When Does the Seller Owe the Broker a Commission? A Discussion of the Law and What it Teaches About Listing Agreements

• Author: by Steven K Mulliken
• Pages: 11

1. INTRODUCTION

Attorneys often are troubled when real estate agents complete sales agreements for both parties to a transaction This offends attorneys because it appears 10 be a conflict of interest, It provides the potential for overreaching and abuse, and It may constitute the unauthonaed practice of law Despite those concerns, the practice is quite common.

The seller's iistmg agreement wth a real estate agent is another area with great potential for abuse Though this situation does not pose similar questmns of the unauthorized practice of law (the real estate agent IS a party to the agreement), it does present problems of overreaching and potential difficulties for the seller. A Significant number of cases have litigated listlng contracts? The greatest number of those cases involve litigation concerning whether the seller owes the broker a commission Unfortunately, the average home buyer does not consult an attorney before employing a broker to sell a house Rather, mast consuit attorneys after problems wth real estate agents arise. Many of these problems could be minimized or avoided through proper drafting of the listing agreement

(19861 [hereinafter Rahanl

This article surveys the law concerning when a real estate broker earns a commission and focuses on when a seller may be liable for a commusion even though the property did not sell It discusses the traditional rule that a broker earns a cOmmiSSiOn when he or she brings to the seller a purchaser ready, willing. and able to meet the terms m the listmg apeement The article also examines the mmonty mle that a commmion IS owed only if a sale occurs and title passes. unless the failure of the sale to go through 1s the fault of the seller Recent cases examining the issue are analyzed to determine whether any trends can be Identified. Lastly, the article prorides guidance for pmctitlonem concernmg draftmg 01reriewmg lliimg apeemems

11. WHEN DOES THE REAL ESTATE AGENT EARN .4 COhI3lMISSION-THETWO DOMINANT THEORIES

A seller negonatmg with a prospective real estate agent must determine when the real estate agent earns a comm1won. Wili the commissmn be due when a contract for sale 1s signed, 01 only after cios-I"@ What happens if the buyer defaults or cannot get financinp Probably few sellers consider thew questions before signing a listing ageement. Unfortunately, they frequently become critical concerns

1. THE MAJORITY RULE: FINDING A READY, WILLING, AND ABLE BUYER

   Most jurisdictions follow the rule that the broker earns a commission when he or she brings to the buyer a purchaser who is ready, wilhg, and able to buy the property on the terms set out ~n the listing agreement.5 While the parties clearly are free to modify that common law mie m their agreement,6 if they fail to do so. a commission mag be earned even though a sale never takes place Similarly, a

   'Id 5 4 0XI)'Id 5 403, s o air0 .Annolatian Modem Vcmc w Lo Right o/Roal Eslotr Bmkei Lo P s c o ~ n

   Commivlon F~omSeiierhnmpd

   %rBuyer4faulU L%& ihlid CmL7ofl @Sa& 12 A L R 4th 1063 1084 (1883)

   IRohan. supra now 2. 5 4 02(1) The author lists LSjun3di~fion~that have adopted

   Lhe fiadlnonal rule concerning when rhe commission IS earned See aka Annotation supra note 4 at 1090-83

   Wohm supm note 2 5 1

   02(2) Became the seller genemy IS not repceunred dunng negotiations with the red estate agent and because agents use form Llsnng apeemenrr prepared b) their counsel II 13 unlikely that the common law, will he altered in faior of the seller

   This ~itu~iionfrequently occurs when the buber defaults pnor 10 closing In that

   event, many junsdictionr would hold that the broker earned hlr e~mmlJJlon *hen a lalid bales contract was entered info See 4nnotatmn. supra note 4 at 1090 266

   19911 REAL ESTATE COMMISSIONS

   full commission generally will have been earned even If the purchaser defaults on payments shortly after closing

   Many of the cases that hold that a commission is earned merely by producing a ready, wdlmg, and able buyer involve Situations in which the seller has backed out of the deal. For example, in Holl~ inger ?J Mc.Wchael,g the seller signed a listing agreement with a broker that included B provision far a su-percent commission. The broker brought the seller a written offer, which was accepted and later modified to adjust the price to reflect the cost of points charged the seller because of FHA financing. When the broker called the seller to arrange closing, the seller indicated that the deal was off. The court found that the broker had earned his commission when he "procured a purchaser able, ready and willing to purchase the seller's property on the terms and conditions specified in the contract of employment.' 'lo

   The general rule appears logm.1 in c a m in which the seller is to blame far the deal's failure. That same rule, however, also can result in liability for a commission when the deal fails through no fault of the seller. For example if, after the sales contract is signed, the purchaser is unable to get financing, the seller generally is mll liable for a commission, even though no sale results." The theory is that the seller is capable of investigating the financial backing of the prospective purchaser and accepts the purchaser by entering into a binding agePement?2 The reahty of most residential purchases, including the short time period most offers remain open, makes this theory more fiction than fact. Regardless, the seller frequently will be responsible for paying the commi~~ionin these circumstances although the deal never closes.

