Credit to Jeff Keitelman and Tracey Stockton, DLA Piper LLP (US)
Some real estate brokers offer to share a portion of their brokerage commissions on certain deals as a way to reduce transaction costs for their best corporate clients. Is this fairly common practice of commission sharing lawfully permitted in your state?
State laws are all over the map on this issue. Our recent survey shows that 10 states actually prohibit any type of commission sharing, and, of the 40 that technically allow it, most state statutes and accompanying regulations and guidelines (state laws) are narrowly drafted. And in some cases, like when the U.S. Government is the tenant, even federal law or custom may prohibit the practice. Accordingly, this practice of commission sharing requires careful consideration of all facts and circumstances on a case-by-case basis.
Some states permit commission sharing by brokers but limit that permission to sharing only with other professionals (like lawyers) who are licensed in that state. Other states allow commission sharing whether or not the non-broker party is licensed. Some states prohibit commission sharing with unlicensed parties, but only to the extent the non-licensee performs a service for which a license would otherwise have been required. Some states permit commission sharing with a party that is licensed in any one of the 50 states, but prohibit commission sharing with those licensees if the ultimate beneficiary of the share is a non-licensee. And still other states limit that ultimate-beneficiary analysis only to the state in which the relevant property is located.
Most states that allow some form of commission sharing require written disclosure of the fee-sharing arrangement among all interested parties. In most instances, a finding of improper commission sharing or lack of required notification can result in fines, penalties or license revocation of the broker involved. Accordingly, even in those states that do not require disclosure, an agreement documenting the commission-sharing arrangement may be the prudent course of action in any event. Moreover, a carefully crafted indemnification provision might be advisable to protect the parties in the event the commission share is reviewed by regulatory authorities at some later date. In states where commission sharing is technically prohibited, it still may be desired by the parties that the broker share some of the financial burden of a transaction. The parties then often structure some way for the broker to be liable for the payment of tenant improvement costs, costs related to the landlord’s improvement work, design costs, moving costs, etc. In many states, however, the definition of commission sharing is broad enough to include “expenditures made for a principal” or wording of similar import, thereby obviating the ability of a broker to lawfully pay or share in such costs. Again, prudence would dictate a thorough review of the regulatory environment before proceeding in this manner.
For larger corporate users with omnibus service agreements with major brokerage firms, it may be easier to mitigate the burden caused by state law prohibitions against commission sharing. For example, many such agreements provide for a market-rate commission structure on individual sale or lease transactions but also include many administrative and project management services to be provided by the broker at no additional cost to the user. In addition to saving money, these large corporate users find that shifting the burden of real estate administration, for example, adds additional value, including with respect to the reporting requirements mandated by Sarbanes-Oxley. Given the facts of a particular case and the applicable state law, it may be possible to identify similar avenues for cost shifting to enable the provision of an indirect benefit within legal boundaries.
Unfortunately, at present there is no comprehensive regulatory scheme in place that can be used as a guideline for evaluating commission-sharing arrangements across the 50 states. If some type of commission sharing or similar arrangement is desired, prudent practice would dictate that the parties review the specific facts of the applicable case in the context of applicable law.