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For real estate brokers, the new year should be a time to consider new measures to safeguard commissions, starting with a review of commission agreements. Besides being statutorily required, a commission agreement is also the broker’s protection: it memorializes the commission arrangement and provides remedies if the commission is not paid.

In addition to complying with the Statute of Frauds, commission agreements should also address scenarios that have become more common in the marketplace: extended closing dates and defaults. Two recent cases demonstrate how a poorly drafted agreement can jeopardize a commission under such circumstances.

In Classic Homes Realty v. E.J.G., the court denied a broker’s commission claim because the sale of property did not occur within the listing agreement’s time frame. The listing agreement contained a standard survival clause, providing for a commission if the property was sold within 180 days from the expiration of the listing to a buyer introduced to the property by the broker. A contract to sell the property was executed during the 180-day time frame. But the contract contained a 60-day due diligence clause, giving the buyer the right to terminate for any reason during due diligence, which expired after the 180-day survival period. Based on the listing agreement, the broker was entitled to a commission if the property was “sold, leased or exchanged within” 180 days from the expiration of the listing “to a buyer introduced to the property during the term of the listing agreement.”

The court explained that under well-established law, a real estate commission is payable upon completion of a sale. Even if a transaction is not completed until after expiration of a listing period, the broker will still be entitled to a commission if a binding written contract is executed during the listing period. In the Classic Homes Realty case, however, the court concluded that the property was not “sold” and that a binding contract did not exist during the listing period because the buyer had the right to terminate anytime prior to the expiration of due diligence.

Until such time, the seller could not specifically enforce the contract or seek damages from the buyer for failing to perform, since the buyer had reserved an absolute termination right. Consequently, even though it clearly facilitated the deal, the broker lost a commission because the contractual due diligence happened to end after the listing agreement had expired.

The court did address the obvious concern about parties manipulating due diligence dates to avoid a commission, which the court characterized as “connivance.” The court reiterated that under Ellsworth Dobbs, Inc. v. Johnson, parties to a contract are obligated to deal with brokers fairly and in good faith. Brokers can sue for damages if they violate this obligation and conspire to avoid payment of a commission.

The court also observed that brokers and their clients, being sophisticated real estate practitioners, are able to draft agreements that address when a commission will accrue and be payable. Presumably, if the listing agreement in Classic Homes Realty had been drafted differently, perhaps to define the property as being “sold” when a contract of sale is executed, the court would have enforced the agreement and awarded the broker a commission.

In a separate case, a broker was also denied a commission when a contract purchaser defaulted and forfeited the deposit. In FGH Realty, LLC v. Centex Homes, LLC, the buyer decided to walk away from the deal after securing development approvals. The contract of sale contained a default clause entitling the seller to terminate the contract, retain the deposit as liquidated damages and receive all of the plans and approvals for the project. The broker sued the buyer for its commission, arguing that the buyer had breached its implied agreement with the broker pursuant to Ellsworth Dobbs.

In denying the broker’s claim, the court observed that while the buyer may have defaulted under the terms of the contract by failing to close, it did not breach the contract. The contract contained specific remedies in the event of the buyer’s default. From the court’s perspective, the buyer did not breach the contract because it complied with those remedies, being forfeiture of the deposit and an assignment of all plans and approvals.

As the court explained, the broker’s rights are derived from the contract between the seller and buyer. If that contract is properly terminated, a claim against the buyer for breach of its implied obligations to the broker cannot be sustained.

The court’s reasoning is troublesome, since the broker should not suffer when a contract purchaser who does not have a termination right nonetheless elects to walk away from a deal. It also appears illogical, since the broker presumably would have a valid claim against the buyer if it had contested the release of the deposit or the plans.

Interestingly, the court did not advise if the broker pursued its commission from the seller, who received the deposit as liquidated damages. If not, it may have been because the broker clause in the contract of sale obligated the seller to pay a commission only if a title closing occurred.

There are several lessons to be learned from these two cases. First, the commission agreement should provide that if a contract of sale is executed during the survival period and a closing ultimately occurs, the broker will be entitled to a commission. The commission agreement should clarify that the commission will be earned upon execution of the agreement, not when due diligence or other contingencies are satisfied, and will be payable upon closing of title. As illustrated by Classic Homes Realty, brokers cannot afford to risk their commissions on a court’s interpretation of what it means for property to be “sold.” Therefore, brokers should embrace the court’s recommendation that they draft their commission agreements in a manner that more clearly defines when their commissions will be earned, due and payable.

Second, the commission agreement should address the seller’s obligation to the broker if a contractual deposit is forfeited. The broker should be entitled to a portion of the deposit, and this obligation should supersede any contractual language providing for payment of a commission only upon a title closing. While the broker may not have recourse against a defaulting buyer, it should not be prevented from collecting a portion of its commission from a seller who receives liquidated damages. Like the seller, the broker is entitled to be compensated for its time and effort.

Finally, if a buyer defaults under a contract of sale, the broker should assert a claim against the buyer under Ellsworth Dobbs. If the buyer fails to comply with a default clause, it may expose itself to a commission by having breached the contract.

In these difficult times, brokers must vigilantly protect their commissions. It is time to dust off the standard commission agreement and revise it to incorporate precise terms and definitions that will protect the broker’s entitlement to a commission and enhance his/her ability to collect it.

Craig W. Alexander is a partner in the law firm Mandelbaum Salsburg Gold Lazris & Discenza in West Orang. He can be reached at [email protected] The views expressed in this article are the author’s own.

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