Commission Issues: License Law Provisions

Payment of Commissions

  • All monies collected in connection with a real estate brokerage transaction must be collected in the name of and with the consent of the broker. (Ohio Revised Code Section 4735.21)
    • This section covers “commissions, deposits, payments, rentals or otherwise.” The Division interprets this to also include any bonuses paid to agents by other licensees or by the parties to the transaction.

Commencing an Action for a Commission

  • Only a licensed broker may commence an action for a commission or other compensation in connection with a real estate transaction. (Ohio Revised Code Section 4735.21)
  • A licensee can be subject to disciplinary action by the Ohio Real Estate Commission for demanding a commission to which he is not entitled without reasonable cause. (Ohio Revised Code Section 4735.18(A)(10))
    • This section does not apply to demands made to another licensed broker; therefore, this does not apply to cooperative disputes between brokers.

Unlicensed Persons

  • A broker or salesperson is prohibited from paying commissions or fees to or splitting commissions or fees with persons not licensed in Ohio, if the purpose for the payment is to compensate them for performing acts that require an Ohio real estate license. (Ohio Revised Code Section 4735.18(A)(11) and Section 4735.20(A))
    • This section would prohibit paying finder’s fees to unlicensed persons for referring prospective buyers or tenants.

Referral Fees

  • An Ohio broker is permitted to pay a commission or referral fee to a broker licensed in another state who refers clients or prospects to the Ohio broker. (Ohio Administrative Code Section 1301:5-5-06)
  • The term “refer” or “referral” is defined as the introduction or directing of a person by one broker to another broker for brokerage services.
  • This section does not permit the out-of-state broker to perform any acts with respect to Ohio property that requires an Ohio license (i.e., negotiating a contract) except as described below regarding commercial transactions.

Out-of-State Commercial Brokers

  • Ohio law allows out-of-state brokers to participate in the sale and lease of commercial real estate located in Ohio even though that out-of-state broker is not licensed in Ohio. (Ohio Revised Code Section 4735.022) To do so, very specific requirements must be met. If these requirements are met, an Ohio broker can pay a cooperative commission to the out-of-state broker. (Click here for more information on this topic.)

Duty to Pay Salespersons

  • Upon receipt of a commission, a broker is required to render an accounting and pay a salesperson his earned share within a reasonable time. Failure to do so is grounds for suspension or revocation of the broker’s license (Ohio Revised Code Section 4735.18(A)(30)).
  • The “earned share” to which a salesperson is entitled is not defined by law, but rather is determined by the agreement of the parties. The Division will usually look to any independent contractor agreement, commission schedule, or policy manual agreed upon by the broker and agent and enforced by the broker to determine the agent’s earned share.

Duty to Pay Upon Termination

  • Unless provided otherwise in an independent contractor agreement or office policy manual, a broker must still pay an agent his earned share of a commission for transactions that were “in contract” at the time the agent terminated his relationship with the broker.
  • This commission can be paid directly to the agent even though he may be unlicensed or licensed with a different broker at the time the commission is received.

Deductions/Offsets

  • Often a broker wishes to deduct money from a salesperson’s commission for debts the agent owes the broker or to compensate the broker or other affiliated agents for work they did to conclude the transaction.
  • Such deductions or offsets by a broker will be allowed by the Division of Real Estate if they were specifically permitted by the terms of an independent contractor agreement, or by the broker’s policy manual. If consent to the deductions does not exist, the Division will limit such deductions to only those expenses specifically related to the transaction on which the commission is owed.

Payment to Agent’s LLC or Corporation

  • The Ohio license law allows an agent’s commission to be paid to a corporation, LLC, or other legal entity in which the agent is an officer or has an ownership interest. (Ohio Revised Code Section 4735.20)
  • Prior to paying an agent’s commission to such an entity, the broker is required to verify that the agent is either an officer or has some ownership interest in the legal entity to which they want their commissions paid. The broker also must keep a record of this verification for a period of three years along with the following additional information:
    • The name of the licensee who earned the commission, fee or other compensation;
    • The amount paid; and
    • The name of the entity to which it was paid
  • Examples of verification would be:
    • A copy of the articles of incorporation listing the agent as an officer;
    • A copy of a stock certificate demonstrating an ownership interest;
    • A copy of the partnership or association agreement;
    •  A copy of the articles of organization for an LLC
  • A broker may want to ask the agent for a copy of the entity’s authorization to do business in Ohio. Although not specifically required by law, a broker may also want to ask the agent to sign a statement that they:
    • Are an officer, stockholder, etc.;
    • That the legal entity is authorized to do business in the state of Ohio;
    • That the entity is properly registered and in good standing;
    • That the entity will not engage in any activity that requires a real estate license;
    • That they will notify the broker if any of that information changes or is no longer true (i.e., the agent no longer has an ownership interest, the entity is not in good standing, etc.)