5.1 Broker Responsibilities, Brokerage Agreements, and Compensation
Key Takeaways
- Only the broker, not an affiliated salesperson, holds the actual brokerage relationship with a client; salespeople work in the broker's name.
- Tennessee prohibits a broker or affiliate broker from accepting or entering a net-price listing under Rule 1260-02-.07.
- Commission is fully negotiable, is earned when the broker produces a ready, willing, and able buyer, and is paid by the named principal.
- A buyer can owe commission under an exclusive buyer-agency agreement even if the buyer closes a deal found without the agent.
- Procuring cause determines which broker earns commission in disputes over an uninterrupted chain of events leading to the sale.
Who the broker is and what the broker owes
In every brokerage, the broker is the party who actually contracts with the client. Affiliated salespersons (and associate brokers) act in the broker's name and report to the broker. When a seller signs a listing, the seller is the broker's client; the individual licensee who took the listing is an agent of the broker, not an independent principal. This is why a salesperson cannot keep a listing when leaving a firm: the listing belongs to the broker.
The broker owes statutory duties to clients commonly summarized as OLD CAR: Obedience, Loyalty, Disclosure, Confidentiality, Accounting, and Reasonable care. To customers (non-clients such as the other side's principal), the broker still owes honesty, fair dealing, and disclosure of known material defects, but not loyalty or confidentiality.
Supervision and trust funds
The broker is responsible for supervising every affiliated licensee and for safeguarding client money in a trust (escrow) account separate from operating funds. Mixing client funds with business funds is commingling; spending client funds is conversion. Both are serious license-law violations even if no client is ultimately harmed.
Brokerage agreements compared
A brokerage agreement is an employment contract between principal and broker. The key variable is exclusivity, which controls who can earn the commission.
| Agreement | Who may sell/find | Broker paid if owner/buyer acts alone? | Notes |
|---|---|---|---|
| Exclusive right to sell | Only the listing broker markets; any sale earns commission | Yes, even if owner finds the buyer | Strongest for broker; most common |
| Exclusive agency | Listing broker is sole agent | No, owner may sell themselves commission-free | One agent, but owner reserves a carve-out |
| Open listing | Owner may list with many brokers | No, only the broker who procures the buyer | Owner can sell directly with no fee |
| Net listing | Owner sets a net; broker keeps the excess | N/A | Discouraged or illegal; conflict of interest |
| Exclusive buyer agency | One broker represents the buyer | Yes, buyer may owe fee even if buyer finds the home | Mirror image on the buy side |
Trap: Students confuse exclusive right to sell with exclusive agency. The difference is whether the owner can sell to a buyer they found themselves without paying. Under exclusive right to sell, the owner still pays; under exclusive agency, the owner does not.
Most listings must include a definite expiration date and may not auto-renew indefinitely; an open-ended listing is a common license-law violation.
Compensation, earning the fee, and procuring cause
Commission is always negotiable. Any printed or suggested standard rate, or any agreement among competing brokers to charge the same rate, is illegal price fixing (covered in 5.3). A broker earns commission by producing a buyer who is ready, willing, and able to buy on the seller's terms. If a seller then refuses to close for no valid reason, the commission can still be earned even though no sale occurred.
Worked example. A home sells for $385,000 at a 6% total commission. The listing broker and selling broker split 50/50, and each broker pays the affiliated salesperson 60% of the broker's share.
- Total commission: 385,000 x 0.06 = $23,100
- Each brokerage's half: 23,100 / 2 = $11,550
- Each salesperson's 60%: 11,550 x 0.60 = $6,930
- Each broker keeps: 11,550 - 6,930 = $4,620
Procuring cause decides commission disputes between brokers in an open listing or after a buyer switches agents. The broker who set in motion an uninterrupted chain of events that led to the ready, willing, and able buyer is the procuring cause and earns the fee. Merely showing a property first does not guarantee procuring-cause status if the connection is later broken.
Independent Contractors, Procuring Cause, and Commission Splits
Two operational issues round out brokerage law.
Affiliation status: most salespersons work as independent contractors under a written agreement, paid by commission (not salary), responsible for their own taxes, yet still supervised by the broker for license-law compliance. The IRS "statutory nonemployee" rules for real estate agents require a written contract and commission-based pay. Supervision for compliance does not convert the agent into an employee for tax purposes.
Procuring cause resolves who earns the fee when more than one agent touches a deal. The procuring cause is the agent who started an uninterrupted chain of events leading to a ready, willing, and able buyer. Merely opening a door first does not guarantee it if the buyer later, independently, returns through another agent after a genuine break.
Worked split example: A property sells for $450,000 at 6%. The listing side and selling side split the total 60/40 (listing 60%). The selling brokerage pays its agent 70%.
- Total commission = $450,000 x 0.06 = $27,000.
- Selling side (40%) = $27,000 x 0.40 = $10,800.
- Selling agent (70% of $10,800) = $7,560; selling broker keeps $3,240.
- Listing side (60%) = $27,000 x 0.60 = $16,200, split again per that firm's agreement.
Always read which percentage applies to the total, which to the side, and which to the agent's share — mislayering the percentages is the classic error.
Independent Contractors, Procuring Cause, and Commission Splits
Two operational issues round out brokerage law.
Affiliation status: most salespersons work as independent contractors under a written agreement, paid by commission (not salary), responsible for their own taxes, yet still supervised by the broker for license-law compliance. The IRS "statutory nonemployee" rules for real estate agents require a written contract and commission-based pay. Supervision for compliance does not convert the agent into an employee for tax purposes.
Procuring cause resolves who earns the fee when more than one agent touches a deal. The procuring cause is the agent who started an uninterrupted chain of events leading to a ready, willing, and able buyer. Merely opening a door first does not guarantee it if the buyer later, independently, returns through another agent after a genuine break.
Worked split example: A property sells for $450,000 at 6%. The listing side and selling side split the total 60/40 (listing 60%). The selling brokerage pays its agent 70%.
- Total commission = $450,000 x 0.06 = $27,000.
- Selling side (40%) = $27,000 x 0.40 = $10,800.
- Selling agent (70% of $10,800) = $7,560; selling broker keeps $3,240.
- Listing side (60%) = $27,000 x 0.60 = $16,200, split again per that firm's agreement.
Always read which percentage applies to the total, which to the side, and which to the agent's share — mislayering the percentages is the classic error.
Under an exclusive-right-to-sell listing, the seller personally finds a buyer and completes the sale during the listing term. What does the seller owe the listing broker?
A $420,000 sale carries a 5% commission split 50/50 between two brokerages, and the listing salesperson receives 70% of the listing brokerage's share. How much does that salesperson earn?