When is a listing agent owed a commission? The answer to that depends, of course, on the language in the listing agreement. Recently, the Standard Forms Advisory Committee of the California Association of Realtors® (CAR) revised the language in the standard Residential Listing Agreement (RLA). The new language makes it clear that, unless certain exceptions apply, a commission is owed only when both of two conditions are met: (1) a ready, willing, and able buyer makes an offer whose price and terms are accepted by the seller, and (ii) the buyer completes the transaction, unless prevented from doing so by the seller.
Previously (and maybe still) it was widely understood that a commission had been earned if a buyer was procured who made an offer that matched the price and terms specified in the listing agreement , or on other price and terms the seller might find acceptable. A completed transaction was not a required condition for a commission to have been earned.
The previous version of the RLA said a commission was due if anyone: "procures a buyer(s) who offers to purchase the Property on the above price and terms, or on any price or terms acceptable to Seller."
Suppose that one had a listing agreement using the previous form and that the "above price and terms" stipulated something like "purchase price of $300,000, cash proceeds to seller, escrow in 45 days or less." Next, suppose that a buyer came forward with a funds-verified, cash offer of $300,000 and a 30 day escrow. One more supposition: the market seems to be heating up and the seller wants to take advantage of it; so he counters at $325,000. The buyer walks. Has a commission been earned? Under the old language, many would have said "yes".
But not under the new contract. Now, the buyer must have an offer that is accepted. Moreover, he must also complete the transaction (unless prevented from doing so by the seller).
Why the change? Often, when real estate practices change, when contract or disclosure language is changed, it is the result of a court decision. That is what happened here. Last year, California’s Fourth Appellate District Court ruled on a dispute involving whether or not a commission had been earned. The case of RealPro, Inc. v. Smith Residual Company did not involve a CAR listing agreement, but the one that had been used had similar language.
In the RealPro situation, a buyer had made a full-price ($17 million) offer on terms that the seller found acceptable. However, the seller then increased the listing price to $19.5 million. The buyer declined the price increase; but, subsequently, the buyer’s broker, as a third-party beneficiary, sued for his commission.
The trial court focused on the portion of the listing that set forth price and terms, which said "$17,000,000 cash or such other price and terms acceptable to Sellers..." The court’s view was that it would be a mistake to say that the listing was for $17 million. Rather, it "was for $17 million cash or such other price, plus terms acceptable to Sellers."
The Appellate Court said, "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." Pretty clearly, the appellate court was of the view that it is a sale - not just an acceptable offer - that triggers a commission. You can’t fight them; so you might as well join them. The new RLA reads that a commission is due if anyone "... procures a ready, willing, and able buyer(s) whose offer to purchase the Property on any price and terms is accepted by Seller, provided the Buyer completes the transaction or is prevented from doing so by the Seller." [my emphasis]
Readers will note that the new condition (completion of the sale) is qualified by the phrase "or is prevented from doing so by the Seller." Does that mean that, if a transaction is underway and the seller does something to prevent the closing, a commission will then be owed? It reads that way, doesn’t it? We’ll let you know once it has been litigated.