Menu

Buyers And Sellers Incentives

The Department of State intermittently issues rulings on the validity of promotions and incentives offered by licensees to buyers and sellers. While each proposal is subject to a fact specific inquiry, this outline surveys that analysis by DOS in reviewing their permissibility. 

On March 10, 1997, the Department of State's legal counsel issued an Advisory Opinion regarding a consumer-incentive program offered by PHH Real Estate Services Corporation ("PHH"). At issue was (1) whether the payment of certain expenses by PHH constituted payments for services for which a real estate license is required and (2) whether such referral payments constituted impermissible "splitting of commissions" within the meaning of real property Law §442.

The PHH Opinion continues a long line of interpretations from the Department of State regarding the fee splitting and kickback prohibitions in Section §442 as they relate to a variety of promotional programs designed by real estate licensees attempting to increase services and sales. Each of the DOS opinions provide an analysis of the application of the law to a specific set of facts posted by a licensee concluding with an opinion as to whether or not the proposed conduct is legally permissible. By seeking such an opinion a licensee can obtain specific advice upon which the licensee may rely in conducting, if permissible, its promotion and acquire general advice which is useful for all licensees as they fashion new, creative ways of increasing service and sales. This article will review the history of Section §442, prior opinions of the Department's counsel and the most recent PHH opinion.

Section §442 entitled "Splitting Commissions", was first enacted in 1922 and originally provided that no real estate broker shall pay any part of a fee, commission or other compensation received by the broker to any person for any service, help or aid rendered by such person to the broker in buying, selling, exchanging, leasing, renting or negotiating a loan upon any real estate unless such person is a duly licensed real estate broker or real estate salesperson associated with the broker. The intent of Section of §442 is to protect against unlicensed real estate activity. To that end, it prohibits a real estate broker from paying any part of its compensation to an unlicensed person where such payment is to compensate the unlicensed person for providing services for which a real estate license is required. Section §440 of the Real Property Law requires licensure when any person, for another and for a fee, commission or other valuable consideration, lists for sale, sells, at auction or otherwise, exchange, buys or rents, or offers or attempts to negotiate a sale, at auction or otherwise, exchange, purchase or rental of an estate or interest in real estate, or collects or offers or attempts to collect rent for the use of real estate, or negotiates, or offers or attempts to negotiate a loan secured or to be secured by a mortgage on real property other than a loan to be secured on one-to four-family residential property. Thus, where such services are being provided to a broker by an unlicensed individual, the broker cannot pay for the services and such activity will be curtailed. Such payments are prohibited fee splitting.

In 1941, Section §442 was amended to add the "kickback" prohibition which, generally, provides that no real estate broker shall pay any part of any compensation received by the broker to any person who is or is to be a party to the transaction in which such compensation shall be or become due to the broker unless such party is a duly licensed real estate broker or real estate salesman regularly associated with such broker. This amendment was a legislative reaction to the Court of Appeals holding in J.L. Holding Company v Reis (240 N.Y. 424) interpreting the fee splitting provisions of Section §442 as not prohibiting a real estate broker from paying a portion of its fee to a buyer or seller in a transaction as such buyer or seller was not required to be licensed to provide service, help or aid in relation to the transaction to which they were a party. The addition of the kickback provision prohibits a buyer or seller from demanding a portion of the real estate broker's commission for providing services which would otherwise require the buyer or seller to be licensed. As now constituted, Section §442 restricts the activities of unlicensed persons in regulated real estate transactions by prohibiting a broker from (1) paying any part of its commission to another for help rendered by such person to the broker in the buying, selling, exchanging, leasing, renting or negotiation of a loan on real estate, including condominium resales, unless such person is a duly licensed real estate broker or salesman regularly associated with the broker and (2) prohibiting the broker from paying any part of its commission to any party to the transaction unless such party is duly licensed. As such, the purpose of prohibiting unlicensed activity is achieved and parties to the transaction are not in a position to leverage commission payments at closing. While the licensee retains the right to consensually renegotiate a commission payment, the licensee is not obligated to do so (Opinion 92-42-A [Staro]).

The Department of State has issued a number of opinions over the past 10 years applying the prohibitions in Section §442 to specific fact patterns of different promotions proposed by real estate licensees. In Opinion Letter 93-9, the Department was asked whether or not it would be lawful for a real estate broker to provide a United States savings bond to any purchaser or a house in a transaction in which the broker acted. The request being somewhat ambiguous, the Department opined on a number of scenarios which would be both permissible and impermissible. First, the Department noted that Section §442 is not violated where the broker gives the purchaser something of value from third-party retailers if the broker is not paying for the item (see also Opinion Letter 90-19, broker providing discount coupons from local businesses). A fee split or kickback cannot occur where the broker is not paying any portion of its commission to or for the benefit of the party. The opinion continues to state that the broker may pay, on behalf of the broker's client who is paying the broker's commission, for items associated with the sale of the house as these payments are construed as being equivalent to a reduction in the commission agreed to between the principal and its agent (see Opinions 87-8 and 89-11, broker providing client with home security systems; 88-10, broker providing client with moving services; 91-51, broker providing client with vacation rental use; 93-21, broker providing client with airline tickets; and 92-32, broker providing client with a vacation trip).

