This article has been written by Kshitij Pandey, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.com.
Table of Contents
Introduction
The real estate sector has been a driving force for India’s economy for many years. In India, the real estate sector is the second-highest employment generator, after the agriculture sector. The real estate sector in India is expected to reach US$ 1 trillion by 2030. By 2025, it will contribute 13% to the country’s GDP. The emergence of nuclear families, rapid urbanisation, and rising household income are likely to remain the key drivers for growth in all spheres of real estate, including residential, commercial, and retail. Rapid urbanisation in the country is pushing the growth of real estate.
For people, apart from buying a permanent home for themselves, real estate has been the most stable form of investment with high returns on investment. Buying and selling of property are involved between buyer and seller with brokers and agents acting as intermediaries. Due to this, people dealing in real estate enter into various contracts especially when appointing a broker for buying and selling a property. For appointing a broker for buying and selling of the property, the most commonly used contract in the brokerage agreement. This paper will briefly discuss the use of real estate brokerage agreements in real estate.
Significance of a brokerage agreement
A brokerage agreement helps a property owner/buyer to authorize a real estate broker to find a buyer/seller for the property on their terms for which they pay the commission to the broker. This contract gives the broker the sole authorization to represent the seller/buyer and their properties to the prospective buyers/sellers. It is more of an employment contract rather than a real estate one. It helps to ease the burden on the buyer/seller of the property to find third-party/buyer/sellers of their respective property by delegating that responsibility to the broker. The brokerage agreement states how the broker will advertise and find prospective buyers or sellers of the property for the highest possible price and maximum profit. It includes the commission fee as well for helping in the transaction.
Types of brokerage agreements
Open brokerage agreement
In this type of brokerage agreement, the seller/buyer of the property retains the right to employ any number of brokers. It is a non-exclusive type of brokerage agreement. Here, the seller/buyer is obligated to pay a commission only to the broker who successfully finds a prospective buyer/seller. They retain the right to sell/buy the property.
Exclusive right to sell brokerage agreement
An exclusive right to sell a brokerage agreement is the most commonly used contract as a brokerage agreement. In this type of agreement, a broker is appointed as the sole seller’s broker and has the exclusive authorization to present the property for buying/selling. The broker receives the commission no matter who sells the property while the brokerage agreement is in effect.
Real estate broker
Under the provisions of real estate law. Only a broker can list, sell or rent as an agent of another person’s property. They have to procure a license to show the property to interested buyers/sellers, filling the contracts and listing agreements of the property.
Legal compliance for broker under RERA, 2016
To be a broker in India, there is no need for any specific stipulation or knowledge requirement, as well as there, are no standards of practice that establishes any accountability, clearness or transparency, and professional standards. Henceforward to bring further accountability, clearness, or transparency, brokers have now been covered under the scope of RERA, 2016. A mandatory requirement is a registration that is set under Section 9 of the Act. It states that without formal registration, no real estate agent shall facilitate the selling and buying of properties.
For registration, a real estate broker has to make an application to the appropriate authority for the formal registration in the prescribed manner, within time, pay the appropriate fee mentioned in the schedule and all relevant documents as prescribed. Once the application is made to the authority, they can either: –
- a) Grant the license for a particular state or territory of India
- b) May reject the application for the reasons which shall be recorded in writing if such application doesn’t follow the provisions of the Act.
If the period prescribed under the Act is completed and the applicant doesn’t receive any further message about the paucity of information for rejection of his/her application, then the application is presumed to be registered. When the broker gets registered, he/she will receive a registration number by the appropriate authority and this number will be referred to by him in every purchase or sale transaction facilitated by him/her. Therefore, every broker who has registered themselves under RERA shall facilitate the sale or purchase under their name with a specific registration number.
Punishment for non-compliance and non-registration
Brokers who have not registered themselves under the act have to be liable to a penalty up to Rs. 10,000 per day from the day of default, which may be extended up to 5 % of the cost of the property for sale facilitated by the broker.
Clauses
Because the same considerations arise in almost all real estate transactions, most listing agreements require similar information, starting with a description of the property. The description typically includes a list of personal property that will be left with the property when it’s sold, as well as a list of personal property the seller expects to remove (for example, appliances, and window treatments).
Here are the clauses that are covered in a standard real estate brokerage agreement
- Title- Title of the contract has to be mentioned as in any contract i.e., brokerage agreement.
- Parties- First and foremost the name of the parties who are entering into this agreement and their details. The sample clause would look like this as follows: –
‘This real estate brokerage agreement is made on____(Date), between the parties: –
a. Buyer
(Address_____________)
(Further details________)
b. Broker
(Address_____________)
(Further details________)
3. Recitals- Another common clause used in contracts. It should be used to give the background of the parties i.e. The buyer/seller and the broker and how they entered into this agreement. The sample clause would look like this as follows: –
“Whereas buyer/seller desires to buys or sells the property, whereas broker shall act as an intermediary finder of buyer/seller of property”
4. Legal compliance: – This clause ensures the broker will comply with the applicable law of the state and has the license to provide his services. The sample clause would look like this as follows: –
“As required by law, the broker shall comply with all applicable laws and has obtained necessary and appropriate licenses to provide broker services”
5. Services: – This is one of the key clauses of the brokerage agreement. It lists out the services which will be provided by the broker. This clause is significant from the buyers/seller’s perspective as it defines and lists out all the duties and responsibilities of the broker. The sample clause would look like this as follows: –
“The broker shall: –
- Use his skills/knowledge and commercially reasonable efforts to find buyers/sellers of the respective property listed in this agreement;
- Notify the buyer/seller of the property with immediate effect of any offers received. etc. “
6. Term and termination- This clause will state the commencement date of the agreement. The sample clause would look like this as follows: –
“The term of this agreement shall commence from______ (effective date) and shall continue in full force and effect as described by this agreement”
7. Fees and payment: – Another key clause of this agreement. This clause will state how the transaction between the interested parties will take place. The broker’s commission fee and how it will be calculated is to be stated. Conditions can be added for the broker in order to make the agreement more conclusive. The mode of payment is also to be stated. The sample clause would look like this as follows: –
“The broker will take part in the transactions between the parties, with the buyer/seller having the right of final approval of the deal.
