the real estate industry. Although fee-for-service and even wage programs exist in the industry today, commissions continue to dominate. This topic is about how commissions are earned, shared, disputed, used and misused in real estate.
Central to any discussion of commissions has to be a discussion of “procuring cause.” Accordingly, Understanding Procuring Cause is the first subject in this topic. The subject includes sections explaining the Legal Definition of Procuring Cause as well as Applying Procuring Cause to Real Estate. If procuring cause has to be the first subject in any discussion of commission, Sharing Commissions has to be second. Finally, no discussion of commissions would be complete without some mention of Commissions and Antitrust.
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Compensation problems are resolved by contract. Although not widely understood, to be entitled to a commission it is not enough to have a real estate license, be an agent of one of the parties, or even to be the procuring cause of the sale. Commissions are due only if there is an enforceable agreement to pay a commission. Listing agreements serve that purpose on the listing side. Ordinarily, the listing broker’s unilateral offer of compensation in the MLS serves the same purpose on the selling side.
In FSBO, and some MLS Only or Limited Service situations (those where no compensation is offered and the listing broker has instructed cooperating brokers to negotiate the commission with the seller), there is no pre-existing agreement to pay a commission. The problem can only be solved by getting the seller to agree to pay a commission before proceeding with the transaction. One-party listings were developed as a way to get the seller to agree to pay a commission.
Because license law allows the seller to pay a commission to an agent representing only the buyer, there is no reason to get a “listing” just to create a commission contract. A simple compensation contract can accomplish the same thing without creating a dual agency situation. Care must be taken, however, when forming such a compensation contract to avoid any chance of an unintended agency claim.
The best way to avoid an unintended agency claim when asking a seller for a compensation contract is to include a Ano agency relationship clause right in the contract. Such a clause spells out plainly the lack of an agency relationship between the agent and the seller. It will also warn the seller that actions taken by the agent that may appear to benefit the seller are being done exclusively for the benefit of the buyer. It is also a good idea to warn the seller that anything they say to the agent will be disclosed to the buyer.
Many companies have developed their own compensation contracts. In many states, the state association publishes such forms. Here in Oregon, there is no published compensation contract. The Oregon Association of REALTORS®has, however, developed a sample compensation contract with a no agency clause. Click here for a copy of the sample contract.
It can be tempting for agents to try to solve the compensation issue in their buyer’s offer. This is an exceedingly bad idea. Agents are not a party to the sale agreement. This causes agents to state their desired commission in terms of a contingency to their client’s offer to purchase. That, in turn, creates a conflict of interest because the seller may reject the buyer’s offer based on the commission issue and not the merits of the offer itself. Unless this potential outcome is fully disclosed to the buyer, and they agree to take the risk, making your own commission a contingency of an offer can violate agency duties and real estate license law. It is for this reason that negotiating a compensation agreement, with a clause to deal with unintended agency, is the best way to deal with unrepresented sellers.
Even if the listing broker is willing to pay a coop commission, the problem of unintended agency still exists if the agent must deal directly with a party they do not represent. For instance, in a Limited Service Listing where the listing broker offers a coop commission there is still a chance the seller will come to regard the buyer’s agent as their own agent. The only difference is there is no compensation contract with the seller in which to insert a single agency relationship clause.
If there is no compensation agreement between agent and seller, the best way to get single agency relationship language in front of the seller is through an addendum to the buyer’s offer. In this case there is no risk of harming the buyer’s interest because nothing is being asked of the seller. The seller is simply being advised about the actual agency relationships that exist in the transaction. That is, that the agent will represent only one party in the transaction. Think of a single party addendum as a beefed-up final agency acknowledgment.
As with compensation agreements, many companies have developed their own “no agency relationship” addendums. Such addendums are not yet in wide use in Oregon or other states. The Oregon Association of REALTORS® has, however, developed a sample single party addendum clause. Click here for a sample of the addendum.