When the item of value being provided by the broker is given to the broker's client as a part of the negotiation of the agency agreement, there is no violation of Section §442 as the parties are merely negotiating a commission arrangement. Commissions are freely negotiable between the parties and where something of value is given by the broker to its client or paid by the broker for the benefit of the client. As such, the broker is not paying any portion of its commission as the broker and the client are merely establishing the initial brokerage compensation agreement. This is true where the agreement is between the listing broker and the seller or between the buyer's agent and the buyer. The opinion goes on to provide that in the situation of buyer agency, the real estate broker representing the buyer may provide something of value to the buyer in negotiating the compensation to be paid to the buyer's broker even where the actual monies to be paid to the buyer's broker are paid to the broker by the seller who agrees with the buyer in the purchase and sale contract to pay the buyer's agent. Finally, Opinion 93-9 concludes that the seller's agent may not provide the savings bond directly to the buyer. Such a transaction would violate Section §442 as the real estate broker would then be paying a portion of its commission to a party to the transaction (non-client) who is presumably unlicensed. However, the opinion indicates that a resolution would be for the seller to provide the savings bond directly to the buyer with the seller entering into a commission agreement with their agent providing for an equivalent reduction in the seller's agent's commission.

Common to each inquiry as to whether a promotion is permissible is breaking down the component parts of Section §442 and then applying the law to the specific facts. In the fee splitting context, the initial inquiry is whether the recipient of the payment or item of value is a licensee. No prohibition arises where the party receiving the consideration is a duly licensed real estate broker or salesperson associated with the broker. When the recipient is not licensed, the inquiry continues as to whether the item of value is being paid from commissions the broker is receiving in the transaction. Where the broker is not paying for the items of value, there is no payment from commissions and therefore no impermissible activity. Likewise, where the items of value are provided to clients as part of a negotiated commission agreement, no payment is being made from commissions. When the broker is paying for the item of value and providing it directly to or for the benefit of an unlicensed party, the final question, which is the back side of the initial question, is whether the item paid for was for services which require licensure. These are the activities set forth in Section §440, referenced above. When the activities do not require licensure, there is no fee splitting. An example is paying for advertising fees associated with a transaction. Clearly, a broker does not engage in prohibited fee splitting when it pays the local newspaper, which is not licensed as a real estate broker, for advertising it placed in relation to a transaction, even though payment to the newspaper was paid from funds derived from commissions received.

In the kickback context, the inquiries are whether the recipient (1) is a party to the transaction; (2) is a licensee; and (3) is a client negotiating a fee, or a customer. A non-licensed party who is a client of the broker may receive items of value as part of a negotiated reduction in the commission due to the broker. A non-licensed party who is a customer may not receive items of value as prohibited kickback.

PHH is a licensed real estate broker whose clients include an established national network of service providers who assist homeowners who are relocating. PHH utilizes this network of service providers (which includes American Airlines, BJ's Wholesale Club, Navy Federal Credit Union, USA Federal Savings Bank and First USA Federal Savings Bank) to offer savings and incentives to the customers of its clients. These clients provide PHH's customers with cash savings, cash rebates and frequent flyer miles. PHH's service provider clients market a program to its customers and PHH reimburses the service provider client for the expense of such advertising and promotion. When an interested customer contacts PHH about buying or selling a home, PHH refers the customer to a local licensed real estate broker who enters into an agency relationship with the consumer. When the local broker earns a commission as a result of the PHH referral, the broker pays a referral fee to PHH. A portion of the fee received by PHH is used to pay PHH's client's marketing expenses and for the item of value (i.e. the cash rebate or frequent flyer miles) provided to the buyer or seller in the transaction.

The PHH scenario involves (1) the payment of compensation from the local real estate broker to PHH, (2) the payment by PHH to its unlicensed service provider clients for advertising expenses and the cost of the promotional item provided by the service provider to the local broker's client and (3) the receipt of the promotional item by the buyer or seller. Both PHH and the local real estate broker are licensed and therefore there is not prohibition to the payment of the referral fee from the local broker to PHH. In relation to the payment of sums by PHH to its service provider clients, the service provider clients are not parties to the transaction and therefore there is no prohibited kickback. Likewise, the buyer or seller, having entered into an agency agreement with the local real estate broker, are merely negotiating the commission agreement by accepting the item of value. The inquiry becomes, therefore, whether the payment by PHH to the service provider client is a prohibited fee split.

DOS initially addressed a preliminary licensing issue regarding the conduct of the service 
provider clients. The issue is whether the activities they participate in require licensure. DOS decided that the activities provided do not fall within the statutory definition of Section §440 as the service provider clients do not list property for sale, do not buy or sell real property for their customers, do not negotiate or offer to negotiate the purchase or sale of real property for their customers, and do not negotiate or offer to negotiate a mortgage loan for their customers. To the extent that any of these services are performed, they are performed by the local licensed real estate broker.

DOS then addressed whether the fee paid by PHH to its provider clients constitutes an unlawful fee split. The service provider clients are not real estate licensees and are being paid by PHH from commissions earned in the related transaction Therefore, the payment will be an unlawful fee split unless the services paid for are those for which a real estate license is not required. DOS noted that Section §442 is clear in that it does not prohibit all payments to unlicensed persons, only those for which a license is required. In reviewing the service provided by the service provider clients to PHH, DOS pointed out that they are merely promotional offers within the long line of DOS opinions holding such to be valid transactions. As such, the services the service provider clients provide PHH and their advertising costs are not items for which a real estate license is required and, therefore, PHH's payment of these items is not a prohibited fee split.

Real estate licensees can develop promotions which do not violate the prohibitions against fee splitting and kickbacks. Should any doubt exist, a definitive ruling may be had from the Department of State by writing for a declaratory ruling. NYSAR recommends that such rulings be procured.

Featured Content

First quarter Legal Lines now available

The first quarter 2018 edition of NYSAR’s Legal Lines is now available online at NYSAR.com. This edition covers commission issues, a New York State Supreme Court ruling on unsigned letters not creating a contract, support animals and more. Learn more

legal-NYSAR-180x150-2016
Legal