Common practice may result in fines against broker

Broker X was listing a property for rent.  His agreement with the owner stated that the fee for successfully obtaining a tenant would be an amount equal to one month’s rent.  A tenant was procured and at the signing of the lease Broker X told the tenant to write two checks – one made out to the landlord for the security deposit and another for the first month’s rent made out to the broker, as payment of the landlord’s listing fee.

This practice is apparently quite common in the regional market (and perhaps elsewhere in PA), in that it is more efficient to simply collect the landlord’s fee directly from the tenant rather the tenant paying the landlord, then the landlord writing a second check for the same amount.  Unfortunately, this landlord didn’t see it that way and filed a licensure complaint that resulted in a $1,000 fine against the broker.

Why the fine? In short, the broker collected money in a way not authorized by the parties to the transaction.  Specifically, the lease said that all rental checks were to be written to the landlord and there was no agreement in any other document (such as a listing contract) in which the landlord authorized or instructed the broker to collect the fee directly from a tenant.

Oops.

A broker who wishes to collect leasing fees this way needs to spell it out to everyone by including authorization language in both the rental listing contract and the lease documents.  If the landlord agrees to this system in the listing contract and the landlord and tenant agree to a direct brokerage payment in the lease, the broker should be pretty well protected from this sort of claim in the future.

The relevant PAR Standard Forms (Forms XLR and LR) do not currently have this specific authorization language, and with a lot of rental business done on non-PAR forms, it is likely that most generic or home-grown forms do not have it either.  Brokers who continue to do business in this way should discuss the issue with brokerage counsel to determine what modifications are necessary to reflect their specific business practices.

Brokers might also take this opportunity to re-examine how they collect and account for these fees to see if any other practices need to be adjusted. By way of example, if you’re collecting the landlord’s fee directly from the tenant – who you don’t represent and who has no fee agreement with your firm – it could look bad if you don’t clearly show both the authorization to collect that way and the proper allocation of the funds to your operational accounts.

The PAR Standard Forms Oversight Committee will start a thorough review of all PAR landlord/tenant forms in 2012.