Why Realtors Should Exercise Caution When It Comes to Brokerages and Their Commissions

As a realtor, you stay busy. There are a lot of different situations that you have to navigate. You’re generating leads, marketing, holding open houses and tours, meeting with your clients and working on their behalf, staying on top of developments in your city and area, and you’re learning every day about real estate regulations and trends. The last thing you want to worry about is your commission. You want your commissions to come to you on time, with no problems and no hang-ups.

When working with brokerages, realtors would do well to ensure that they hire a lawyer to review and ensure they are protected in that their agreements with their brokerages that their commissions will be held in a commission trust account, and are trust funds until paid out to them.

Why is this important?

If, for example, the brokerage encounters financial difficulties and files for bankruptcy, a proper agreement and a commission trust account will stand a better chance of protecting any pending commissions from being claimed by another party--say, such as other creditors or secured creditors.

Making sure that your agreement with a brokerage contains specific provisions about your pending commissions being held in a commission trust account and language regarding how you will receive any pending commissions in the event of the failure of the brokerage will help protect you and your income. If the brokerage that you’re working with does not have a commission trust account or does not include this kind of language in its agreement with you, you should encourage the brokerage to take different action and establish a commission trust account. More important it hire a competent lawyer to work with you.

Over the summer the Toronto-based real estate brokerage, TheRedPin, closed and is now in the hands of a receiver, MNP Ltd. TheRedPin was launched to be a real estate disruptor--it was a virtual office website, which meant that it aspired to offer the full services that you would expect from a traditional brokerage, but with additional online tools, artificial intelligence resources, and data to help inform consumers in their search for a home.

One of the most notable facets of TheRedPin’s closing is that there were substantial pending commissions receivable owed to agents when it closed its doors and, unfortunately for the realtors who were waiting for those commissions, a secured creditor (investor) claimed first right to those commissions. It turned out that the Brokerage did not have a commission trust account, and there was no specific language in the agreements between the realtors and TheRedPin regarding the disbursement of the commissions and their trust status in the event of bankruptcy. An Ontario Court Judge ruled that these pending commissions are not trust funds. The matter is still under appeal, but Realtors can take a lesson from what has so far happened with TheRedPin.

Make sure that when you’re working with a brokerage, your commissions are held in a commission trust account and that you have a good lawyer review your agreement with the brokerage to deal with and specify what will happen to your commissions in the event of the brokerage’s failure.


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