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SPLITTING COMMISSIONS WITH OUT-OF-STATE BROKERS

April 2, 1998

Is it permissible under The Texas Real Estate License Act (the "Act") to pay a portion of a commission to a broker licensed in another state? Assume the following:

 

You are a Texas real estate broker licensed under the Act.

 

A broker licensed in another state has an exclusive representation agreement with a prospective tenant located in the other state, and the prospect is seeking property to lease in the State of Texas.

 

You enter into a cooperating brokerage agreement with the out-of-state broker whereby you agree to share a portion of the commission you expect to receive from a Texas landlord with the out-of-state broker.

 

The out-of-state broker is licensed in that broker’s state, but is not licensed in the State of Texas.

 

The out-of-state broker does not conduct any of the negotiations in Texas.

 

You are a subagent of the tenant, your duties and loyalties are solely to the tenant, you are not acting in a dual agency or intermediary capacity, and another broker licensed in the State of Texas represents the landlord.

 

You disclose your agency relationship to all parties required under applicable law, as and when required.

 

Under the current Act and existing case law in Texas, the arrangement described above would not violate the prohibition against splitting fees set forth in Section 15(a)(6)(F) of the Act, and is permitted under Section 14(a) of the Act.

 

Section 15(a) of the Act provides that the Texas Real Estate Commission ("TREC") may suspend or revoke a license issued under the provisions of the Act at any time when it has been determined that any one of several provisions of the Act have been violated. One of the itemized provisions is Section 15(a)(6)(F). That subsection provides that a license may be suspended or revoked for "paying a commission or fees to or dividing a commission or fees with anyone not licensed as a real estate broker or salesman in this state or in any other state for compensation for services as a real estate agent."

 

Because of the phrase "or in any other state," Section 15(a)(6)(F) does not prohibit he payment of commissions to a real estate broker licensed in another state.

 

Section 535.147(a) of Title 22 of the Texas Administrative Code, The Rules and Regulations of the Texas Real Estate Commission (the "Rules"), defines "any other state" to mean "the states, territories, and possessions of the Untied States and any foreign country or governmental subdivision thereof."

 

Section 14(a) of the Act provides that it is unlawful for a broker to compensate a person for performing an act as a real estate broker if the person is not a licensed broker or licensed salesman in this state. "However, a licensed broker may pay a commission to a licensed broker of another state if the foreign broker does not conduct in this state any of the negotiations for which the fee, compensation, or commission is paid." Section 14(a) of the Act. Section 535.1(e) of the Rules provides "The Real Estate License Act permits Texas-licensed brokers to cooperate with and share earned commission with persons licensed as brokers by other states, but all negotiations within Texas must be handled by Texas licensees."

 

Unless a foreign broker holds a valid Texas broker’s license, the foreign broker must have an agreement with a broker licensed in Texas in order to enforce collection of a real estate commission in Texas. See, Tower Ten, Ltd. v. Real, Inc., 619 S.W.2d 186 (Tex.App.–Houston [1st Dist.] 1981, writ ref’d n.r.e.)

 

TREC published an article entitled "Enforcement Questions and Answers" dated March 17, 1997 (the article may be found on TREC’s web site at www.trec.state.tx.us). On page 22 of the article there are questions and answers relating to out-of-state brokers. In one of those answers, TREC states "The foreign broker must…associate with a Texas broker who handles all the negotiations and other acts that require a license in Texas…." In another answer, TREC states "…according to Section 14(a) of the Real Estate License Act, a Texas broker may share a commission with a foreign licensee so long as the foreign licensee does not engage in activities requiring a license in Texas." The Questions and Answers Article may be helpful to discern TREC’s enforcement policy, but it is not law and does not have the same significance as the Act. Therefore, to the extent there is any difference in wording, the Act must be given precedence over the Questions and Answers Article.

 

There may still be some question about the interpretation of Section 14(a) of the Act. It may not be clear what actions constitute conducting negotiations in this state. Section 535.15(a) of the Rules provides "Locating and bringing together a buyer and seller through correspondence or telephone constitutes negotiation if done from within the borders of Texas." Section 535.1(d) of the Rules provides "Negotiating from another state with someone within the State of Texas or offering property by mail from another state to residents of Texas does not require Texas real estate licensure." Apparently, if a foreign broker were to correspond and communicate by telephone from outside the borders of Texas, he would not be conducting negotiations in this state.

 

For example, a foreign broker, while sitting in the foreign broker’s office in the state in which the foreign broker is licensed, may participate in negotiations in a telephone conference call with a Texas broker and other persons located in Texas. The Texas broker may pay a portion of the commission to the foreign broker, so long as the foreign broker has associated with the Texas broker and the Texas broker handles the negotiations which take place in Texas. This example is based on an interpretation of the language of Section 14(a) that the foreign broker is not conducting negotiations in this state because he is not physically present in this state. It might also be argued that the foreign broker is not conducting the negotiations but is merely participating in negotiations which the Texas broker is conducting.

 

Robert D. McTaggart is Board Certified as a specialist in the area of Commercial Real Estate Law by the Texas Board of Legal Specialization. He works with buyers, sellers, owners, tenants, investors and lenders to help complete real estate and business transactions. He also serves as legal counsel to the North Texas Commercial Association of Realtors®.

 

The foregoing article is intended to give an overview of the topic discussed but is not intended as legal advice. If you have a specific legal question or need legal advice, contact an attorney of your choice.