BrokersReal EstateWhat Every Real Estate Broker Should Know About Commissions

October 18, 2021by Jeffrey Davis
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The purpose of this article is to provide some insight and education for real estate brokers. The goal as a broker is to get paid for putting together real estate transactions. This article will hopefully help you understand the legal and factual hurdles you will face when earning your commission so you can improve your contract management process and secure your ability to get paid.

What do I need to prove in Court in order to earn my commission?

In New York to prevail on a claim to recover a commission, the broker must establish: (1) that they are duly licensed, (2) that they had a contract, (express or implied), with the party to be charged with paying the commission, and  (3) that the broker was the “procuring cause of the sale”.

Do all sales agents need a license to collect a commission?

Yes. The broker must be licensed and all sales agents under the license must be licensed.

Do I need a written agreement to earn a commission?

No. The agreement between the broker and the client can be either express or implied meaning a broker can be entitled to a commission even without a written agreement.

What is the “procuring cause of a sale”?

Whether a broker is entitled to a commission will depend on whether the broker was  the “procuring cause of the sale” – a common and highly litigated issue. Courts have held that where the broker is not involved in the negotiations leading up to the completion of the deal, the broker must establish that the broker created an amicable atmosphere “in which negotiations proceeded or that [it] generated a chain of circumstances that proximately  led to the sale”.

How do I support my claim for a commission?

It’s important to document your efforts in furthering the transaction between the buyer and the seller. That means you should have a written agreement, you should keep track of all of your expenses, maintain a record of all of your correspondence (whether written or oral), maintain a record of any meetings or showings, and maintain records of your marketing efforts.

Can the client require extra conditions to earning my commission?

Yes. Although as a general rule a real estate broker will be deemed to have  earned a commission when the broker produces a purchaser who is ready, willing, and able to purchase  the property on terms acceptable to the seller, the broker’s right to a commission may be varied by a written  agreement.  To state it another way, unless the parties have agreed otherwise, a real estate broker will be deemed to have earned their commission when he produces a purchaser who is ready willing and able to purchase at the terms set by the seller.This means that the parties to a brokerage agreement can add whatever reasonable conditions to their agreement, including a condition that the contract of sale actually be consummated before the broker is deemed to have earned his commission.

Can my client deny me my commission?

No. Your client cannot do things to intentionally defeat your right to a commission. Courts have held that a broker may still have a right to a recover its commission on the grounds that the seller wrongfully or arbitrarily prevented the completion of the deal. Even where the broker cannot establish that it was the procuring cause of the sale, it may be entitled to recover a commission if the broker’s client terminated the broker’s activities in bad faith and as a mere device to escape the payment of the commission.

However, a word of caution: whether the client terminated negotiations with a potential buyer in bad faith to deprive the broker of a commission is a triable issue of fact. In English, this means that if you are going to argue that the client’s bad faith entitles you to a commission you should have meticulous records proving your case which in turn means you should implement appropriate contract management processes in your ordinary day-to-day practices to ensure that when the time comes for you to sue your client, the facts and proofs weigh heavily in your favor.

Will an oral agreement between the buyer and seller be enough to enforce my right to a commission?

Yes. However, you better have the right proof. In Regency Homes Realty Group, Inc.  v Leo and Laura, LLC the facts of the case were as follows: The broker, who was a licensed real estate brokerage firm, and the seller entered into an exclusive listing agreement concerning the sale of the seller’s property located in New Rochelle (the property). The listing price was $5.5 million and the agreement provided for the payment of a 6% commission. Paragraph 4 of the listing agreement provided that the seller was obligated to pay a commission if, during the period of the agreement, the property was sold or transferred, the property was the subject of a contract of sale, or the seller and a buyer reached a verbal agreement regarding the material terms of a sale.

