Background: The Single Party Compensation Agreement (SP) has become quite prevalent in the current hot housing market! The Legal Tip of the Week from 2 weeks ago explained how to use an SP when a seller does not want to list the property with you, but is interested in paying you a commission if a certain buyer buys the property. The Legal Tip from last week showed you how to further protect yourself using a Buyer Broker Agreement (BRE) at the same time. This week we will discuss what to do if you do not want to reveal the identity of the buyer in the SP before the seller signs.

Fact Pattern: You represent a celebrity, Bedazzled Buyer, who is interested in purchasing a property that is not listed for sale. Bedazzled has signed a BRE with you. You nevertheless want to get the owner to sign an SP to pay you if Bedazzled buys the property. You are, however, worried about revealing Bedazzled’s identity on your SP in case the seller tries to cut you out of the deal.

Multiple Choice Question: If you identify Bedazzled as the buyer on your SP, can the seller elect not to sign your SP and just contact Bedazzled directly? Pick the best answer:

A. No, because the seller must deal directly with you, not the buyer, under the NAR Code of Ethics.
B. No, because the seller must deal directly with you, not the buyer, under the BRE.
C. No, because the seller only found out about Bedazzled through your SP.
D. None of the above. 

Answer: Answer A is likely to be wrong. It’s true that, under Standard of Practice 16-13 of the NAR Code of Ethics, all dealings with a buyer who has an exclusive BRE agreement should generally be conducted with you as the buyer’s agent, and not with the buyer directly. However, the NAR Code of Ethics only pertains to REALTOR® members. If this seller is not a REALTOR®, the seller is not required to comply with the NAR Code of Ethics.

Answer B is wrong. The BRE is an agreement between you and the buyer. It does not impose any requirements on a seller, regardless of whether the buyer is obligated to pay you.

Answer C is likely to be wrong. There is certainly a fairness argument that the seller should not be allowed to take advantage of you in the manner described. However, courts will generally refuse to enforce a broker compensation agreement unless it’s signed by the principal, regardless of any fairness arguments.

Answer D is the correct answer. Agents using SPs identify the name of a prospective buyer at their own peril. Oftentimes, it’s not an issue. But sometimes it can be a concern, such as when the buyer is well-known, or a relative, neighbor, or anyone else who the seller may know or can otherwise contact directly.

Practice Tip: To avoid revealing your buyer’s identity if needed, you can describe the buyer in another manner in your SP. One example is to insert as the “Buyer” in paragraph 1A of the SP, as follows: “That buyer whose offer will be presented by Broker to Principal within 24 hours after Principal signs this Agreement.” Another example would be to insert in that blank space: “The buyer whose offer is in the yellow envelope marked ‘Sealed Offer.’”

Stay Tuned Next Week: Next week we will discuss the all-important issue of agency when using an SP!

-Thank you to Gillian Gillies (Rancho Santa Fe Village Office) for suggesting this week’s legal tip!

Copyright© 2022 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of March 21, 2022. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals. Written by Stella Ling, Esq.