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By Austin B. Quinn
February 10, 2025
The new year has brought with it many changes to real estate laws in California. Brokers will have to adapt to the new rules in AB 2992, a bill that requires every broker to have a written buyer-broker representation agreement before receiving a commission on the sale of real property. This applies to both residential and commercial property sales. The new law does not apply to leases, loan brokerage services, or the sale of state or federal land.
Context Behind the New Rules
The objective of AB 2992 is to provide greater transparency and consistency in real estate transactions. AB 2992 comes as a response to an antitrust lawsuit against the National Association of Realtors (NAR). This case resulted in a settlement over commission-sharing practices that required real estate licensees to have a written agreement with a buyer before showing properties listed on the Multiple Listing Service (MLS).
The settlement terms required a buyer’s broker to obtain a signed representation agreement with a buyer client prior to touring a property and the agreement had to address compensation for the buyer’s broker, which would serve as the maximum that the broker could have received from any source with respect to that transaction.
AB 2992 expands these requirements for other properties, both residential and commercial, regardless of whether they have been listed on the MLS or not.
What are the new rules?
Buyer-Broker Representation Agreements: Brokers who represent buyers must enter into signed representation agreements with their buyers “as soon as practicable”, which, at the latest, must not be after a buyer has already made an offer to purchase the property. Note that this is later than the standard practice of obtaining the agreement before touring the property. The agreement must contain compensation terms, the services to be provided, termination provisions, and the timing for broker compensation.
- Standard Disclosure: Before executing the agreement, the broker must provide the buyer with the disclosure required by Section 2079.14 of the Civil Code.
- Further Disclosure: Agreements involving residential property with one to four units or a mobile home must contain the following statement in at least a 10-point boldface type, immediately preceding any provision related to the licensee’s compensation: “Notice: The amount or rate of real estate compensation is not fixed by law. They are set by each broker individually and may be negotiable between the seller and broker.”
- Duration and Renewal Requirements: The new rules prohibit a buyer-broker representation agreement from lasting longer than 3 months from the date the agreement was made, except if the agreement was entered into between a real estate broker and a corporation, limited liability company, or partnership. The representation agreement would not renew automatically and would require renewal to be in writing, dated, and signed by all parties. Additionally, any renewal would be effective for 3 months at most.
- Enforcement: Agreements in violation of these requirements are void and unenforceable. Violations of these provisions by licensees also violate the licensing law and may trigger disciplinary action by the Department of Real Estate.
- Arbitration: If an agreement contains a provision requiring binding arbitration of any dispute between the buyer and broker in the transaction, the agreement is required to display that provision in a specific way and with specific explanatory language.
Consequences for Buyers, Sellers, and Brokers
AB 2992 requires more clear agreements, reducing the risk for misunderstandings. This may further streamline negotiations by requiring brokers to formalize agreements earlier in the process. Brokers may provide more dedicated service and advocacy for buyer interests after securing an agreement earlier in the process, but may also have to adjust their client management strategies and timelines to accommodate the 3-month window and renewal limit. Independent agents not previously bound by the NAR settlements will also benefit.
Brokers may also be able to better leverage their clear representation of a client for more effective negotiation. However, commercial real estate professionals in particular may have to make substantial adjustments. These new rules curtail previously flexible agreements and timelines for commercial brokers.
Due to the strict requirements and penalties imposed, brokers will want to consult with legal counsel to ensure compliance and update practices around buyer-broker agreements and various forms so that they can maintain a seamless transaction process.
If you have any questions regarding the new rules, please feel free to contact Talon Powers at tpowers@hechtsolberg.com or Austin Quinn at aquinn@hechtsolberg.com.