17.5 How Brokers Are Engaged

• Library: Real Estate Transactions in Virginia (Virginia CLE) (2019 Ed.)

17.5 HOW BROKERS ARE ENGAGED

17.501 General Rules. ⁴⁰⁶

A. Brokerage Relationship Arises from the Engagement (Employment) of a Broker. At common law, a real estate broker was considered the agent of the party who first employed the broker. ⁴⁰⁷ This concept of "employment" or "engagement" has also been codified in the statute, which defines a "brokerage relationship" as the "contractual relationship between a client and a real estate licensee who has been engaged by such client for the purpose of procuring a seller, buyer, option, tenant, or landlord ready, able, and willing to sell, buy, option, exchange or rent real estate on behalf of a client." ⁴⁰⁸

1. The Employment Contract. Before July 1, 2012, at common law the broker's engagement could be either express or implied, as determined by the conduct of the parties. ⁴⁰⁹ The relationship of the parties was not dependent upon what it was called but what the law considered it to be. ⁴¹⁰ The sole statutory requirement for an express written contract was under the statute of frauds, which requires that brokerage agreements in connection with the sale (but not leasing) of real estate be in writing and signed by the party to be charged. ⁴¹¹

Effective July 1, 2012, oral brokerage agreements, whether express or implied, are prohibited. The statute states that "[b]rokerage agreements shall be in writing" and also requires that the amount of the brokerage

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fee and how it will be paid be expressly stated. It also requires that the agreement state a definite termination date (or else termination will occur 90 days after the agreement date), the specific services to be rendered by the licensee, any other terms of the brokerage relationship, and for dual agency consent situations, the disclosures set out in section 54.1-2139(A). ⁴¹² Because the brokerage statute also expressly abrogates the common law of agency "to the extent inconsistent" with the statute, ⁴¹³ section 54.1-2137(B) now also supersedes the common law relating to implied engagement of licensees. ⁴¹⁴

2. Payment Alone Does Not Create Brokerage Relationship. The statute expressly provides that no principal-agent relationship will be created simply because one party is required to pay the broker. ⁴¹⁵ This is because it is common for the landowner (whether as seller or landlord) to pay the broker's fee directly or indirectly, even where the broker is the agent of (was hired by and owes fiduciary duties to) the buyer or tenant. Rather, payment is but one matter to be considered as to whether an implied relationship exists.

3. No Brokerage Relationship Created by Using a "Common Source Information Company." ⁴¹⁶ A "common source information company" includes the Multiple Listing Service (MLS), which is used by real estate brokers to list properties for sale or lease and which is accessed by all licensed brokers. However, a common source information company may require the broker to provide certain information for using this service. ⁴¹⁷

B. Brokerage Contracts Can Be Either "General" or "Special." The brokerage relationship is "general" when the broker is engaged merely to assist his or her principal in procuring a certain transaction and has no other express conditions attached. Conversely, a "special" contract arises when it contains various conditions that need to occur (whether

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through the broker's performance or otherwise) for the broker to earn his or her commission. ⁴¹⁸

C. Scope of Broker's Authority.

1. Authority Limited.

a. Limited Authority Presumed as Matter of Law. Virginia courts have long held that real estate brokers have a limited scope of power to act on behalf of their principals as a matter of law; this has been defined as the power to "bring the parties together" and "negotiate the sale or purchase of real property" but not to actually execute contracts on behalf of their principals. ⁴¹⁹

b. Parties May Increase Broker's Authority by Agreement. While a principal can vest his or her broker with increased authority, such as the power to bind the principal to transactional contracts, this authority must be verified by the party who deals with the broker or else that party acts at his or her own peril. ⁴²⁰

2. "Written" Brokerage Agreements Must Include Required Terms. Section 54.1-2137(B) provides that all brokerage agreements "shall be in writing and shall:

1.	Have a definite termination date; however, if a brokerage agreement does not specify a definite termination date, the brokerage agreement shall terminate 90 days after the date of the brokerage agreement;
2.	State the amount of the brokerage fees and how and when such fees are to be paid;

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3.	State the services to be rendered by the licensee;
4.	Include such other terms of the brokerage relationship as have been agreed to by the client and the licensee; and
5.	In the case of brokerage agreements entered into in conjunction with the client's consent to a dual representation, the disclosures set out in subsection A of § 54.1-2139."