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There are two potential problems to be aware of when dealing with a FSBO and MLS Only or Limited Service Listings. The first potential problem is handling the commission. The second, and potentially more difficult, problem is handling the increased risk of an unintended agency relationship created by dealing directly with an unrepresented party.
An MLS Only or Limited Service Listing, like any MLS listing, may or may not include a unilateral offer of compensation from the listing broker. If an offer of compensation from the listing broker is made in the MLS, the cooperating buyer broker can treat the commission issue pretty much as they would any other MLS listing. If, however, no offer of compensation is made by the listing broker, and cooperating brokers are instructed to negotiate a commission with the seller, the buyer’s agent must treat the situation as they would a FSBO.
The commission issue when dealing with a FSBO, or listings that do not include compensation, has been a source of considerable confusion. Historically, agents have handled the commission issue when dealing with an unrepresented seller by having the seller sign a Aone-party listing. This approach creates a dual agency situation in which the agent represents both the buyer they brought to the sale and the seller. As in any dual agency situation, the risk associated with the transaction is increased.
Most states, and Oregon is no exception, allow a real estate licensee to act as the buyer’s agent only even when the commission is paid by the seller. (See e.g., ORS 696.810(1)) It is, therefore, possible for a buyer’s agent, when dealing with a FSBO or in a situation where a listing broker is not paying compensation and authorizes negotiations with the seller, to have a commission agreement with the seller that does not include representation. In this way, a single agency situation can be maintained and the risks associated with the transaction reduced.
The legal ability to represent only the buyer while receiving a commission from the seller does not reduce the risk of an unintended agency claim. Such claims, commonly made by buyers against subagents in the days when all licensees represented the seller, are Aimplied agency claims. Under the common law, an agency relationship can be implied from the conduct of the parties. In an unintended agency situation, a principal in the transaction claims an agent’s actions lead the principal to reasonably believe the agent was acting as their agent. If the belief was indeed reasonable, the court may find an agency relationship actually existed.
Licensees must be aware of the potential for an unintended agency relationship when dealing directly with unrepresented parties. When dealing with unrepresented sellers, the buyer’s agent often performs services, such as providing forms, suggesting solutions to problems, finding information and so on, that could be construed as evidence of an agency relationship. Therefore it is critical that the seller (and the agent for that matter) understand that any actions undertaken by the agent are done for the sole benefit of the buyer even if the seller might also benefit as a result. How to avoid unintended agency claims and collect commissions from someone you don’t represent is the next topic in this subject.
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Modern real estate practice can bring agents working for buyers into direct contact with sellers who are not represented or are not represented for the purpose of negotiating and closing a transaction. Typically, such cases arise when an agent is working with a buyer who is interested in a property that is being offered for sale by the owner (FSBO). To represent their buyer client, the agent must deal directly with the unrepresented owner.
A similar situation can arise in cases where the property of interest to the buyer is listed in the MLS but the listing broker and the seller have agreed to limit the services the listing broker will provide. Some listings may involve what are called “MLS Only” listings where the only service provided by the listing broker is placing the property in the MLS. In other situations, called “Limited Service Listings,” the listing broker may provide marketing, forms and other preliminary services to the seller.
When the services being provided to the seller by the listing broker do not include arranging for showing, negotiating the contract or assisting the seller in contract performance, the buyer’s agent can be in basically the same position as when dealing with a FSBO. That is, in order to represent their buyer client, the buyer’s agent must deal directly with the unrepresented owner. MLS Only and Limited Service Listings, therefore, raise many of the same problems as for-sale-by-owner transactions.
Recently, there has been much discussion in the industry about the impact of MLS Only and Limited Service Listings. Many buyer agents feel they are being asked to do the “work” of the listing broker. That is not true any more than it was true that the listing agent’s subagents in other companies were doing the buyer’s agent’s work in the old single agency days of real estate. A buyer’s agent dealing with an unrepresented seller on their buyer’s behalf is no different than a listing agent dealing with an unrepresented buyer on the seller’s behalf.
