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Court Rules Broker With Full-Price Offer Not Entitled To Commission

Written by on Monday, 11 June 2012 7:00 pm

Some people will tell you that a broker has earned a commission if he or she brings an offer by a ready, willing, and able buyer at the listed price on terms acceptable to the seller. Others will say that a commission has not been earned until an offer has been accepted and a purchase contract entered into. Still others will say that a commission has not been earned until a sale has closed.

Of course, it all depends. In particular, it depends on what is said in the listing agreement. And, as a recent California case (RealPro, Inc. v. Smith Residual Company, LLC et al., Fourth Appellate District Court of Appeal) makes clear, while we may agree about what is said in the listing agreement, we may disagree about what it means.

Here is what happened. MGR Services, Inc., a real estate broker, entered into a listing agreement with the owners of 46.8 acres of vacant land in Riverside County, California. The agreement was from September 21, 2005 to April 1, 2006. According to the court record, it set forth price and terms as follows, "$17,000,000 cash or such other price and terms acceptable to [Sellers], and other additional standard terms reasonably similar to those contained in the 'STANDARD OFFER AGREEMENT AND ESCROW INSTRUCTIONS FOR THE PURCHASE OF REAL ESTATE,' published by the AIR Commercial Real Estate Association ('AIR') or for such other price and terms agreeable to [Sellers]."

The listing agreement specified that a cooperative broker could, "as a third party beneficiary hereof, enforce the terms of this [Listing] Agreement against the [Sellers] or [MGR]."

In late November of 2005, RealPro brought to MGR a cash offer at the listed price of $17 Million. The buyer was "ready, willing, and able to purchase the Property…on all material terms contained in the Loopnet listing as represented by MGR…" Subsequently, MGR acknowledged receipt of the offer and indicated that the listing price was being increased to $19.5 Million. "Except for the increased price, Sellers indicated that the terms of buyer's offer to purchase were acceptable." No purchase agreement was entered into.

Then, in March of 2006, RealPro, as third party beneficiary of the Listing Agreement, demanded its 2 percent brokerage fee. When the sellers refused to pay, RealPro filed a complaint alleging breach of contract and breach of implied covenant of good faith and fair dealing. The trial court found that RealPro had "failed to allege facts giving rise to the existence of an enforceable written contract for the payment of a real estate commission…" and entered a judgment in favor of the sellers. RealPro appealed.

The appellate court took note that "the trial court focused on specific language in the Listing Agreement." The appellate court said that "Regardless of all the arguments raised by both parties, the outcome of this appeal is solely dependent upon the interpretation of the language in the Listing Agreement." It went on to say, "The confusion centers on the use of the word 'or' in the Listing Agreement." [shades of Bill Clinton] "RealPro interprets the word 'or' as separating $17 million from 'such other price and terms acceptable to [Sellers].' However, we interpret it to include 'such other price'. Thus, the listing was for $17 million cash or such other price, plus terms acceptable to Sellers."

The appellate court stated that, "we, like the trial court, conclude that the $17 million price was merely an invitation to submit offers." "Although RealPro submitted an offer to purchase the Property, such offer never materialized into a sale that would trigger RealPro's right to a commission."

We all know how important it is to know what your contract says. This case puts us on notice that it is even more important to know what it means. However we are supposed to figure that out.

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  About the author, Bob Hunt

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.