Brokerage Agreement: Everything You Need to Know
A brokerage agreement is a type of contract wherein one party agrees to act as a sales agent of another, who is called the principal. 3 min read
Updated October 29, 2020:
A brokerage agreement is a type of contract wherein one party agrees to act as a sales agent of another, who is called the principal. The agent introduces the products of the principal, which is usually an exporting company, in the external market for a commission determined on the basis of the business deals the agent manages to acquire.
Brokerage Agreement Overview
Unlike in a distributorship, the relationship between the parties in a brokerage agreement is not formally interdependent. The concept of a sales agent is especially useful for companies that have just started out in the export business. It allows even smaller companies to access foreign markets without any large investments or international business experience since the agent takes care of everything. This type of brokerage agreement is commonly known as a commission sales agreement.
How to Use a Brokerage Document
The seller, broker, or buyer can prepare a brokerage document. The document contains several options to customize the agreement according to the requirements of the contracting parties. You can specify the amount of brokerage for each successful deal.
A brokerage agreement usually includes the following details:
- Name of the agent or broker
- Industry related to the business
- The goods or services for which the agreement is being made
- Whether the party requesting the broker's service is a buyer or a seller
- Any licenses or qualifications required for the broker according to the law of the place where he operates
- Details pertaining to determination and payment of the broker's fees
- Whether the broker is entitled to the specified commission on introduction or a successful transaction is required
- The role of the broker in negotiating a business deal
- Duration of the contract
- Circumstances that may lead to the contract's termination
After drafting the brokerage agreement, you should take a printout and get both parties to sign it. You should keep it on file during the period of the agreement and for a reasonable time even after the termination of the agreement.
Laws Applicable to Brokerage Agreements
Brokerage agreements are subject to federal and state laws that govern the formation of a contract. Federal laws mostly restrict goods and services that can be the subject matter of a contract (for instance, you can't make an agreement with a broker to provide an illegal service) and other broader aspects of a contract (for example, differentiating a brokerage agreement from a business partnership). State laws, on the other hand, deal with the interpretation and execution of a contract.
Further, there may be specific laws to regulate the licensing and qualification of brokers in certain industries, such as insurance and real estate. For example, in some states, you can't pay finder's fees in the insurance industry. Similarly, in the real estate sector, most of the states do not allow paying a finder's fee to a non-licensed realtor.
When Should You Make a Brokerage Agreement?
You should use a brokerage agreement if:
- You have contacts and experience in a specific industry and can introduce buyers and sellers of certain goods and services for a commission.
- You are into selling goods or services and are willing to pay a commission to a broker for finding your clients or customers.
- You are looking to purchase certain goods or services and are willing to pay a broker to find them for you.
Buyer's Brokerage Agreements
Buyer's broker agreements are common among home buyers who hire the services of a real estate broker to find them a suitable property. There are two major types of buyer broker agreements:
- Non-Exclusive Agreement: In this type of agreement, a buyer is free to search the property through more than one broker. The agreement sets out the scope of broker's duties and buyer's obligations. However, the buyer is under no obligation to pay compensation to the broker. The agreement also absolves the buyer from the responsibility of paying a commission if another party (e.g., the seller) pays a commission to the broker.
- Exclusive Agreement: Under this agreement, the buyer works with a single broker and can't hire other agents to represent him. The hired broker works diligently on behalf of the buyer and is entitled to a commission if the buyer decides to purchase the property the broker introduced. An exclusive brokerage agreement usually runs for a period of one to 12 months while non-exclusive agreements are mostly made for one or two months.
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