WHEN IS A SELLER LIABLE FOR A REAL ESTATE BROKERAGE COMMISSION
By: John Newman, Winter 2004
Typically a seller of real estate signs a listing agreement with a broker in which the seller agrees that the broker will be the seller’s agent to sell the property during a specific period of time and agrees to pay a commission if the broker sells the property at the listing price within the listing period. In many cases the broker procures a buyer but the transaction is not consummated at a closing. Reasons range from the buyer changing his mind before entering into a binding contract, to the seller defaulting on the contract. Under what circumstances is the seller liable to the broker for a commission—even when no closing has taken place?
As a general rule, unless the parties enter into a contract of sale and there is a closing the seller is not liable for a commission. Courts read into every listing agreement a requirement that, barring default by the seller, a commission will not be due and payable to the broker unless there is a closing.
A broker earns his commission only when:
(a) he produces a buyer ready, willing and able to buy on the terms fixed by the seller;
(b) the buyer enters into a contract with the seller; and
(c) the buyer closes the purchase.
However, if the seller acts in bad faith or the closing does not occur due to seller’s wrongful act, then the broker can recover a commission from the seller even though there is no closing.
The facts from a recent case demonstrate the nuances of these principles. The seller signed a listing agreement which provided that:
In the event the Broker presents a buyer who agrees to the terms stated in the listing agreement, or any other terms, and the seller fails to proceed with sale, he shall be liable for commission.
The listing agreement was very short - sixty days, ending August 1, 2002. The Seller insisted on closing by August 1, 2002. The broker found a buyer who was willing to close by that date and had a pre-qualification letter qualifying him for a mortgage loan.
The seller’s attorney’s draft contract provided for a closing on August 1, 2002, stated that the initial deposit of $15,000 was due, contained “time of the essence” language and did not contain a mortgage contingency clause.
The buyer’s attorney made a counter-proposal which included a mortgage contingency clause and a 30-day due diligence period. The counter-proposal also deleted the “time of the essence” language.
The seller’s attorney replied that he would not accept a mortgage contingency clause but would accept a due diligence period, but only of seven days rather than thirty days.
The buyer’s attorney replied that buyer refused to delete the mortgage contingency clause or to shorten the due diligence period to less than twenty days.
The seller’s attorney again rejected the mortgage contingency clause and the twenty-day due diligence clause, insisting on the seven-day period previously offered.
The buyer’s counsel sent yet another draft which still contained the mortgage contingency clause but now set a closing date of September 30, 2002.
The seller refused to accept the final proposed contract of sale. The listing agreement had expired and the seller advised the broker that he was removing the property from the market.
The broker sued the seller to recover the full five per cent commission, alleging that the seller engaged in “frustrating conduct” and breached the implied covenant of good faith.
The trial court found that the broker had produced a buyer ready, willing and able to purchase on terms agreeable to the seller, that the buyer and the seller had reached a “meeting of the minds” and that the seller wrongfully changed his mind, frustrating the sale after the broker had earned its commission.
On appeal, the Appellate Division reversed. The court reasoned that from the outset the seller wanted an expeditious closing as evidenced by the short-term listing agreement which indicated that closing would occur on or about August 1, 2002. Despite being on notice of the need to close quickly, the buyer submitted its final contract proposal providing for a September 30, 2002 closing. By that time, the listing agreement had already expired and the broker “had simply failed to produce a purchaser ready, willing and able to perform in accordance with mutually agreed-upon terms, let alone those set by seller.”
The Appellate Division noted that although the listing agreement did not expressly prohibit a mortgage contingency, the buyer’s insistence on such a clause significantly altered the contract. The court ruled that it was clearly within the prerogative of the seller to reject even a full price offer based upon unacceptable terms. The court said:
[A]n owner of a real property who has signed a listing agreement retains the right to
withdraw the property from the market before a buyer is produced; subject, of course
to every contracting party’s obligations to deal fairly and in good faith.
The court said that the fact that the buyer found the seller’s proposal unacceptable and objectionable is not the measure. Rather, the test is whether the putative buyer was a ready, willing and able buyer and had made an offer conforming with the seller’s reasonable requirements, including, in this case, accommodating the seller’s stated need for a speedy closing.
The court ruled that nothing in the seller’s conduct was inconsistent with his obligation to both the putative buyer and the broker, and that the real estate transaction was aborted because of the failure to agree on essential terms rather than any wrongful conduct on the seller’s part.