Later, the buyer and seller allegedly entered into an oral agreement to sell the property for $4.7M. The seller then backed out of the deal because there were other terms that he allegedly didn’t agree to. The broker sued the seller based on the oral agreement between the seller and buyer to purchase the property for $4.7M citing paragraph 4 of his listing agreement. According to the Court, the brokerage agreement is clear and unambiguous that a commission was due if there was an oral agreement as to the material terms of the sale.

However, the Court also noted that there were triable issues of fact as to whether there was ever an agreement between the buyer and seller because there were questions about material terms of the sale. The essential/material terms of any contract of sale include “the time and terms of payment” and since it wasn’t clear whether the buyer and seller had a meeting of the minds on the “time and terms of payment”, the broker’s claim would have to go to trial.

There is a critical lesson from the above case. It is important for every broker to remember, that even if you believe you are entitled to a commission based on an oral agreement between the buyer and the seller, you need to make sure that the oral agreement covers all of the material and essential terms for a binding agreement so you don’t run into an issue that will force you into an expensive trial. If there isn’t a meeting of the minds with respect to ALL of the material terms of an agreement between the buyer and the seller, you may not be entitled to your commission. Those are issues of fact and issues of fact are often determined through extensive discovery or at trial. Therefore, the solution for you as the broker is to first consult with your attorney when putting together a deal sheet or deal memorandum when memorializing the terms of the alleged oral agreement.

If my client doesn’t own the property could he still be responsible for paying the broker fee?

Yes. An interesting rule of law that many brokers do not realize, is that an individual doesn’t have to own the property to employ a broker and to be liable for that broker’s commission regarding the sale of that property. Therefore, if someone enters into an agreement with you to sell property, they may be on the hook even if they don’t actually or technically own the property.

Can my client, the principal of a Company, be personally liable for the commission if the property is owned by the Company?

Yes. If you have a listing agreement that does not indicate that the individual who executed the agreement was acting as an agent for someone else, then that person may be personally liable for  the commission. Therefore, a principal of a company who employs a broker can be personally liable for commissions (when the broker performs the contract by procuring a purchaser), even though the principal does not personally own the property involved and cannot, therefore, sell it. Where the listing agreement is clear and unambiguous on its face, outside evidence that the individual was acting as an agent may be inadmissible to defeat your claim for a commission.

What does this mean for you as a broker? Well, for example, where an individual signs the listing agreement in the section designated for “owner,” and does not identify herself as an agent, or state that she did not intend to be responsible for the obligations that she assumed, then she may be held personally liable under the listing agreement unless she can later prove (at trial essentially) that she was acting as an agent and disclosed that relationship prior to signing the listing agreement. The important takeaway here is, it matters what your contracts say. Even simple things like signatures will be critical early on in any litigation.

If I have an exclusive listing agreement, can I earn my commission even if I wasn’t procuring reason for the sale?

Yes. Where a broker has an exclusive right to sell agreement, he is entitled to a commission for any sale procured within the time frame specified in the agreement, regardless of who was responsible for bringing about the sale. Whether the Plaintiff was even the procuring factor in the sale of the property makes absolutely no difference when it comes to exclusive listing agreements. Any sale during the term of an exclusive listing with a real estate broker gives rise to a commission being due and owing to the broker. Where a broker has an “exclusive right to sell” agreement, he is entitled to a commission for any sale procured within the time frame specified in the agreement, regardless of who was responsible for bringing about the sale.

Can an exclusive listing agreement contain a provision that “freezes” the listing agreement while the property is in contract?

Yes. In a recent case where I was responsible for establishing new law in favor of brokers, one of the central issues was whether the exclusive broker listing agreement which contained a “freezing” or “tolling” provision was enforceable or if it was an unenforceable “automatic renewal” provision under New York General Obligations Law Section 5-903. Specifically, the exclusive broker listing agreement “froze” if the buyer and seller were in contract and “unfroze” when the buyer-seller contract fell through for whatever reason. The Appellate Division has found that such “freezing provisions” are in fact enforceable and permissible in exclusive listing agreements.

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