5.1 Broker Responsibilities, Brokerage Agreements, and Compensation

Broker responsibilities and supervision

The broker is the licensee who holds the brokerage relationship with the client. A salesperson (or associate broker) works under the broker's license and cannot independently hold a listing, collect compensation directly from the public, or maintain a trust account. All client funds, listings, and supervisory duties flow up to the broker.

The broker is legally responsible for supervising every affiliated licensee's licensed activity. Independent-contractor tax status does not remove this duty: a salesperson may be an IRS independent contractor for income-tax purposes yet still be fully supervised for license-law purposes. A broker who fails to supervise can be disciplined for an affiliate's misconduct.

Trust funds and commingling

Client money — earnest money, deposits, rents — must be held in a separate trust (escrow) account, not in the broker's operating or personal account. Mixing client and business funds is commingling and is a serious violation. Using trust money for the broker's own purposes is conversion, which is worse and can be criminal.

Brokerage agreements

A brokerage agreement creates the agency relationship in writing. The major types are:

Every listing should be in writing, state the property and price, define the broker's authority, state compensation, and contain a definite expiration date. A listing with no end date (an automatic-extension or indefinite term) is improper in most jurisdictions. A net listing — where the broker keeps everything above a seller's set net — invites self-dealing and is prohibited or strongly discouraged.

A listing is a personal-service contract between the seller and the broker, not the salesperson; if the salesperson leaves the firm, the listing stays with the broker.

Trap: who terminates a listing

A listing terminates by expiration, performance (sale), mutual agreement, or operation of law (death of a party, destruction of the property). A seller can usually revoke the broker's authority but may still owe damages for breach if the revocation is wrongful.

When commission is earned

The classic rule: a broker earns the commission by producing a ready, willing, and able buyer who agrees to purchase on the exact terms of the listing (or terms the seller accepts). Under this rule the commission is technically earned at the point of a meeting of the minds — not at closing. Many modern listing forms shift the trigger to actual closing, so always read the contract, but the exam default is the ready-willing-and-able standard.

If a seller backs out after accepting a full-price offer, the broker may still be owed the full commission even though no closing occurred, because the broker performed.

Procuring cause

When two brokers claim the same commission, the dispute is decided by procuring cause — which broker started the uninterrupted chain of events that led to the sale. Simply being the last agent to open the door does not establish procuring cause; an unbroken effort that produced the ready buyer does.

Worked commission math

A home sells for $420,000 at a total commission rate of 6%.

• Total commission: 420,000 x 0.06 = $25,200
• The listing and selling sides split 50/50: 25,200 / 2 = $12,600 each side
• The selling salesperson keeps 70% of their side: 12,600 x 0.70 = $8,820
• The selling broker keeps the remaining 30%: 12,600 x 0.30 = $3,780

Another common format: a seller wants to net $200,000 after a 5% commission. Do not multiply $200,000 by 5%. Solve: price x (1 - 0.05) = 200,000, so price = 200,000 / 0.95 = $210,526.32. The commission is 210,526.32 - 200,000 = $10,526.32.

Commissions are always negotiable between client and broker; no law, board, or MLS may set or fix a rate. Antitrust law (Section 5.3) treats rate-fixing among competing brokers as a felony.

Broker fiduciary duties

Whatever the agreement type, the broker owes the client a set of fiduciary duties often abbreviated OLD CAR: Obedience to lawful instructions, Loyalty (the client's interest above the broker's), Disclosure of material facts, Confidentiality, Accounting for funds, and Reasonable care and diligence. Confidentiality survives termination of the listing; loyalty and obedience do not extend to illegal acts.

To customers (the other party who is not the client), the broker still owes honesty and fair dealing and must disclose known material defects, but not the duties of loyalty or confidentiality. Confusing these two duty sets is a frequent exam trap.

Compensation does not define agency

Who pays the commission does not determine who the client is. A buyer's broker may be paid from the seller's proceeds yet still represent the buyer. The agency relationship is created by the written agreement and conduct, not by the source of the check. Likewise, a referral fee paid between cooperating brokers is normal, but a salesperson may only be paid by their own broker — never directly by the seller, buyer, or another firm.