   Liability for a commission also may occur in other instances that are not necessarily the result of seller bad faith, such as when ajoint owner of the property becomes unable or unwilling to complete the transaction!s or when the seller has a defect in title?'

   . / I

2. MINORITY RULE: UPON TITLE CLOSING

   In 196i. m the case of Eilsuorth Dobbs, h c 1, Johnson" the Supreme Court of Sew Jersey took the lead and mersed the tradi~ tional rule. Dobbs malwd the failure of closing because of the fin an^ cia1 inability of the buyer A contract for sale was signed that called far S2500 in payments p r m to closing Those payments were made but the buyer was unable to arrange financing to complete the sale After tying up the property far a year. the seller released the buyer from the contract The real estate agent sued the seller and the buyer for his commission The Supreme Court of Yew Jeney departed from the traditional rule and held as follows

   When a broker IS engaged by an owner of propert) to find a purchaser for IT, rhe broker earns his cornmimion when (a) he produces a purchaser read?. wlling and able to buy on the term3 fixed by the owner, (b) the purchaser enters into a binding contract with the owner to do LO. and (c) the purchaser compleres the transaction by closing the title in accordance with the pro-~isions of the contract If the contract is not consummated because of lack of financial abilit3 of the buyer to perform or because of any other default of his. there 1s no right to commission against the sellerLti

   Otherjunadstmm have found the Yew Jemey rule penuasire with courts in a number OfJurisdlCtlons expressly adopting the Dobbs pow tion" Additmnallg at least one Juradktlon imposes the rule by statute"

   19911 REAL ESTATE COMMISSIOKS

   The New Jersey rule clearly LS the superior rule It more accurate-iy reflects the understanding of the parties, and works equity. While a number of jurisdictions have not adopted the New Jersey rule ex-pressly, courts often attempt to reach the result of the rule through other doctrines. Although a seller can he found liable for a commis-sion when title does not close, courts are hostile to this result and generally avoid Imposing liability on a seller when the sale falls through, unless the failure of the sale was the seller's fault Thus, most courts examine whether the seller was guilty of bad faith.

3. LIABILITY FOR A COMMISSION IS GENERALLY LIMITED To SITUATIONS

   IN WHICH THE DEAL CLOSES OR THE SELLER DEFAULTS

   If a real estate transaction fails to close because of the fault of the seller, courts often will find that a commission is owing When the seller is not at fault, courts will avoid imposing liability on the seller far a commission by employing any number of doctrinal approaches The primary doctrines are discussed below

   1. Construction of the Listing Contract to Require a Sale

   Perhaps not surprisingly. one way courts frequently impose the New Jersey rule IS by construing the listing a5eement to require that a sale or exchange occur before liability for a commission anses. In some instances this IS clearly legnmate, such as when the listing agreement uses language that clearly calls for a sale Listing agree-ments in Xew York, for example, frequently indicate that the commission IS due "as, if, and when title pas~es.'''~

   That language makes the commission contmgent upon title passmg.

   Other junsdictians stretch quite far so reach the desired result For example, m Diehl and Associate$ 1m.c Houtchmzo the court ex-plained that a difference exists between a listing agreement that ''w quires a broker to merely find a purchaser and a brokerage contracr which requires a broker to sell, make. or effect a sale.' The listing ageemens the court was examining began by indicating thac the real estate agent was employed to 'sell or exchange the property" The court focused on that language to desermme that the listing agree-ment required a sale before a commission was due. The court did not note the fallowing language in the clause concerning the com~ rnlSSl0"

   In the event that you, or an> other broken cooperating with you, shall find a buyer readg and willing to enter into a deal for said price and terms, or such other terms and price as I may accept. 01

   that during your employment you place me m contact with a buyer to or through whom at any time within 90 days after the termmasion of said employment I may sell or convey sad property...