Real Estate Finance Notes 8/20/04

When is the commission earned?

There are lots of ways under the listing agreement in the book. The agent gets a conclusive presumption that he or she caused the sale! Does there have to be a sale in order to have a selling price? How could there be a selling price if the seller removes the property from the market? But there is a selling price listed on the contract. How do we feel about the rules for when the agent earns the commission? If you’re representing the seller, you’ll want to change the paragraph about the commission in a number of ways. If you wanted to make it clear that the agent only received the commission in the event that the sale closed, what would you say? What about the doctrine of preventing performance? If the agent brings in a good offer but you screw it up in some way, they’ve probably earned their commission. Is it enough to say that the commission is due “at the closing” or “when the sale closes”? What if the buyer defaults? Do we protect ourselves by saying that the commission is payable when the sale closes? Wouldn’t the court just imply a reasonable time? If the condition that was agreed upon never occurs, then the court will say that the commission is at a reasonable time. Thus, you’ve only really agreed on when the commission gets paid, not if it gets paid.

There are other elements you might want to change. The agent want to be protected from being cut out of the deal by the buyer and seller waiting until the listing expires. So they put language in saying that if you sell the property to anybody who they introduced you to, even after the six months is up, they still get the commission. You would want to make the agent notify the seller in writing of everyone that they think they had introduced you to. Also, it can be negotiated so that it only applies if there isn’t another agent involved. The rationale is that you shouldn’t have to pay twice.

Drake v. Hosley

There are more than two people who want to buy property in North Pole, Alaska! So first, Drake signs an exclusive listing agreement with Hosley. A purchase agreement is signed such that they are to close within 10 days of getting evidence of clear title. The thing is that Drake owes some money to his ex-wife. How will that be handled? Well, he was going to pay off his ex-wife as soon as the property is sold. Good title is considered at the time of closing. Sometimes you can get good title by using the proceeds of the sale to pay off any liens on the property. So they get evidence of clear title. Then Drake’s attorney and Hosley apparently agree to expedite the closing. There’s no closing on April 11^th, and then on April 12^th, Drake sells to another person. Did Drake really find a buyer between April 11^th and April 12^th? No way! Someone probably came and told him they would pay more if he could weasel his way out of the contract. On April 12^th, Hosley tenders performance.

The simplest way to buy property is to pay cash out-of-pocket. One alternative is to borrow the money from the bank in exchange for the mortgage. To the seller, it’s all the same because they get cash. But it might be hard to find a bank in North Pole, Alaska! Or maybe you have bad credit. Maybe the seller will say: “Okay, I’m the bank!” The buyer buys a down payment and then agrees to pay the seller in installments. At the end of the day, as far as the buyer is considered, it’s pretty much the same. But the seller has some cash plus a promissory note secured by the mortgage to pay the balance.

Hosley sues for his commission. Does he get it? Yes! What’s the rule of the case? The commission is earned when the seller accepts the buyer: the seller is then estopped from saying that the buyer isn’t suitable. At that point, the seller becomes obligated to pay the commission. What’s wrong with that rule? What is the Dobbs rule? The Dobbs rule requires performance, that is, closing the sale in order for the commission to be earned. What’s the public policy here? The court says that people commonly understand that you don’t pay unless the sale closes. So they make a new rule there for New Jersey.

What if you want to do business differently? What if the broker wants the commission as soon as a buyer is found and accepted by the seller? That seems to be the problem with the rule. Some say that we want people to be able to contract any way they want. But that’s not the sentiment of the consumer protection movement. Should we have freedom of contract, or should consumers be protected from themselves? Other courts who have adopted the Dobbs rule have said that you can waive it, but it’s kind of like a UCC requirement: you have to give lots of notice to the seller to assure that they know what they’re getting themselves into.

What happens here? Does it matter what rule the Alaska court adopted? It doesn’t because performance was still tendered. Thus, the court argues, the buyer attempted to perform and thus, according to Dobbs, the seller defaulted. We assume that the result is that Drake must pay two commissions: one to Hosley and one to the agent who secured the eventual sale. Did Drake deserve this?

What was the deal about who Hosley represents? Why did the court care? The court says that Drake’s attorney and Hosley can’t agree to anything because they both represent Drake. Whatever Hosley said, it doesn’t make a difference because the agreement wasn’t between the buyer and the seller. This is how the court upholds summary judgment. Does this make sense? Maybe Hosley talked to the sellers. You can at least imagine that he did. We don’t get a trial to find out. Maybe Hosley mediated an agreement. But as a matter of law, the court finds that Hosley is not an agent of the purchasers and can’t bind them.

But the court could have dealt with this differently. The contract doesn’t say that time is of the essence. They could have said that closing on the 12^th or the 13^th is okay. They could have said Drake is a creep who shouldn’t be able to weasel his way out of paying the commission. But they say that Drake’s attorney, Wickwire, and Hosley both owe their allegiance to Drake. Even if the court adopts Dobbs, Hosley still gets his commission. Most states use the old rule. A minority have adopted Dobbs. But Dobbs is the recent trend. (CRASH!)

A problem on liability for commission

“Pursuant to a non-exclusive listing agreement, O places his property in the hands of B1, B2 and B3 for sale at $10,000. B1 produces a buyer willing to buy the property for $10,000. Before the contract is signed, B2 produces a buyer for $11,000. So, O refuses to sign with B1’s customer and signs with B2’s instead. Thereafter, B2’s customer suffers financial reverses and refuses to go through with the deal. Thereupon B3 produces a buyer at $9,500. O, disgusted with the whole thing sells to B3. To whom does O owe a commission?”

Under the traditional rule and under Dobbs, O will owe a commission to B1. Under the traditional rule, he owes the commission to B2, but not under Dobbs. He owes a commission under either rule to B3 since the sale actually went through. Does it make a difference that it’s for less money than he originally wanted to sell it for? He could have held out for his $10,000 and not owed a commission to B3.

What about involuntary sales? What if the property is taken by eminent domain or foreclosed upon and sold at an auction? Do you have to pay a commission? Say the agent has an exclusive listing. Is there anything in the contract that says the sale must be voluntary? Nope. We don’t intuitively like the idea of the seller having to pay a commission when there is an involuntary sale, but that’s what the contract provides for. Many cases have held that in the case of involuntary sales the seller owes the commission. That could be one thing you would want to change if you were an attorney representing the seller.

Who does the broker represent?

Typically, the broker represents the seller. But the law and reality are totally out of whack. Generally, you call a real estate agent and ask to buy a house. You want them to drive you around and show you places. You typically think of that person as being your agent. You’ll ask if there’s anything wrong with the house. If the agent were really the agent of the seller, then the agent would say: “I can’t discuss that with you.” But that’s not the way that the market works! The agent, as a factual matter, represents both parties. But as a legal matter, the agent owes a fiduciary duty to the seller. In litigation, sellers may claim that agents violated an exclusive loyalty due to the seller. Many states, including Ohio, have changed the law such that agents can represent the buyer, the seller, or both. The requirement is that the agent must deliver a disclosure form, usually at the time the offer is submitted.

There is a duty to disclose the agency relationship. There is a duty to disclose material defects. In many states, including Ohio, there are statutory requirements that the seller must disclose material defects. This was pushed for by agents so they could get off the hook for having to disclosure bad stuff.

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