PAYING A REBATE TO A PRINCIPAL
by Robert D. McTaggart, Attorney At Law
January 28, 1997
Assume you are a broker representing a tenant in connection with the negotiation of a lease, and the tenant requires you to pay a portion of your fee to the tenant. Under the Texas Real Estate License Act, are you allowed to pay a rebate to the tenant? The answer is a qualified "yes."
Under Section 15(a)(6)(F), the Texas Real Estate Commission ("TREC") may suspend or revoke your license for "paying a commission or a fee to or dividing a commission or fee with anyone not licensed as a real estate broker or salesman in this or any other state for compensation for services as a real estate agent."
However, TREC's enforcement policy allows payment of a rebate to a principal, as set forth in "Paying a Rebate or Compensation to a Real Estate Principal," an article published by TREC, currently available as document number 99000005 by calling TREC's Fax Service at (512) 419-1623. The TREC Article states that "payment of a rebate to an unlicensed principal does not constitute a violation of Section 15(a)(6)(F) because the payment is not made to a person for services as a real estate agent." The TREC Article makes a distinction between a commission and a rebate. The payment may not be made to the tenant for the performance of real estate services by the tenant (such as for making a referral).
There are other concerns to consider. The TREC Article states "It is highly recommended that written disclosure be made to both principals." In the disclosure document, you should be careful not to characterize the arrangement as one of paying a commission to the tenant. Rather, you should characterize it as, in effect, a reduction or refund on the rent paid under the lease.
Also, of course, you must be careful not to violate any of the Act's express provisions, including these from Section 15(a)(6) of the Act:
"(D) failing to make clear, to all parties to a transaction, which party [the agent] is acting for, or receiving compensation from more than one party except with the full knowledge and consent of all parties;
(H) accepting, receiving, or charging an undisclosed commission, rebate, or direct profit on expenditures made for a principal;
(V) conduct which constitutes dishonest dealing, bad faith, or untrustworthiness."
Section 535.156 of TREC's Rules and Regulations (the "Rules") expands on the duty of a licensee to avoid dishonest conduct. Section 535.156(b) provides, in part, "A licensee must deal honestly and fairly with all parties..." Section 535.156(d) provides "A licensee has a duty to convey accurate information to members of the public with whom he deals." Failure to disclose to a landlord could constitute a violation of these provisions of the Act and Rules.
TREC has taken disciplinary action against brokers who have paid all or part of their commission to a buyer in a situation where the seller of property has provided financing. In those situations, TREC has asserted that the broker was dishonest in violation of Section 15(a)(6)(V) of the Act and Section 535.156 of the Rules set forth above. A seller which provides financing could arguably be "injuriously affected" by the payment of a portion of a commission to a purchaser. A seller or other lender typically wants the purchaser to invest some of the purchaser's own money in the property, so the purchaser is less likely to default on the loan.
A lease is similar to a seller-financed sale in some respects. Rent payments are made over the term of the lease, and a landlord may pay for tenant finish-out expenses. So, a landlord could argue that the landlord is hurt by the broker's "dishonest" payment of a portion of the commission to the tenant, on the theory that the tenant will be less likely to perform under the lease because the tenant did not have to pay the tenant's own money (or at least not as much) to the landlord when the tenant made the initial rent and security deposit payments at the inception of the lease.
The landlord's argument would depend on the characterization of the failure to disclose the payment as being a "dishonest" act, or the conveyance of inaccurate information. If there is no basis upon which the broker could be accused of a misrepresentation, then the broker could argue that the broker was not dishonest because the broker never represented that the broker would not pay a rebate to the tenant.
The arrangement for payment to a tenant must not be used as a device to circumvent any requirements imposed on the transaction by any party. For example, if a lender or landlord requires that the tenant must pay for a certain amount of improvements to the property with the tenant's own funds, then the fee being paid to the tenant should not be included in the funds used for this purpose without full disclosure and consent by the lender or landlord.
You should also advise the tenant to consult the tenant's certified public accountant or tax attorney as to tax questions, such as whether the rebate must be reported to the Internal Revenue Service as income.
This article is based TREC's enforcement policy as expressed in the TREC Article, and certain assumptions, and the result may be different based on different assumptions. You should consult with legal counsel to resolve any questions or concerns based on any similar situation in which you may be involved.
Robert D. McTaggart is legal counsel for the North Texas Commercial Association of REALTORS® and is Board Certified as a specialist in the area of Commercial Real Estate Law by the Texas Board of Legal Specialization. If you have any questions about this topic or other legal questions you may contact Mr. McTaggart at (214) 265-1914.
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