Problems that arise in FSBO and Limited Service Listings situations have nothing to do with who is doing the most work. The issues raised have nothing to do with what duties a listing broker “should” provide. Attempts in other states to take that road by having the state demand that brokers provide certain minimum services have met with lawsuits, confusion and uncertainty. How to deal with unrepresented sellers is a business issue, not a regulation issue. How to handle the business issues involved is the next topic in this subject.
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“Disclosed limited agency” is just another name for dual agency. It is defined in Oregon law as: “a real property transaction in which the representation of the buyer and the seller or two buyers occurs within the same real estate business.” Clearly, dual agency in Oregon continues to be company-based. Disclosed limited agency agreements and administrative rules, however, have significantly changed the old “in-company” sales model still practiced in most states.
The “in-company” sales model in use in Oregon until 2002, and still in use in most states, handles the potential conflicts of dual agency by making all the company’s licensees agents of all the company’s clients. In that way, it is thought, all agents could have access to listing files and still represent buyers because their ability to use information gleaned from listing files to the advantage of their buyer clients would be limited by their also being agents of the seller. All that was required to make this system work was a set of rules about what information a dual agent could and couldn’t disclose and some way for the client to “agree” to an “in-company” sale.
Because the in-company sale model depended on creating dual agency relationships for all agents as soon as any agent took a listing or started working with a buyer, it was necessary to get client approval before actually entering into an agency relationship. This was accomplished by making an “in-company” disclosure part of the initial agency disclosure. However, because the initial agency disclosure was to be given before there was an actual agency relationship, the wording of the in-company disclosure was somewhat awkward. The form asked the prospective client to give “limited authorization” for an agent they “may” hire to act as a dual agent if a situation involving dual agency were to “arise” in the future.
It wasn’t long before lawyers working for disappointed buyers were able to exploit the awkwardness of the in-company form. Arguing the form did not contain clear consent to a dual agency relationship after full disclosure to the client of the consequences of giving such consent; lawyers were able to successfully attack the legal sufficiency of in-company forms. This lead to a general rethinking of dual agency in real estate and the rise of disclosed limited agency relationships.
Disclosed limited agency is dual agency. The law of agency allows dual agency only with the written consent of the principal given after receiving full disclosure by the agent. What courts want to see is that the principal understood the consequences of what they were agreeing to before they gave their consent. So, what are the consequences of dual agency to the principal?
If you look at agency duties, you will quickly see that dual agency creates a very serious loyalty and confidentiality problem. Other duties, like diligence, can be more difficult with clients on both sides of a transaction, but there is simply no way to be loyal to parties with conflicting interests and there is no way to hide information from yourself. The consequences of dual agency are attenuated loyalty and lack of confidentiality. With this in mind, it is much easier to understand disclosed limited agency.
Disclosed limited agency, because it involves dual agency, can be done only by written agreement. In that agreement, the agent must disclose the consequences of dual agency to the principal and obtain the principal’s agreement to the relationship. In Oregon, this is accomplished by having both clients sign a statutory Disclosed Limited Agency Agreement form. Although identical in structure, there are separate statutory forms for sellers and buyers.
Like any agreement, the first thing a Disclosed Limited Agency Agreement does is identify the parties to the agreement. When it comes to disclosed limited agency, those parties are the agent, the principal and the agent’s principal broker. You can think of disclosed limited agency as involving a triangle. Real estate agents conduct their activities on behalf of their principal broker. The listing or selling agent acts as the principal broker’s subagent to provide services to the company’s client. It is this triangular relationship that makes disclosed limited agency possible.
When two different licensees working for the same principal broker get involved in a transaction with one representing the seller and one the buyer, the principal broker is a dual agent. That is the case because the services provided each client is being provided on the principal broker’s behalf. The individual listing and selling agents, however, have personally only established an agency relationship with one of the parties to the transaction. Disclosed limited agency allows those individual agents who have worked only with one party to continue to represent just that party. It is the principal broker alone who is the dual agent.
