Key Issues for Property Brokers
Referrals from brokers are the foundation for many cross-border property deals. The circumstances are usually some variation of the following: –
- The prospective international buyer contacts a trusted local broker about property opportunities in a foreign country.
- The expectation is not that the local broker will be familiar with property opportunities in the foreign country; but rather the local broker will know of a trusted broker in the target foreign country (“Target County”) that can identify a suitable property and facilitate a smooth transaction.
In the best circumstances, the transaction is a win-win for all involved: (a) the broker in the Target County gets a new customer; (b) the international buyer is introduced to a knowledgeable broker in the Target Country that facilitates a cross-border deal at no additional cost to the buyer; and (c) the referring broker receives a broker referral fee and goodwill from the local client for the referral.
In the worst of circumstances, the broker in the Target Country lacks the skill-set to facilitate the cross-border deal, the client becomes frustrated and the referring broker loses the deal and his relationship with the client.
Referring brokers should do their homework before making a referral to a foreign broker. This would include (for example):
- Due diligence on the foreign broker. Does the broker appear to have the requisite experience and knowledge to facilitate the transaction? The broker need not know the answer to every question; but should (at a minimum) be able to identify major issues including rules on foreign ownership and/or visa matters. It is also worthwhile to ask the foreign broker for proof of licensing (if applicable) and/or check if the foreign broker has the Certified International Property Specialist designation (CIPS).
- Lawful and Binding Referral Agreement. Most introduction agreements are informal (e.g., oral contracts). Honest brokers will fulfill their obligations, but dishonest ones will not. Demand that the foreign broker signs a written contract memorializing the agreement (it does not need to be long) and confirms the broker referral fee is lawful in the foreign broker’s home country. Unscrupulous brokers will often refuse to pay a referral fee on the pretext that the introduction fee is unlawful in their home country. Depending on the size of the transaction and the location of the parties, it may be worth inclusion of a choice of law provision and arbitration agreement.
- Ask if there are any tax implications for you as the referring broker. An out-of-country referring broker will generally not be taxed on his/her referral feeby the Target Country. This is because the referring broker did not perform any services in the Target Country (i.e., was physically outside of the Target Country during the referral process). This is the position in the United States and you would have a similar outcome in non-income tax jurisdictions like the United Arab Emirates.
That said, some Target Countries may require withholding on the out-of-country referring broker’s introduction fee (thereby reducing the net amount of the referral fee) or deny a deduction to the broker in the Target Country for the payment of the introduction fee, the effect of which may be passed onto the referring broker. Ask the question so that the parties’ expectations are aligned and there are no surprises.