Defining an Exclusive Representation Agreement
Exclusive Representation Agreement in its most basic form is an agreement that certifies that a lawyer will represent a client exclusively, or a broker will represent a seller of a particular product or service. You might think of Exclusive Representation Agreements as exclusive employment contracts. They have become pretty routinely used in the legal world. They are not the norm in business matters though. Some industries start out with a practice and then they use that practice as a model to help them scale their businesses. For example , the model of having exclusive representation agreements for real estate agents came from the broker and those contracts have largely been used ever since. We didn’t really see it in other industries until recently. Franchise businesses use them sometimes with mixed results. Now we are seeing a rise in contracting for online businesses.
Integral Components of an Exclusive Representation Agreement
An exclusive representation agreement creates a fiduciary relationship between the customer and the real estate professional hired by the customer to represent the customer’s interests. The terms of the agreement define the levels of service, scope of work, duration of agreement, and compensation payable to the real estate professional by the customer for the services provided. Listed below are some of the main elements of an exclusive representation agreement that customers and real estate professionals should understand:
The parties to an exclusive representation agreement are the real estate professional offering the services and the customer who is hiring the real estate professional to perform the services.
The scope of services includes the specific real estate activities that the real estate professional will perform on behalf of the customer.
Duration of agreement indicates how long the real estate professional has committed to provide the services to the customer.
Compensation structure refers to how much the real estate professional will be compensated for their services and the timing of the payment for those services.
Advantages and Disadvantages of Exclusive Representation
Exclusive representation agreements can offer various advantages to the parties, such as ensuring a consistent level of service from the representatives and giving each party an assurance from the other that their interests will be a priority. Such exclusivity also reflects the general rule that contracts do not impose automatic obligations to deal with or make available assets to another party or parties.
There can also be a burden to exclusivity, however, such as when the representative does not meet expectations or if there are expectations for performance by more than one representative, such as when selling or otherwise disposing of property in exchange transactions. It may also unnecessarily restrict the actions of the parties. In most such cases, the parties have the unilateral ability to make disclosures, or give notices, that would otherwise violate such limitation.
If sales or dispositions are being made that are subject to restrictions due to exclusivity or related to the representation, the parties should address the matter in the underlying deal documentation. This avoids any inconsistency with other documents and ensures that the agreement will still be subject to confidentiality obligations that may apply to them.
Complications can arise in the cases of dispositions or representations or transactions that are structured as offers for conditional or contingent deals and that may or may not close. Under such contingencies, exclusivity, can be a trap for the unwary, where one party purports to make conditional arrangements with another party potentially to benefit from the results of the prior party’s efforts despite the exclusive representation agreement.
Crafting an Exclusive Representation Agreement
An exclusive representation agreement is one of the first binding steps a potential client has with a firm, so it’s important to make sure that all necessary terms are included and that the agreement is properly drafted so as to protect everyone involved – including the potential client.
If you’re interested in setting up an exclusive representation agreement, there are several steps you should take to ensure that you have everything you need to create an enforceable agreement.
Talk Through All Terms
When a potential client expresses interest in retaining your firm, schedule an in-person meeting or a phone call to discuss all terms and determine if they’re agreeable to both parties. Once you have settled on all terms, send the potential client a draft of the exclusive representation agreement so they can provide feedback and make sure that your understanding of those terms is accurate. If the potential client proposes any modifications, be open to discussing those changes and how they might impact the agreement. Once you’re both satisfied with the agreement, you can either send them the official version, which they will review and sign. Or, if your state allows, you can sign the representation agreement digitally for even greater ease.
Use at Least Two Signature Blocks
As you draft your exclusive representation agreement , make sure to include at least two signature blocks. The first should be filled out to include your own information (i.e. name, bar number, law firm name, etc.), and the second should be filled out to include the potential client’s information. If the potential client is married, they should also sign and print their spouse’s name below their own on the form. If the potential client is a business entity, you should obtain the signature of the individual or information you agreed the firm would primarily deal with.