The full disclosure part of disclosed limited agency is accomplished in Oregon by incorporating the statutory Initial Agency Disclosure into the Disclosed Limited Agency Agreement. The Initial Agency Disclosure explains representation of more than one party to a transaction, including the role of the principal broker and the loyalty and confidentiality limitation involved in dual agency. Once the disclosure is made, the parties give their permission for the individual agents to continue to represent only the party with whom they already have a relationship while the principal broker represents both parties as a dual agent.
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Like the old agency disclosure law, the new law requires clients to acknowledge actual agency relationships at the time an offer is written. This final agency acknowledgement form is typically incorporated into the sale agreement form. In cases where the final agency acknowledgement form is not incorporated into the sale form, it can be attached to the contract for sale as an addendum. Whatever the means of delivery, the content of the final agency acknowledgement is established by law.
The final agency acknowledgement form used in Oregon assumes that not later than the time of offer, real estate licensees will have formed one of the three types of agency relationships authorized in Oregon licensing statutes. That is, the form assumes the agents will represent either the seller or the buyer or both and asks the agent to mark the check box appropriate to the agency relationship they have established. This checkbox manner of agency acknowledgement can be confusing to clients and agents alike.
The final agency acknowledgment form adopts industry jargon by asking for the “selling licensee” the “selling firm” and the “listing licensee” and the “listing firm.” The “selling licensee” must then declare whether they represent the buyer exclusively, the seller exclusively or both buyer and seller as a “disclosed limited agent.” The “listing licensee” is given only the choice of representing the seller exclusively or both the buyer and seller as a disclosed limited agent.
That selling licensees have more representation options than listing licensees makes little sense unless you know something of the history of agency relationships in real estate. When agency disclosure was introduced in 1993, it was common practice in the industry for all agents to work for the seller. Agents in offices other than the listing agent’s were considered “subagents” of the listing firm. It was, therefore, possible for both the “selling firm” and the “listing firm” to represent the seller exclusively. The practice of sub-agency has now all but disappeared but not its vestiges.
The final agency acknowledgement form is most easily used when there are two different agents from two different firms, with one agent representing the seller as the “listing licensee” and the other representing the buyer as the “selling licensee.” In such a transaction, it will be clear the buyer has their own agent, the seller theirs and that each agent represents their party exclusively. Dual agency situations in which one of more agents from the same firm represents both buyer and seller are less straight forward thanks to the advent of “disclosed limited agency.”
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Problems with dual agency and consumer confusion resulted in a complete overhaul of agency disclosure laws in 2002. The new agency disclosure law distinguishes between disclosure of agency relationships and their formation. Under the new law, real estate licensees must give consumers who may be seeking representation from a real estate licensee (any real estate licensee, not just the particular agent involved) a pamphlet that explains agency relationships and the duties of an agent. This new disclosure requirement is so simple, it has caused some confusion.
After years of forcing consumers to sign something as soon as they talk to a real estate licensee, it has proved hard for agents to simply hand out something. There is, however, now no requirement whatever that agents document giving consumers the Initial Agency Disclosure Pamphlet. Nevertheless, companies have developed a variety of policies regarding consumer acknowledgment of delivery of the pamphlet. Agents should, of course, follow their company policies.
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In Oregon, agency disclosure was first adopted in 1993. The law demanded that real estate agents personally provide the buyer and seller in a real estate transaction with a statutory initial agency disclosure form. Agents were required to get the buyer and seller to acknowledge receipt of the disclosure. The statutory form, which was to be given at “first substantive contact” with the buyer or seller set out the duties of “buyers’ agents” and “seller’s agents” as well as agents “acting for both the buyer and the seller.” A “final agency acknowledgement” stating the agency relationships at the time of offer was also required under the law.
Under the 1993 law, buyers and sellers were asked to sign a statement saying they had received the disclosure and understood agency relationships in real estate, including the then common practice that all agents represent the seller. The form, however, went on to ask the person signing it to declare their relationship with the agent presenting the form. The form also contained what was called a “limited authorization regarding in-company sales.” It was these latter two provisions that proved to be the downfall of the agency disclosure form.
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