It is important to note the extent to which the court delved into the factual underpinnings of seller’s claim of good faith. Good faith is not a given and cannot be presumed. Sellers of real estate should always remember that they may required to demonstrate their good faith when a contract fails to be consummated in the absence of any clear default by the buyer. Walking away for a good reason is markedly different than walking away for no reason or a pretext.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
Typically a seller of real estate signs a listing agreement with a broker in which the seller agrees that the broker will be the seller’s agent to sell the property during a specific period of time and agrees to pay a commission if the broker sells the property at the listing price within the listing period. In many cases the broker procures a buyer but the transaction is not consummated at a closing. Reasons range from the buyer changing his mind before entering into a binding contract, to the seller defaulting on the contract. Under what circumstances is the seller liable to the broker for a commission—even when no closing has taken place?
As a general rule, unless the parties enter into a contract of sale and there is a closing the seller is not liable for a commission. Courts read into every listing agreement a requirement that, barring default by the seller, a commission will not be due and payable to the broker unless there is a closing.
A broker earns his commission only when:
(a) he produces a buyer ready, willing and able to buy on the terms fixed by the seller;
(b) the buyer enters into a contract with the seller; and
(c) the buyer closes the purchase.
However, if the seller acts in bad faith or the closing does not occur due to seller’s wrongful act, then the broker can recover a commission from the seller even though there is no closing.
The facts from a recent case demonstrate the nuances of these principles. The seller signed a listing agreement which provided that:
In the event the Broker presents a buyer who agrees to the terms stated in the listing agreement, or any other terms, and the seller fails to proceed with sale, he shall be liable for commission.
The listing agreement was very short - sixty days, ending August 1, 2002. The Seller insisted on closing by August 1, 2002. The broker found a buyer who was willing to close by that date and had a pre-qualification letter qualifying him for a mortgage loan.
The seller’s attorney’s draft contract provided for a closing on August 1, 2002, stated that the initial deposit of $15,000 was due, contained “time of the essence” language and did not contain a mortgage contingency clause.
The buyer’s attorney made a counter-proposal which included a mortgage contingency clause and a 30-day due diligence period. The counter-proposal also deleted the “time of the essence” language.
The seller’s attorney replied that he would not accept a mortgage contingency clause but would accept a due diligence period, but only of seven days rather than thirty days.
The buyer’s attorney replied that buyer refused to delete the mortgage contingency clause or to shorten the due diligence period to less than twenty days.
The seller’s attorney again rejected the mortgage contingency clause and the twenty-day due diligence clause, insisting on the seven-day period previously offered.
The buyer’s counsel sent yet another draft which still contained the mortgage contingency clause but now set a closing date of September 30, 2002.
The seller refused to accept the final proposed contract of sale. The listing agreement had expired and the seller advised the broker that he was removing the property from the market.
The broker sued the seller to recover the full five per cent commission, alleging that the seller engaged in “frustrating conduct” and breached the implied covenant of good faith.
The trial court found that the broker had produced a buyer ready, willing and able to purchase on terms agreeable to the seller, that the buyer and the seller had reached a “meeting of the minds” and that the seller wrongfully changed his mind, frustrating the sale after the broker had earned its commission.
On appeal, the Appellate Division reversed. The court reasoned that from the outset the seller wanted an expeditious closing as evidenced by the short-term listing agreement which indicated that closing would occur on or about August 1, 2002. Despite being on notice of the need to close quickly, the buyer submitted its final contract proposal providing for a September 30, 2002 closing. By that time, the listing agreement had already expired and the broker “had simply failed to produce a purchaser ready, willing and able to perform in accordance with mutually agreed-upon terms, let alone those set by seller.”
The Appellate Division noted that although the listing agreement did not expressly prohibit a mortgage contingency, the buyer’s insistence on such a clause significantly altered the contract. The court ruled that it was clearly within the prerogative of the seller to reject even a full price offer based upon unacceptable terms. The court said:
[A]n owner of a real property who has signed a listing agreement retains the right to
withdraw the property from the market before a buyer is produced; subject, of course
to every contracting party’s obligations to deal fairly and in good faith.
The court said that the fact that the buyer found the seller’s proposal unacceptable and objectionable is not the measure. Rather, the test is whether the putative buyer was a ready, willing and able buyer and had made an offer conforming with the seller’s reasonable requirements, including, in this case, accommodating the seller’s stated need for a speedy closing.
The court ruled that nothing in the seller’s conduct was inconsistent with his obligation to both the putative buyer and the broker, and that the real estate transaction was aborted because of the failure to agree on essential terms rather than any wrongful conduct on the seller’s part.
It is important to note the extent to which the court delved into the factual underpinnings of seller’s claim of good faith. Good faith is not a given and cannot be presumed. Sellers of real estate should always remember that they may required to demonstrate their good faith when a contract fails to be consummated in the absence of any clear default by the buyer. Walking away for a good reason is markedly different than walking away for no reason or a pretext.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
