Paying a Rebate to a Principal


Assume you are a broker representing a tenant in connection with the negotiation of a lease, and the tenant requires you to pay a portion of your fee to the tenant. Under the Texas Real Estate License Act, are you allowed to pay a rebate to the tenant? The answer is a qualified "yes."

Payment of a Commission to an Unlicensed Person

Under Texas Occupations Code § 1101.652(b)(11), the Texas Real Estate Commission ("TREC") may suspend or revoke your license for paying ". . . a commission or a fee to or divides a commission or a fee with a person other than a license holder or a real estate broker or sales agent licensed in another state for compensation for services as a real estate agent."

However, such a payment can be made to an unlicensed person, if there no acts took place for which a license was required and there was proper disclosure. According to TREC's website in the Frequently Asked Questions section, TREC's response to the question, "Is a locator permitted to rebate a portion of the locator's fee to the tenant?" states as follows: Yes, as with all license holders, this can only be done with the prior consent of the person the locator represents. [Rule 535.147(d)] In addition, if advertising a rebate to the tenant of a portion of the license holder’s commission, the ad must disclose that the rebate is subject to consent of the party the license holder represents. [Rule 535.154(m)]".

The TREC requires written disclosure be made to both principals. In the disclosure document, you should be careful not to characterize the arrangement as one of paying a commission to the tenant. Rather, you should characterize it as, in effect, a reduction or refund on the rent paid under the lease.

Also, of course, you must be careful not to violate any of the Act's express provisions, including these from §1101.652(b) of the Act:

"(2) engages in conduct that is dishonest or in bad faith or that demonstrates untrustworthiness;

. . .

(7) fails to make clear to all parties to a real estate transaction the party for whom the license holder is acting;

(8) receives compensation from more than one party to a real estate transaction without the full knowledge and consent of all parties to the transaction;

. . .

(13) accepts, receives, or charges an undisclosed commission, rebate, or direct profit on an expenditure made for a principal;" [OCC § 1101.652]

Avoid Dishonest Conduct

Section 535.156 of TREC's Rules and Regulations (the "Rules") expands on the duty of a licensee to avoid dishonest conduct. Section 535.156(b) provides, in part, "A licensee must deal honestly and fairly with all parties..." Section 535.156(d) provides "A licensee has a duty to convey accurate information to members of the public with whom he deals." Failure to disclose to a landlord could constitute a violation of these provisions of the Act and Rules.

TREC has taken disciplinary action against brokers who have paid all or part of their commission to a buyer in a situation where the seller of property has provided financing. In those situations, TREC has asserted that the broker was dishonest in violation of §1101.652(b)(2) of the Act and Section 535.156 of the Rules set forth above. A seller which provides financing could arguably be "injuriously affected" by the payment of a portion of a commission to a purchaser. A seller or other lender typically wants the purchaser to invest some of the purchaser's own money in the property, so the purchaser is less likely to default on the loan.

A lease is similar to a seller-financed sale in some respects. Rent payments are made over the term of the lease, and a landlord may pay for tenant finish-out expenses. So, a landlord could argue that the landlord is hurt by the broker's "dishonest" payment of a portion of the commission to the tenant, on the theory that the tenant will be less likely to perform under the lease because the tenant did not have to pay the tenant's own money (or at least not as much) to the landlord when the tenant made the initial rent and security deposit payments at the inception of the lease. The landlord's argument would depend on the characterization of the failure to disclose the payment as being a "dishonest" act, or the conveyance of inaccurate information. If there is no basis upon which the broker could be accused of a misrepresentation, then the broker could argue that the broker was not dishonest because the broker never represented that the broker would not pay a rebate to the tenant.

The arrangement for payment to a tenant must not be used as a device to circumvent any requirements imposed on the transaction by any party. For example, if a lender or landlord requires that the tenant must pay for a certain amount of improvements to the property with the tenant's own funds, then the fee being paid to the tenant should not be included in the funds used for this purpose without full disclosure and consent by the lender or landlord.

Summary

So, yes a Real Estate broker can pay a rebate to the tenant provided that there is written consent of all of the parties. You should also advise the tenant to consult the tenant's certified public accountant or tax attorney as to tax questions, such as whether the rebate must be reported to the Internal Revenue Service as income.