Real Estate Brokerage Fees: A Comprehensive Overview

In April 1996, the Real Estate Brokers Law and Regulations came into effect. While the law largely regulates the brokerage world, many perceive it as an unregulated market operating under its own rules. The main point of contention revolves around brokerage fees. Clients sometimes believe the broker did not perform their duties diligently and is therefore not entitled to fees; brokers sometimes demand fees from tenants despite lacking a brokerage agreement; and disputes often arise concerning exclusivity agreements.

This article aims to clarify who is entitled to brokerage fees, the conditions for receiving them, and the actions available to both brokers and clients in case of disputes.

Who is Entitled to Brokerage Fees?

To work as a real estate broker, a license from the Ministry of Justice is required. Only a licensed broker is entitled to receive brokerage fees. (Section 14(a)(1) of the Brokers Law)

The practice of an unlicensed individual working for a brokerage firm and acting as a broker, performing all tasks except signing documents, is unlawful. A brokerage firm may not employ unlicensed individuals, except in administrative roles (Section 13 of the Brokers Law). You can verify a broker’s license in the register of licensed brokers maintained by the Ministry of Justice’s Department for Regulating Professions.

Before engaging a broker, verify their valid license. Without one, they are not entitled to fees (even if you agreed to pay them).

Conditions for Receiving Brokerage Fees

The Brokers Law stipulates several cumulative conditions for receiving fees; failure to meet any one condition invalidates the fee claim. These conditions are: (Section 14 of the Brokers Law)

1. Client as Payer: Only a client is obligated to pay brokerage fees. A client is considered a party to a contract for services with the broker, regardless of whether they pay a fee. (Section 1 of the Brokers Law)
2. Valid License: The broker must hold a valid license at the time of the brokerage activity or be temporarily exempt (sometimes granted to those who engaged in brokerage before the law’s enactment). The license must be valid during the brokerage activity, not obtained afterward.
3. Written Agreement: The client signed a written agreement to conduct real estate transactions containing all details mandated by the Brokers Regulations. If the client agreed to exclusive brokerage, the written document requires additional information.
4. Effective Cause: The broker was the effective cause of the parties’ entering into a binding real estate agreement. Note: A client may use multiple brokers. The question of “effective cause” differs with exclusivity agreements.
5. No Legal Aspect: The broker did not prepare or assist in preparing a legally binding document, nor represent a client in legal negotiations prior to drafting such a document. (Section 12 of the Brokers Law)

Required Details in a Brokerage Agreement

One condition for receiving brokerage fees is a written agreement. According to the Brokers Regulations, this agreement must include:

• Names, addresses, and identification numbers of the broker and client;
• Type of transaction (e.g., “rental,” “sale”);
• Description of the property;
• Approximate transaction price;
• Agreed brokerage fee amount or percentage, and whether the price includes VAT.

While additional details can be included, the above are mandatory. Exclusive brokerage agreements require additional information.

Details Required for Exclusive Brokerage Agreements

The exclusivity agreement is a separate document added to the standard brokerage agreement. It must include:

• All details required for a standard brokerage agreement;
• Broker’s commitment to brokerage activities during the exclusivity period;
• Exclusivity period. For apartments, this cannot exceed six months from signing. For other properties, it cannot exceed one year. For non-apartment properties without a specified period, the law limits it to nine months. (Section 14(b1) of the Brokers Law)

Is the Broker Always the Effective Cause in Exclusive Agreements?

Clients often engage multiple brokers concurrently. The broker who successfully completes the transaction is entitled to fees, provided they were the effective cause. Disputes arise when this causality is questioned. The broker usually claims entitlement, while the client may disagree.

Legislation addresses this. Section 14(b) of the Brokers Law establishes a legal presumption: A broker acting under an exclusive agreement is considered the effective cause.

However, this presumption is rebuttable. In *Bral Nesachim* (CA 4036/16 *Bral Nesachim Ltd. v. Benjamin*, (Nevo, 20.07.2016), the Supreme Court suggested (non-exhaustive) guidelines to rebut this presumption:

Considering all this, several criteria or guiding questions can help determine whether the burden of proof to rebut the presumption in Section 14(b) has been met. These include, without limitation: the date the buyers viewed the property – before or during the exclusivity period; if before, how long before; the date of the deal – shortly after the exclusive agreement, during active marketing, or after marketing; the quantity and quality of the exclusive broker’s marketing efforts; the parties’ good faith – any suspicion of the client knowingly circumventing the exclusive agreement; whether the sellers excluded potential buyers; and how the buyers learned of the property – through another broker, prior acquaintance, or otherwise. Inquiry with the buyers about the key factors influencing their decision is important.

Action Against a Client Refusing to Pay

Attempt amicable resolution first. If unsuccessful, send a demand letter before legal action. This letter is for negotiation purposes only. If unsuccessful, file a civil claim for monetary damages.

For claims under 38,900 ₪ (as of January 2023), a small claims court is an option. Brokers often prefer a slightly reduced claim in small claims court due to lower costs and faster proceedings (approximately six months on average).