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Professional Standards Manual

Trading Services

1. Practice Standards

(h) Paying and Receiving Referral Fees

Some licensees pay or receive referral fees. Typically, referral fees are paid by a licensee for receiving a ‘‘lead’’ which results in the licensee earning remuneration. A licensee might receive a referral fee for referring a client to another licensee or service provider if that client uses the services of that other person. The following are issues that licensees should be aware of related to the payment or receipt of referral fees.

Paying a referral fee to an unlicensed person

A licensee may pay an unlicensed person a referral fee as long as

  • the unlicensed person does not solicit, for the purposes of making a referral, the names of persons who may want to acquire or dispose of real estate;
  • the practice of making referrals is not the main business of the unlicensed person making the referral; and
  • the unlicensed person making the referral does nothing else that would require them to be licensed (refer to the definition of ‘‘real estate services’’ in section 1 of RESA).

Those who intend to pay a referral fee to an unlicensed person have an obligation to first ensure that person satisfies the above criteria. Section 6-1 of the Rules prohibits the payment of any remuneration to an unlicensed person in relation to real estate services if that person is required to be licensed. For this reason, it is important that a brokerage has clear policies, and advises its licensees accordingly, with respect to the payment of referral fees. It may also be useful to obtain independent accounting advice with respect to any tax implications that may be associated with the payment of referral fees to unlicensed persons.

See also Don’t Play Follow the Leader:  Paying Referral Fees to Unlicensed Lead Generation Businesses is Prohibited (Report from Council, December 2014)

Paying a referral fee to another licensee

Licensees must only receive remuneration related to the provision of real estate services from the brokerage with which they are engaged. Therefore, any form of remuneration, including referral fees, must be paid to the related brokerage for disbursement to the licensee. No remuneration may be paid directly to the licensee. The definition of ‘‘remuneration’’ is very broad and includes any commission, fee, gain, or reward.

Disclosure that a referral fee is to be paid

Section 3-3(1)(f) of the Rules requires a licensee to disclose to a client ‘‘all known material information respecting the real estate services’’ being provided. If a licensee has agreed to pay a referral fee, that is a material fact which must be disclosed to the client. This is true whether the referral fee is to be paid to a licensee or to an unlicensed person.

The Council does not consider internal remuneration sharing arrangements to be matters which require disclosure under section 3-3(1)(f) of the Rules. This is true whether these internal arrangements relate to the manner in which remuneration is shared between a brokerage and its related licensees, or the manner in which remuneration is shared between licensees or with unlicensed employees of the same brokerage.

Example

Mr. Seller, who wants to sell his home, is referred to Licensee Good by Ms. Referrer. Licensee Good would like to pay Ms. Referrer a referral fee for the ‘‘lead’’. Licensee Good must disclose to Mr. Seller the intention to pay a referral fee to Ms. Referrer, and the amount of that referral fee.

Receiving referral fees

[06/19/2012 The following section was added to the Professional Standards Manual]

Section 5-11 of the Rules requires a licensee to disclose in writing to a client any remuneration the licensee anticipates receiving that is not to be paid directly by that client. Therefore, if a licensee is to receive a referral fee for referring a client to another service provider, be that another licensee or another person providing services related to real estate (e.g., a mortgage broker, appraiser, etc.), the licensee is required to disclose to the client the details of this referral. Those details include:

  • the source (who is paying the referral fee);
  • the amount, or if the amount is unknown, the likely amount or method of calculation of the amount; and
  • any other relevant facts related to the referral fee.

Remuneration is a very broadly defined term, and includes any form of benefit, whether it be money or otherwise (e.g., mortgage points). All referral fees, benefits, and other forms of remuneration must be received through the brokerage with which the licensee is engaged.

Further, section 3-3 (1)(e) of the Rules requires a licensee to maintain the confidentiality of information respecting a client. This is consistent with privacy law which requires that a licensee not provide a client’s personal information to a third party without that client’s consent, or unless otherwise required by law to do so. In the course of making a referral, the type of information a licensee may be asked to provide to another licensee or service provider will vary. Some referrals may involve basic contact information (e.g. name and telephone number or email address) whereas some may require details concerning the client’s real estate, mortgage or appraisal requirements.

In all cases, the information must be treated as confidential and cannot be released to a third party without first obtaining the consent of the client. Licensees may find more detailed information on this matter at www.cio.gov.bc.ca/local/cio/priv_leg/documents/pipa/guidepipaview.pdf

Example

Mr. Seller, a client of Licensee Good, wants to purchase a home in the market area worked by Licensee Best. Licensee Good refers Mr. Seller to Licensee Best on the understanding that Licensee Best agrees to pay Licensee Good a referral fee if Mr. Seller buys a home through Licensee Best. In order to comply with section 5-11 of the Rules, Licensee Good must disclose to Mr. Seller that he anticipates receiving a referral fee from Licensee Best if Mr. Seller buys a home through Licensee Best. He must also disclose the amount or the method of calculation of the amount. In addition, Licensee Good must also obtain Mr. Seller’s consent to providing Mr. Seller’s personal information to Licensee Best.

