One reason that brokers and agents like buyer-broker agreements is that the buyer's agent knows up front what level of commission he or she is working for. With a buyer-broker agreement a buyer's agent is not hesitant to show property where the seller may be offering a low commission or even no commission at all. This is because the commission is going to be paid by the buyer. (Typically, a buyer-broker agreement will stipulate that the buyer's obligation will be offset by any amount the seller is paying. For example, a buyer-broker agreement might call for the buyer's agent to receive a commission of 2.3% of the selling price. If, in a given transaction, the seller had agreed to pay the buyer's agent 1.5%, then the buyer's obligation would be .8%)

But what if, after locating a property and negotiating a purchase agreement, the buyer subsequently defaults and backs out of the transaction. Is the buyer's agent owed a commission then? Yes, according to California's Fourth Appellate District Court of Appeal.

In the case of Schaffter v. Creative Capital Leasing Group, LLC the appellate court was considering an appeal from a judgment of the San Diego Superior Court.

Creative Capital Leasing Group (CCLG) hired Brett Schaffter to find desirable condominium properties in the downtown San Diego area. CCLG's strategy was to purchase condominiums in the area when they were in the early construction stage. CCLG speculated that the properties would substantially appreciate during the one- to two-year escrow periods. Upon completion CCLG would resell them.

In 2001 Schaffter and CCLG entered into a standard buyer-broker agreement produced by the California Association of Realtors® (CAR). At the time, Schaffter was an agent with Prudential. Subsequently, Schaffter left Prudential and affiliated with RE/MAX. Not long thereafter, a new buyer-broker agreement was executed between the parties, with RE/MAX as the broker.

In April of 2002, CCLG contracted to purchase eight units in the Park Place development. In February of 2002, CCLG contracted to purchase six units at Renaissance, and in September of that year CCLG purchased two units in Pacific Terrace.

Subsequently, CCLG decided to back out of the Renaissance and Pacific Terrace purchases. The developers, wanting to avoid litigation, allowed the cancellations and only retained $1,000 of the deposit money. Jack Winick, CCLG's corporate counsel as well as a principal, advised Schaffter that they did not intend to pay him any commission on those transactions.

After several months of delays, CCLG ultimately closed on the Park Place purchases, but they refused to pay Schaffter the commission owed to him. In that situation, as in our example earlier, the seller paid a 1.5% commission and the buyer was to pay an additional .8%, having contracted for a total 2.3% commission to Schaffter.

After attempting mediation, Schaffter and RE/MAX brought suit against CCLG (Prudential had assigned its commission to Schaffter). The court was unimpressed with CCLG's arguments. It noted that the buyer-broker agreement specifies that (a) the commission is earned when the buyer executes a purchase agreement, and that (b) it is due if the buyer defaults. It was irrelevant to this that the sellers chose not to pursue damages from the buyer. Moreover, the court was not moved by CCLG's argument that Schaffter's services were only minimal and “not worth more than the 1.5 percent commission” received from Park Place.

Hence, the court upheld the judgment that CCLG owed the commissions.

This was an important case and it should be an important decision to the real estate community. Unfortunately, the decision has not been certified for publication and, thus, cannot be cited or used in other cases. Hopefully, the California Supreme Court will certify it for publication.

Published: September 25, 2008

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .