Breaking Down Exclusive Broker Agreements: Essential Guides and Advantages

What is an Exclusive Broker Agreement?

An exclusive brokerage agreement is a contract between a licensee of one company (the Listing Broker) and a client (the Seller), giving the Listing Broker the exclusive right to sell the client’s property. This is in exchange for a commission to the Listing Broker for a sale that occurs , if and when it occurs within the term of the agreement.
An exclusive brokerage agreement is most commonly used by a property owner when selling the property. However, commercial real estate brokers also sometimes enter into exclusive brokerage agreements with property tenants or tenants’ representatives to become the "exclusive broker" for that particular company’s leasing and leasing renewal needs.

How Exclusive Broker Agreements Function

In essence, an exclusive brokerage agreement creates an agent-principal relationship between the broker and the seller. The seller authorizes the broker to act as the seller’s agent and to receive compensation from a party who purchases the property during the period of the exclusive brokerage agreement.
The seller agrees that the seller will pay the agreed-upon commission to the broker if a ready, willing and able buyer is at any time found during the term of the agreement. The seller may, however, structure the agreement to provide a commission only if the sale closes. The seller also may choose to limit the conditions for obtaining the commission to those situations in which the broker is the "procuring cause" of the transaction.
The broker agrees to give the seller a notice (either written or electronic) of the termination of the exclusive brokerage agreement at or before its expiration.

Advantages and Disadvantages of Exclusive Broker Agreements

Exclusive brokerage agreements offer several advantages over traditional non-exclusive or open arrangements. For property owners, the primary benefit is the assurance that their property is being marketed by a broker who is accountable and dedicated to selling their property. This exclusivity can result in more efficient and focused marketing efforts by the broker. When multiple brokers are simultaneously marketing a property, as is often the case with non-exclusive arrangements, the marketing efforts may be fragmented and not effectively targeted.
In addition to accountability, exclusive brokerage agreements provide clear terms regarding the responsibilities of the parties. The terms and scope of the agreement should be explicitly stated in writing, which provides both parties with a solid understanding of exactly what is expected of them. These agreements also outline the remuneration the broker will receive for the sale of the property. Having a clear understanding of the commission structure helps both the owner and the broker manage their expectations of timing and remuneration.
The primary drawback of an exclusive arrangement is the limited access it provides to a wider network of potential buyers. Often, owners may choose to enter into an exclusive brokerage agreement with a single broker rather than multiple brokers. This can be a disadvantage if the owner has no prior relationship with a broker that possesses the necessary resources to successfully market the property within the limited time frame. Additionally, in order to ensure that their property receives maximum exposure, some owners may place ads in multiple publications. In a non-exclusive arrangement, one broker may place ads in different digital and print publications to ensure as many potential buyers see the ad. However, if the owner is working with a single broker, they may have to pay additional compensation for ads in multiple publication sources.
Exclusivity in a brokerage agreement can be a win-win situation for both the owner of the property and the broker. The owner gets to work closely with a dedicated broker to sell their property, and the broker receives commission to use their skills and background to sell the property. The period of exclusivity between the owner and the broker could be as short as ninety days or extend for over a year—this is a decision that should be made based on what will work best for the owner of the property.

Essential Clauses in an Exclusive Broker Agreement

An exclusive brokerage agreement should clearly define the commission that will compensate the broker for his or her services and also specify how the commission will be calculated. The agreement should state what services the broker will perform and when. It is in this section that a broker can suggest marketing ideas that the owner may not have considered. For example, the broker might suggest pre-listing preparations or staging the home to showcase its best features.
The agreement should then set forth the commission rate and any other payment terms, such as whether the broker’s commission will be a dollar amount or a percentage of the selling price. These should include the base commission, any split with another broker if another company brings a buyer, what happens if the property is sold without a broker involved, and whether there is a different rate if the property is leased.
In addition to the commission, an exclusive brokerage agreement should set forth how and when the commissions will be paid. Common arrangements include upon signing of the agreement, upon arrival of a tenant, upon closing of any sale or pending sale, and/or publication of the listing. Clarifying commission payment terms will help avoid confusion later on if the agreement is terminated or the property is sold without the owner owing royalties or commissions beyond an amount already paid.
The duration of the agreement must be specified, usually as a number of months. An exclusive brokerage agreement can be renewed by agreement of both parties. An owner can terminate the exclusive brokerage agreement upon reasonable notice as stated in the agreement.
If the agreement is terminated, it should be specified whether the broker will receive amounts due as of the termination date. It is a good idea for the document to contain a provision that keeps the broker bound after the termination with respect to claims arising before termination.

Legal Aspects of Exclusive Broker Agreements

When the Dodd-Frank Act was passed, it gave our clients who were doing broker dealer transactions some options, one of which was an exclusive and non-exclusive relationship with a broker dealer. As has been our experience throughout our many years performing legal work, many of our clients opted for the exclusive relationship as the broker dealer would have exclusivity over certain aspects and would generally be favored for other transactions due to this exclusivity. What we saw was that they race for exclusivity was on, and sometimes a client would sign the exclusive relationship agreement without fully understanding the terms or what they were signing onto.
The fine print is there for a reason, and we’ve seen that in exclusive brokerage agreements. Some of the important considerations and clauses for clients that we would like to advise them of when entering into an exclusive broker dealer relationship is as follows:
Compensation We’ve seen some companies would go ahead and enter into an agreement with a broker dealer that says that they would be the exclusive broker. Very rarely, however, did those agreements state what the exclusive compensation would be. The compensation clauses typically would say to the broker dealer that they are exclusive but they are not saying how the compensation was going to be paid out when the deal closes, or if it closes. If you are getting paid on a percentage, then it should be written as a percent and not "to be set". Phrases like this are too ambiguous for a court to rule on, as well as for a client to base their compensation fund on.
Term of Employment It should be noted that brokers also get laid off, transferred or change firms without notice. Your clause should allow you to terminate the agreement for any reason, or no reason, with the notice stated. As we’ve seen, some agreements have required a notice of the impending termination of anywhere from 60-90 days, which may be a substantial amount of time for someone who would like to leave. Know how long you would like the notice to be, then know how long you would like to give your employer.
Exclusivity Restrictions In the back of most contracts we’ve seen, there are a number of requirements that an exclusive brokerage should comply with. Some of the most unrealistic of these would be having to hire all off-duty cops or hired hands to stroll precincts or area around a property that is for sale. In this way, a clause of this nature is unreasonable, as you cannot control how many cops are walking into the precinct from day to day.
Non-Solicitation Most of the clients that we’ve seen proud of their having signed an agreement with an exclusive agreement have rushed to call their agents into a meeting to inform them of the new relationship. The agent may even sign their own exclusive agreement into their own ‘exclusive’ arrangement with the company. However, when the agent leaves and solicits customers from the old company, they may find themselves in litigation with a non-competition provision which states that they will not solicit employees or clients of the old company for a period of two years. If this is not even permitted, consider how long you will be with this new exclusive relationship and amend from there.
Bottom line, know what you are signing and know and amend the fine print.

How to Draft and Finalize an Exclusive Broker Agreement

If you decide to proceed with engaging a broker, the following steps will guide you through the process of creating and effectively finalizing an exclusive brokerage agreement.

1. Do your research. Before you hire a broker, you should do some preliminary research to ensure that any candidate uses an exclusive listing broker agreement:

(a) Meets the criteria of your state law; and
(b) Includes the elements of an enforceable contract.
As stated above, one important criteria in determining the enforceability of an exclusive brokerage agreement is the exclusion of the element of consideration from the contract. In other words, either the seller/seller’s agent must pay the broker some form of compensation, or the broker must provide the seller with a benefit of equal value to the commission. Without compensation or consideration, this element of an enforceable contract cannot be satisfied.

Negotiate the terms and conditions. It is important for you and a candidate broker to together meet to discuss your unique objectives , time constraints and inspection requirements. Are all the necessary details covered to effectuate the sale and meet your objectives?
Engage the broker by executing the exclusive brokerage agreement. You can take two approaches when executing your exclusive brokerage agreement:
(1) Execute a written agreement; or
(2) If you are uncertain about the broker scenario, you can legally sign 1-2 month contracts to test the waters with prospective brokers on the market. At the end of that period, you can finalize an exclusive agreement with the broker that proves to be the best fit. Or, you can take the time to test your property with your own marketing efforts without entering into an exclusive agreement at all.
Implement your marketing plan. Your contract should include a list of methods that encapsulate your marketing plan that the broker will undertake. In addition, the contract should also list the seller’s responsibilities. For instance, if you are required to continuously receive feedback on the showings, or if you are required to have your schedule and time availability on hand as well as be responsive to the broker’s suggestions on pricing, etc.

Common Errors in Exclusive Broker Agreements

Common mistakes in exclusive brokerage agreements include:

Failure to meet the requirements of the Statute of Frauds. The Statute of Frauds requires the agreement to be in writing and signed by the agent or the agent’s authorized representative. 50-10-3. This requirement has been interpreted broadly and includes "all written communications which are intended to become part of the broker’s employment agreement." Keltner v. Clark, 180 Ga. App. 822, 823 (1989). It is therefore essential that the agreement be comprised of one single document signed by the agent or an authorized representative of the agent. Although the individual agent will be responsible for a violation, a violation can have serious ramifications for the company as well. For example, if the Statute of Frauds is violated, a principal may terminate the agreement without notice and the agent will have no recourse.
Failure to include an automatic termination provision upon sale, lease or rental of property. 50-10-28(e) provides that an exclusive brokerage agreement "shall not require payment by the principal of any fee, commission, or valuable consideration for any sale, lease, or rental upon the happening of the event unless such event occurs or if the event does not occur within a period of one year, except where the party seeking recovery can prove that after such one-year period from the date of execution of the agreement he has engaged in due diligence in accordance with the contractual terms of the agreement."
Failure to include all disclosures required by statute including the Misdemeanor Notice, Residential Property Disclosure Act, Lead-Based Paint Disclosure (when applicable), the Oil and Hazardous Substance Release Remedial Action Requirements, and others that may be appropriate for your locality.
Failing to review the exclusive brokerage agreement on a regular basis to ensure it continues to comply with the statute, especially in light of the fact that the statute is revised annually.

Examples and Case Studies in Exclusive Broker Agreements

To illustrate a few key points about exclusive brokerage agreements, I thought it would be interesting to throw out a few examples of where an exclusive brokerage agreement would be preferred, where a non-exclusive brokerage model would be preferred, and where exclusivity might actually be an issue for a carrier.
First, let’s consider the example of a Texas or Florida-based trucking business (the "Trucking Company") which hauls refrigerated produce from Mexico into the United States under contract with a major supermarket chain (as a refresher – this is also known in the industry as a "retail consolidation program."). The Trucking Company is very profitable, and has been able to book more and more contracts with major chains. However, the Trucking Company outsources approximately 75% of its loads to other large truckers in Mexico (the "Subcontractor-Truckers"). In order to move more loads on a timely basis, the Trucking Company wants to offer its Subcontractor-Truckers an exclusive brokerage agreement, whereby the Subcontractor-Truckers are the only truckers authorized to pull the Trailer for a particular load and bring it to the Wal-Mart distribution center in Dallas. Under French law, such exclusivity is prohibited, and the exclusive broker would be considered to be potentially liable for damages. Republic law states that while the exclusivity is presumptively illegal, a broker, in certain situations, may be able to prove that the exclusivity is necessary for the efficient functioning of the contractual relationship.
Second, let’s assume a New York-based brokerage working with a client who uses airfreight to move high-value breath test systems to home-health care providers (the "Client"). The Client previously used another broker’s where the first broker’s compensation was a flat fee of $100 per-treated box, and that is all that the Client paid. However, the Client’s Company was frustrated with the high rates, and after a year switched to the New York-based brokerage to negotiate better rates. We are informed by the New York-based brokerage that, in general, airfreight is generally an expensive mode of freight transportation, and customers usually request the lowest cost possible. In this case, assuming the brokerage is offering an exclusive brokerage agreement, a proposal to the Client could be: under the exclusive brokerage agreement, the Client will pay $75 for the first treated box, and $50 for each additional box thereafter (for each shipment from an original location to a destination), and the New York-based brokerage will arrange for pick-up at the Client’s load point, bringing the shipment to the Client’s stated delivery point. However, the Client will be responsible for any additional freight charges above the estimates, and will be invoiced for the additional freight charges.
The problem with the exclusive brokerage agreement is that, once the Client accepts the new brokerage agreement, if shipping rates go up then the Client will be paying $100 for the first treated box and receiving less service (because he would have the ability to shop the rates around including other airfreight carriers). Thus, the Client would be placed at a market disadvantage. A negotiated agreement with the parties would provide a built-in economic test, which would allow the Client to become eligible for the lower rate in the event of a general Jump in freight rates.
Third, the group considers a Wisconsin-based carrier and a shipper with a high volume of one particular load (the "Source Carrier"). Because the Source Carrier ships mainly one commodity, the Source Carrier may have difficulties managing its assets for this particular commodity, and customers may perceive its business as unfolding into many commodities. Another alternative for source carrier is to assign the load to a capacity participating broker who would be compensated based on the agreed schedule and within the contracted service area. In this instance, the carrier can use the source broker for capacity and payment terms and can use a non-exclusive broker for pricing, with this broker focused on the larger picture of what the carrier is carrying.

Conclusion and Guidelines

By now, you have a clear understanding of exclusive brokerage agreements and the benefits they provide to both buyers and sellers. Engaging an exclusive broker can help a seller achieve higher property prices, better screening out unsuitable buyers. On the other hand, buyers can secure distinct advantages and opportunities through exclusive representation.
For sellers, the takeaway is that engaging an exclusive broker can lead to tangible sale enhancements. With fewer properties up for grabs, an exclusive relationship can increase your negotiating power and ultimately fetch a higher price for the business.
On the other hand, buyers need to take advantage of exclusivity and engage with the agent actively. Be clear about your requirements up front, and provide detailed feedback during the tour process. Your input can help the agent better understand your specific needs , evolve the selection and find the deal that is right for you.
The additional takeaways include:
Be Professionally Represented
Engage an agent with experience that specializes in your specific market. They’ll be able to assess needs quickly, scrutinize business opportunities and negotiate the best deal for you.
Read Your Exclusivity Agreement
Your engagement may be settled verbally, but always follow-up with a formal agreement and make sure you review it carefully before signing to ensure that all the points are agreeable to you.
Be Proactive
Keep the lines of communication open with your agent. Update them regularly, but in particular let them know of any changes to your situation that might impact your search.
Ask Questions
Don’t be afraid to ask questions. If you don’t understand something, then stop the process and ask. You want to be confident in what you are buying.
Retention of Confidentiality
In the course of engaging with your agent, apply a high degree of confidentiality to your discussions.