Giddy Up

Alec J. Pacella, CCIM

If you’ve spent any time around the legal world, you know that the outcome of many cases revolves around a concept known as “legal precedent.” Cases are made, argued, won and lost based on the results of decisions that had been made on similar cases in the past. Oftentimes, these precedents go unnoticed, as they usually have a narrow potential impact. But every so often, there will be a case that gains widespread attention because of a much broader potential impact. And this was the situation last fall, in a case known as Sitzer/Burnett.

Before I get into the details and potential ramifications, I need to make a disclaimer. The focus on this article is on the primary components of this case, the initial decision and how it may ultimately impact the commercial real estate industry. I am going to deliberately not address specific commission rates. Although this was a part of the original case, I consider it out of bounds for purposes of this discussion as it may be construed as price fixing. And I have no desire to have my broker’s license suspended. With that out of the way, off we go.

The plaintiffs in Sitzer/Burnett are over 500,000 homeowners in Missouri. They collectively alleged that the four national brokerage firms unfairly inflated the commission rate charged to this group in conjunction with the sale of their homes. Also named in the suit was the National Association of Realtors (NAR), as all of these firms are members (known as Realtors) of this trade group. Two of the national brokerage firms chose to settle outside of court but the other two and NAR elected to go to trial.

To fully understand the plaintiff’s position, we need to dig a little deeper. There is a code of ethics associated with being a Realtor and one of these is known as the Participation Rule. This includes an obligation to share a portion of the commission that is received by the seller’s agent with an agent that is representing the interests of the buyer. The amount of the fee available to the buyer’s agent must be disclosed if the property is listed by the seller’s agent on their local multiple listing service (MLS). There are approximately 500 MLSs nationwide, with each typically maintained and administrated by a local or regional board of Realtors that ultimately roll up to the NAR.

The homeowners argued that the commissions charged were unfairly inflated as a result of the seller’s brokerage firm being associated with NAR, who mandate that a portion of the fee be shared with the buyer’s agent in order for the property to be listed on the local MLS. If you are hearing about this for the first time, you may be scratching your head a bit. But it didn’t take long for the judicial system to scratch their heads, as the jury not only quickly found for the plaintiff but granted an initial award of $1.78 billion. And, pending the judge’s decision, not only could this amount triple but the current practice related to commission sharing could either be modified or completely banished. Hundreds of similar cases were immediately filed in courtrooms across the country within days of this decision, with associated alleged damages spiraling into the hundreds of billions of dollars.

Many of you reading this may be thinking that this could have a long-term impact on the residential sector but think the commercial sector is insulated because it’s different. There are several key factors that make me say “not so fast.” First, while the nuances, motivations and drivers of the residential and commercial sectors have many differences, there is but one type of real estate license in most states, including Ohio. It doesn’t matter if an agent only sells houses or only leases office buildings – everyone holds the same real estate license. Second, membership in the NAR is much less widespread amongst firms that focus on the commercial sector. But the two leading trade associations in the commercial real estate sector, the Society of Office and Industrial Realtors (SIOR) and the Certified Commercial Investment Member (CCIM) Institute are both affiliated organizations of the NAR. And third, participation in the local MLS is also much less widespread among firms focused on the commercial sector. But the practice of the seller’s agent sharing their fee with the buyer’s agent is just as common in the commercial sector as it is in the residential sector. If you think that lease transactions are different, think again as it too follows this same practice, with the landlord’s agent sharing the fee with the tenant’s agent. Remember, this was a primary allegation of the plaintiffs in the Sitzer/Burnett case – the amount of the fee that was paid by the seller was unnecessarily increased as a direct result of the seller’s agent sharing it with the buyer’s agent.

The defendants in the Sitzer/Burnett case are in the process of appealing the decision and it will take months if not years for the full impact of the Sitzer/ Barnett case to play out. But to my thinking, the quick and decisive initial verdict speaks volumes of the public sentiment and ultimately where the current fee-sharing arrangement may be heading. And it’s not going to just be isolated to the residential sector. Years ago, one of my real estate Yodas characterized the real estate brokerage industry as “the last of the wild west.” Only time will tell if these real estate cowboys are riding into the sunset.

For Properties Magazine, February2024