Brokers and agents who use buyer-broker agreements should be pleased to learn that another California Appellate Court has held that a defaulting buyer, who had executed a buyer-broker agreement, owed his broker a commission even though escrow did not close. A similar conclusion was reached by California’s Fourth Appellate District Court of Appeal about a year and a half ago (Schaffter v. Creative Capital Leasing Group). In the more recent case (RC Royal Development and Realty Corporation v. Standard Pacific Corporation) the Second Appellate District Court examined a slightly different issue, but came up with a result that will be equally pleasing to buyers’ brokers.

In June of 2005, the Standard Pacific Corporation entered into a written “Confidentiality and Agency Agreement" with RC Royal Development and Realty Corporation (RC) with respect to information or offers concerning certain properties. In the agreement Standard Pacific agreed to pay RC a 1.5% commission on the gross sale price.

RC brought Standard Pacific and LPC Union Apartments, L.P. (Lincoln) together on a particular piece of property in Los Angeles. Standard Pacific entered into an agreement with Lincoln to purchase the property for $116 million. An escrow was opened in August of 2005 with Standard Pacific paying both a $1 million deposit and an additional $5 million as earnest money. Standard Pacific was given a review period of approximately one month, during which it could terminate the contract without forfeiting the earnest money. Failure to terminate the contract within the time allotted would constitute a conclusive waiver of the conditions contained in the review period.

Another condition of the purchase contract was that a certificate of occupancy be issued on the units that were to be built. No deadline was set for the issuance of the certificate of occupancy and, according to the court record, “time was not made of the essence…"

A variety of delays occurred, and a year later still no occupancy permits had been issued. “[D]uring the period of the delay, the condominium market in downtown Los Angeles suffered a reversal" and Standard Pacific felt the project was no longer feasible. Standard Pacific and Lincoln entered into a release agreement and Standard Pacific forfeited $4 million. Escrow was cancelled and no commission was paid. RC then brought suit for its commission.

The trial court ruled in favor of Standard Pacific, holding that there was no obligation to pay a commission unless escrow closed. RC appealed, and the appellate court reversed the trial court ruling.

The appellate court looked closely at the wording of the agreement between RC and Standard Pacific. The agreement said that RC would be entitled to a commission “in the event that the Property is purchased by [Standard Pacific] within one (1) year…" It then went on to define “purchase" as meaning and including “any and all acquisitions of any direct or indirect beneficial interest in the Property…"

The key concept on which the court focused was “beneficial interest". Standard Pacific argued that it had never acquired a beneficial interest in the property because escrow had not closed. The court disagreed. It held that a beneficial interest in property is acquired when a purchase contract has been executed. It is not full legal title, but it is still an interest that has value. The court noted, for example, that, during the escrow period, Standard Pacific had entered into purchase contracts with prospective buyers of the units.

Hence, by the definition of “purchase" explicitly laid out in the agreement, a purchase had occurred and a commission had been earned. The agreement to pay the commission at the close of escrow was just a matter of the timing of the payment, not a condition of payment being earned.

The decision in RC Development required an examination of the specific language of the buyer-broker agreement that was used. It can’t be assumed that every buyer-broker agreement contains language that would lead to the same result. Brokerages that use such agreements will want to examine their language very carefully. Buyers who sign them should do that too.

Published: April 13, 2010

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Bob Hunt is a former 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 .