In a time where consideration for the financial picture of a couple is contractually arranged before the wedding nuptials, is it time for similar agreements in the real estate industry? Let’s consider a couple of options. The first scenario is the ad-hoc partnership arrangement between two like-minded individuals who happen to work in the same real estate office. As a sales manager, I can assure you the moment that two agents approach me with this plan, I shudder. I instinctively begin to prepare two exit letters as the chances of disillusionment are high.
Let’s look at the partnership itself. There is often difficulty deciding how to share the workload, the expenses and the profits equally. It is not just as simple as splitting everything 50/50. Emotions tend to snowball, and ultimately someone can (and likely will) feel that they are being treated unfairly, resulting in a partnership that begins to fail. While there are exceptions to every rule, and role models who manage to make this type of arrangement work, many broker/managers have been left to deal with the carnage of nasty break ups.
There are other issues to consider as well. If you are truly a partnership, have you disclosed this to Canada Revenue Agency (CRA) for the appropriate tax filing purposes? In the event of an audit of either or both of the partners, how do the documentation, expenses and reports called in as evidence get handled? How can CRA review the paperwork and tax filings based solely on the knowledge that you have a handshake agreement on your business partnership?
Let’s assume the partnership is actually successful. What happens if there are lots of listings and buyer clients under contract, and perhaps an assistant or two, and one partner is seriously injured or suffers an illness or worse, dies? What happens to the partnership agreement? What happens to the monies owing? What happens to a (potential) claim from a surviving spouse? What liability does the real estate brokerage have?
Even the best of friendships and/or partnership can turn sour. And when things go bad they can go really bad, especially if the partners are spouses or worse, partners who became spouses as a result of their partnership, both of which are now ending. Who gets to play the mediator in that split? Further still, who would want to?
There are so many elements that need to be dealt with: the current and active clients, the business itself, the assistants and the outstanding deals and future closings. Who is entitled to the client database? This issue becomes especially difficult if one of the partners was routinely the face of the business.
So far we have talked only about partnerships that encompass two partners’ overall business. We should also consider two random colleagues planning to share or split a single deal. This can create a wealth of problems when a sale is generated and commission sharing needs to occur. Were both agents’ names on the sign and marketing materials? If not, whose phone rang to generate the offer? How do you fairly split that commission? Is the named agent entitled to half of listing and the full buying side commission? Would there be a difference if the named agent wasn’t the agent who originated the listing?
Beyond the commission issues, there is potential referral business to consider. Upon the successful sale and equitable commission split of the home, the named agent gets a call to list a neighbour’s house. If a referral is generated as a result of one of the Realtors being recommended (even though both worked on the file mutually) this creates further complication to this “single deal” arrangement.
If you were involved as the partners, how would you handle the dispute that can and will arise when a situation like this occurs? How do you suppose the sales manager/ broker would deal with this? Regrettably it often ends with one or both agents leaving the company, citing favouritism as the main detractor. Trust me when I say no sales manager/ broker envies this break down. It is not fun for anyone.
Most small business lawyers and accountants would suggest the only way to prevent or minimize risk to a transaction in partnership is to generate a solid signed agreement BEFORE the piece of business starts, while both parties are still friendly and keen for mutual success. What should these agreements say? Who should create them? Should both parties have separate council review these agreements to ensure their interests are protected? Who will be assigned as the mediator on handling disputes? How are assets and liabilities dissolved if the partnership ends? If you consider how you would advise your client on the legalities side of their sale or purchase, you’re likely to find the right answers to the above questions.
For an industry that is skilled at generating, negotiating and facilitating well-written and signed contracts for big ticket items, shouldn’t real estate partnerships (and itinerant agreements) be treated with the same prudence and diligence?
With a track record that spans 27 years, Realtor Ronn James says his ambition is to educate the public and Realtors alike. He has landed appearances on Breakfast Television, CityLine, Real Life and a host of radio shows. James has also been a regular contributor to New Homes and Condos For Sale Magazine, Toronto Sun and Canadian Homeplanner. Website: www.RealEstateCommissionMatters.ca, phone 289-242-9050.