17.502 "General" and "Special" Brokerage Contracts.

A. General Contract. When a broker is engaged by a principal to procure a purchaser for a listed property, the broker is entitled to a commission once he or she has produced a purchaser that is ready, willing, and able to buy upon terms defined by the owner-principal. ⁴²¹

1. Broker Required to "Find a Purchaser" But Not to Produce Signed Purchase Contract. In the absence of a special condition in the broker's contract (which would make it a "special contract"), ⁴²² it is not necessary for the broker to procure a valid written contract for sale in order to perform what is required for payment of a commission. ⁴²³ Obviously, this same concept will apply to instances where the broker is engaged by an owner to "find a tenant" or where a prospective buyer or tenant engages a broker to "find a property" for sale or lease.

2. Settlement Not Required. The fact that the sale is never consummated (the parties never go to settlement) ⁴²⁴ does not deprive the

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broker of his or her right to receive commissions unless the failure to consummate is due to some fault of the broker. ⁴²⁵

B. Special Contract. The Virginia Supreme Court has long maintained that the general contract rule will control "in absence of a special contract" by which the parties may alter the general rule by making commissions payable only upon the occurrence of certain conditions or contingencies, fulfillment of which is essential to the broker's right to receive compensation. ⁴²⁶

1. Terms May Affect Broker's Entitlement to Commission. In Rotella v. Lange, ⁴²⁷ the broker's entitlement to a commission was dependent upon the purchaser's paying a certain price, and in Edwards v. Cragg, ⁴²⁸ the broker's commission rights depended upon the broker also financing the buyer's purchase from the broker's principal-seller so that the principal could receive all cash for the sale. ⁴²⁹

2. Broker Employed to "Sell" or "Lease" Property Rather Than "Find" a Purchaser or Tenant. A real estate broker employed to sell or lease, as distinguished from a broker employed to "find" a purchaser or tenant ready, willing, and able to buy or lease, is not entitled to compensation until the broker effects a sale or lease or procures from a customer a valid and enforceable contract of sale or a signed lease. The procurement of a verbal offer or agreement to purchase or lease is not sufficient. ⁴³⁰ For example, in GSHH-Richmond Inc. v. Imperial Associates, ⁴³¹ the court

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held that a listing agreement under which a lessor agreed to pay a leasing agent a six-percent commission on all leases originated by the broker required the broker to originate leases by presenting to the owner-lessor a person or entity that would eventually execute a lease for the premises but did not require the broker to complete negotiation and execution of that lease to receive commissions. The court interpreted the plain and ordinary meaning of the express contractual terms and found that the plain, ordinary meaning of word "originate" is "to cause the beginning of; give rise to; initiate" while the plain, ordinary meaning of the word "consummate" is "to bring to completion." ⁴³² So it is obviously very important to choose words wisely in stating the broker's mission in any written commission agreement. Most brokerage contracts require at least that a signed sales contract or lease be produced as a condition precedent to the principal's obligation to pay the broker a commission.

17.503 Express Contracts. ⁴³³

A. Engagement of Brokers for "Sales" Transactions Must Be in Writing. Pursuant to the Virginia statute of frauds, a "contract for services to be performed in the sale of real estate by a [licensed Virginia real estate broker or salesperson]" must be in writing and signed by the party to be charged. ⁴³⁴

1. Oral Agreements Are Acceptable for Sale of Home to Be Constructed on Lot Already Owned by Purchaser. In Pardoe & Graham Real Estate, Inc. v. Schulz Homes Corp., ⁴³⁵ the Virginia Supreme Court held that a broker's oral contract with a builder for the payment of a commission from the builder's sale of a custom home was not an "agreement or contract for services to be performed in the sale of real estate," as contemplated under Virginia's statute of frauds, and thus, the brokerage firm was not barred by the statute of frauds from recovering its commission under that oral contract. The construction of the home had not begun at the time of the oral contract, and the purchasers of the home already owned the land on which the house was to be built. ⁴³⁶ The court noted that "[g]enerally,

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'contracts to erect buildings or other structures upon land are not within the statute of frauds, although the structures when completed will be real estate.'" ⁴³⁷ The court said that an oral contract providing for a sales commission is not subject...