Appellate Court Rules on Legality of Commission Rebates
April 5, 2019 |
Last month the 10th District Court of Appeals in Franklin County issued a ruling denying a commission rebate because the recipient, a principal in the transaction, was not a licensed real estate broker. The decision is a departure from the current practice of agents occasionally rebating commissions to principals in a transaction, provided the rebate is disclosed as part of the transaction. The Court relied upon a provision in the statute that requires any person suing for a commission, to first prove they are licensed as a real estate broker.
The case stemmed from an agent’s failure to rebate a commission to a buyer after a transaction closed. The Plaintiff, who was the buyer, alleged that he had an oral agreement with his agent to rebate the entire 3% commission to the buyer after closing. The Plaintiff indicated that all parties in the transaction were informed of the oral agreement, including the Plaintiff’s lender. The parties allegedly discussed the best way to rebate the commission, including reducing the purchase price or reducing the loan amount. Ultimately it was decided the commission would be paid to the agent and then rebated to the buyer after closing.
After closing, the agent failed to rebate the commission and the Plaintiff sued. At trial, the trial court noted the Plaintiff signed a HUD-1 statement which identified the agent as the individual entitled to the commission. Although the trial court received evidence that the agent attempted to rebate the commission, the trial court ultimately concluded the oral rebate agreement was, “the worst idea imaginable, and the court finds that this is a clear violation of well-settled law.”
The Appellate Court considered R.C. 4735.21 as dispositive of Plaintiff’s claims, which provides in part:
No right of action shall accrue to any person, partnership, association, or corporation for the collection of compensation for the performance of the acts mentioned in section 4735.01 of the Revised Code, without alleging and proving that such person, partnership, association, or corporation was licensed as a real estate broker or foreign real estate dealer.
Even if the Court found there existed an oral agreement between the Plaintiff and his agent to rebate the commission, the Court found the Plaintiff could not sue for the rebate. The Court concluded to maintain a cause of action for the commission, the Plaintiff was required to first prove he was a licensed real estate broker. Because Plaintiff was not a licensed broker, he could not maintain a cause of action for the commission.
The ruling does not go so far as to render commission rebates illegal, rather it highlights the inability of a client to sue for breach of any agreement to rebate a commission. License law, specifically 4735.18(A)(13), permits the payment of a disclosed rebate. However, 4735.21 limits the right to licensed real estate brokers to sue for a commission rebate.
If your practice includes the occasional rebating of a commission, there are some best practices to avoid liability. First, make sure all agreements are in writing. Second, the Closing Disclosure should reference the commission rebate. Last, make sure your broker signs off on the rebate agreement. Keep in mind however that even these steps will not cure the inability of non-licensees to sue for a breach of a rebate agreement.