Verify Phone Numbers
Before signing the exclusive representation agreement, verify the potential client’s phone number. Obvious fakes, like 555-1212 are easy enough to identify, but there could be more subtle issues. For example, does the phone number have the right format? For example, cell phones in Toronto, Ontario would have a number format of 416-666-1212, not 416-121-6666. If contact information is important to your firm to be able to get in touch with the client in the future or in case you need to forward a copy of the signed agreement to someone else, then you should ensure you have the right addresses and phone numbers before signing the agreement.
Keep a Copy for Your Records
Before sending the final version of your exclusive representation agreement to the client, make sure you keep a copy of the signed agreement for your records. This will allow you to refer back to the agreement later if necessary.
Legal Implications and Risks to Consider
When entering into an exclusive representation agreement, there are several legal considerations and potential pitfalls to avoid. The first is to ensure that the agreement is in writing and signed by both parties. A contract for exclusive representation does not have to be in writing according to the general rule for contracts, but in practice a signed writing is imperative for reducing disputes. The agreement should also clearly state whether the client’s requirement for the professional service is project based or ongoing and specify the fee for each type of service. Many clients require different services from year to year which leads to confusion when trying to determine the fee when they have retained their professional for multiple years.
Another common potential pitfall when awarding contracts for professional services is failing to consider the total not-to-exceed fee when the contract is for ongoing services for an indeterminable period of time versus a specific term. Many public agencies cap the fee for ongoing services at $200,000, but the fee is capped at $100,000 under the general practice act. Often public agencies choose to avoid the $200,000 cap by dividing the contract award into smaller individual contracts so the agency can retain its professional without having to comply with the competitive bidding requirements.
When dealing with an ongoing contract for exclusive representation, or a contract for professional legal services, public agencies must be cognizant of the California Public Contract Code ("Code") which has different requirements for various professionals such as engineers, land surveyors, architects, and landscape architects. Among other provisions, the Code bars any single public agency from awarding a contract for any combination of engineering and land surveying or land surveying and architecture (architectural related activities that require a license) that exceeds the $200,000 cap. This restriction has led many public agencies to award multiple contracts for a single proposed project; thereby allowing architects to form joint ventures so one of them can perform architectural related activities (within his or her individual $200,000 cap limit) and then separate the joint venture so the other architect can also conduct architectural related activities (within a separate $200,000 cap limit). This is a common practice in the private sector in order to avoid the complications of a developer dealing with bonding and insurance issues with multiple licensed professionals.
Case Studies: Successful and Unsuccessful Exclusive Representation Agreements
To illustrate the impact of exclusive representation agreements, two case studies are offered.
The first example is of a successful exclusive representation agreement between a plans administrator (TPA) and a third party coach operator. A TPA sought to represent a national coach operator in the resolution of a pending claims dispute. The TPA handled all aspects of the dispute with the claims administrator. The client had negotiated favorable fees for the service from the TPA. The client also wanted the security of knowing that he was getting the best available services and fees from the TPA. He granted the TPA an exclusive representation agreement in exchange for the TPA providing price and servicing advantages over other service providers, such as Turner, Lewis and Sara Lee.
The second example is of a challenged exclusive representation agreement between a national wholesaler and a disability claims administrator. In this instance, the wholesale company had accepted too high a level of commissions and fees from competitive disability carriers . When it was time for renewals with long term disability carriers, the wholesaler was hesitant to use the preferred TPA or the carrier that offered him a zero fee commission arrangement. He initially allowed the TPA to market exclusively; however, when the TPA gave notice that it was no longer going to market the account, the wholesaler exercised the escape hatch and requested a service model that would allow it to utilize multiple service providers, including the preferred TPA. It had no interest in purchasing the TPA’s preferred services on its own.
The misunderstanding arose from the scope of the exclusive representation. The TPA should have used a general representation agreement or the TurnKey program to reflect its understanding. The TPA misrepresented its services to the account. The TPA wanted the ability to market to 100% of the prospective accounts in the channel. The wholesaler heard something different from the TPA (i.e., that it could save him substantial money if he used only it). Neither used written documents to define the representation agreement.