The Broker’s fee shall be calculated as________ (Method of calculation of commission)
Acceptable forms of payments include_________.
8. Non-circumvention- This clause safeguards broker’s commission. It will state that the buyer/seller must not deal directly with the other interested party in order to circumvent the broker’s commission. The sample clause would look like this as follows: –
“During the term of this agreement, buyer/seller shall not do business with, or otherwise solicit any seller/buyer referred by the broker, to the buyer for the purpose of circumventing, the result of which shall be to prevent the broker from realising or recognising a brokers fee”
9. Exclusivity- This clause gives the broker the exclusive right to introduce prospective buyer/seller to his/her client. The sample clause would look like this as follows: –
“For the term of this agreement, Broker shall have the exclusive right to introduce prospective sellers/buyers to the buyer/seller”
10. Confidentiality- Common clause in all the contracts. This protects the confidential information about the buyer/seller and the broker and about the agreement. The sample clause would look like this as follows: –
“The broker shall safeguard and keep confidential the information and shall not disclose any confidential information to any other person or entity.
The term “Confidential property” shall include any proprietary information in whatever form, that: –
- Information provided by the buyer to broker, including information regarding finances, etc.
- Concerns about any agreements that the broker may aid the buyer in entering into, etc.
Any needed disclosures of confidential information shall be provided to the Seller for approval prior to such disclosures taking place.
Any information disclosed without the above consideration shall serve as a material breach of contract and will result in termination of this real estate agency agreement in its entirety.”
11. Assignment- Another common clause of any contract. It states that any portion or subject covered in this agreement is non-transferable. The sample clause would look like this as follows: –
‘No portions of this agreement shall be transferred or otherwise delegated without prior written consent between the parties.
12. Entire agreement- It states that whatever clauses or subjects are covered in this agreement will constitute the whole agreement. The sample clause would look like this as follows: –
‘This brokerage agreement along with any attached documents shall constitute the entire agreement between the parties.
13. Severability-This clause will state that in case any clause or provision of the contract becomes unenforceable or illegal, the rest of the agreement will remain operative. The sample clause would look like this as follows: –
‘In the instance, any provisions of this agreement shall be found unenforceable or illegal the parties shall work together to agree on a similar enforceable term. Remaining provisions shall remain in full effect and shall not be altered or removed.’
14. Applicable law- This clause will state the applicable laws that govern this agreement. The sample clause would look like this as follows: –
‘This real estate brokerage agreement shall remain under the jurisdiction of (State) India. Any and all legal proceeds from this real estate brokerage agreement shall be conducted under the above jurisdiction.’
15. Dispute resolution- another key and common clause of the contract. This clause will state the dispute settlement mechanism if any dispute occurs in the future. The sample clause would look like this as follows: –
1) This agreement shall be construed and enforced in accordance with the laws of India without regard to the choice of law principles thereof.
2) Any controversy or claim arising out of or relating to this agreement, including but not limited to its enforcement, arbitrability or interpretation shall be submitted to final and binding arbitration, to be held in Delhi, India, before a single arbitrator, in accordance with Arbitration & Conciliation Act, 1996.
3) The arbitrator shall be selected by mutual agreement of the parties or, if the parties cannot agree, then the arbitrator shall be appointed by the court.
4) The arbitration shall be a confidential proceeding, closed to the general public. The arbitrator shall issue a written opinion stating the essential findings and conclusions upon which the arbitrator’s award is based. The parties will share equally in payment of the arbitrator’s fees and arbitration expenses and any other costs unique to the arbitration hearing (recognising that each side bears its own deposition, witness, expert and attorney’s fees, and other expenses to the same extent as if the matter were being heard in court).
Violation of a brokerage agreement
Violations of broker agreements can happen in many different ways. For the client, the main source of a breach of contract occurs due to a failure to pay the broker on time or according to the amount listed in the contract. Another form of a breach is where the client begins working with another broker when the contract has provided exclusive dealing rights for the broker.
For the broker, a common breach of agreement is where they don’t exercise enough diligence in their efforts. For instance, if the broker is lax in placing listings for the property, or if they do not keep up with buyer offers, they could be held liable for a breach. Real estate fraud can also negatively affect the broker’s contract rights. In such cases, the non-breaching party may be awarded damages to pay for financial losses. The amount awarded will depend on several factors including market values and the terms of the contract.
Conclusion
Real estate is a booming sector with increasing middle-class population and investments, especially in India. For its robust functioning, brokerage and agency contracts form the backbone of the real estate sector with brokers and agents being the key player in buying/selling properties. Brokerage agreements need to be neatly drafted and reviewed as to their clauses like services, fees, and payment, etc. are crucial to the functioning of this agreement. With the introduction of RERA, the eventual buyers or sellers of the property will be more protected from fraudulent brokers with a licensing system in place. A proper governing authority in place and increased and robust use of real estate contracts will increase transactions helping the real estate sector to grow and eventually the economy.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