Referring a person who is not a client

Kelowna licensee Betty Best receives a call from Sally Seller about a home Betty has listed for sale. This is the only time Betty and Sally talk. During the course of the discussion, Sally tells Betty that she wants to sell her home in Fernie before moving to Kelowna. Sally asks Betty if she knows a good real estate agent in the Fernie area. Betty tells Sally about Jim Lister, a licensee friend in Fernie. Betty calls Jim to advise him of this, and the two agree that Betty will receive a $2,000 referral fee if Sally lists her home with Jim, and it subsequently sells. Sally lists her home for sale with Jim, the home sells, and Jim sends a $2,000 referral fee to Betty’s brokerage.

Must Betty disclose to Sally that she will receive a referral fee from Jim?

No. Both the common law and section 5-11 of the Rules require that a licensee must disclose to a client remuneration received as a result of providing real estate services to or on behalf of a client, whenever that remuneration is not paid directly by that client. ‘‘Client’’ is defined in section 1-1 of the Rules as ‘‘Client’’ means, in relation to a licensee, the principal who has engaged the licensee to provide real estate services to or on behalf of the principal. In this scenario, Sally is not a client of Betty or her related brokerage. She has not engaged Betty or her related brokerage to provide any real estate services. During the course of a single conversation, she has asked Betty if she knows a good real estate agent in Fernie.

Under these circumstances, Betty’s obligation to Sally is to act honestly and with reasonable care and skill (see section 3-4 of the Rules). Betty has no obligation to disclose to Sally that she will receive a referral fee from Jim if Sally lists her home for sale with Jim and the home sells.

Must Jim disclose to Sally that he intends to pay a referral fee to Betty?

Yes. Section 3-3(1)(f) of the Rules requires a licensee to disclose to a client all known material information respecting the real estate services being provided. By listing her home for sale with Jim and his related brokerage, Sally becomes a client who has engaged them to provide real estate services. Jim has agreed to pay a referral fee to Betty; that is material information which he must disclose to Sally. He must make this disclosure at a time when the information is relevant to Sally — that is before Sally agrees to enter into the listing contract. This timing is important because Sally does not have to agree to the payment of this referral fee. She may agree, or she may choose to list her home for sale with another licensee.

Receiving an unanticipated referral fee

Eileen Lots has a client, Dave Doer, who has just sold his home using Eileen and her related brokerage as his listing agent. Dave is interested in buying a property in White Rock, a market area that is not familiar to Eileen. He asks Eileen if she knows a good real estate agent in White Rock. Eileen refers Dave to Fred Finder and calls Fred to advise him of this referral. There is no discussion about a referral fee; Eileen neither requests nor expects to receive one. Several months later, a cheque from Fred’s brokerage arrives at the office of Eileen’s brokerage, accompanied by a note from Fred to Eileen saying ‘‘Thanks for the lead on Dave. He bought two properties through me. I appreciate the referral’’.

Must Fred disclose to Dave that he intends to pay a referral fee to Eileen?

Yes. Dave has engaged Fred and his related brokerage to provide real estate services to help him acquire properties in White Rock. Fred and his related brokerage have an obligation to disclose to Dave all known material information respecting the real estate services being provided. Therefore, Fred must disclose to Dave the fact that he intends to pay a referral fee to Eileen. He must do so before paying the referral fee. Dave may not agree, and may even suggest that if Fred is prepared to share his commission with someone, that someone should be Dave himself.

What, if anything, must Eileen disclose to Dave?

That depends. Assuming Dave has agreed to Fred’s payment of the referral fee, the answer to this depends on two factors: whether Eileen knew, or should have known, she was going to receive the referral fee, and whether Dave is still considered Eileen’s client when the referral is received.

A licensee can only disclose what he or she knows, or reasonably ought to have known at the relevant time. For example, if Eileen regularly referred clients to Fred and received referral fees for doing so, even though she did not discuss a referral fee with Fred on this occasion, she could reasonably expect to receive one. She must disclose that to Dave at the time she provides him with Fred’s name.However, if this was a ‘‘one off’’ referral to Fred, and, as the scenario suggests, Eileen had no reason to anticipate receiving a referral fee, there would be nothing to disclose at the time the referral was made.

If a referral fee is unexpectedly received, whether disclosure is required at that time is dependent on whether Dave is still considered Eileen’s client at the time of receipt. If the answer is ‘‘no’’; that is, neither Eileen nor her brokerage have been engaged to provide real estate services to Dave in the intervening period, nor is there an ongoing client relationship with Dave, then disclosing receipt of the unexpected referral fee is not required. However, if Eileen or her brokerage have been engaged by Dave to provide real estate services in the intervening period or they have an ongoing client relationship with Dave, disclosure of this referral fee, even though it was not expected, is required at the time of its receipt.

If Fred has made the required disclosure, Dave will have already agreed to the payment of this referral fee to Eileen, regardless of whether Eileen is required to disclose having received it. Eileen’s disclosure, if required, will verify information Dave has already been told by Fred.

If the situation dictates that Eileen must also disclose, this may seem an example of ‘‘too much disclosure’’. Why should Dave receive the same information from two different licensees? It is important to realize that Fred and Eileen have to disclose for different reasons. Fred’s obligation, both at common law and as described in section 3-3(1)(f) of the Rules, is to disclose to his client Dave everything material about the real estate services being provided. The fact that he intends to pay a referral fee to Eileen is material.

Eileen’s obligation, both at common law and as described in section 5-11(1) of the Rules, is to disclose to her client Dave remuneration she has received as a result of providing real estate services to or on behalf of him, when that remuneration has been paid by someone other than Dave.