The payment of the real estate broker’s commission will usually go smoothly when a real estate transaction proceeds to a closing without complication. But what happens when a purchase and sale agreement is signed, but the transaction fails to close? Can the listing broker still recover a commission for having procured a buyer? The answer depends both on the facts of the transaction and on the terms of the agreements in place between the listing broker and the seller.
The payment of the real estate broker’s commission will usually go smoothly when a real estate transaction proceeds to a closing without complication. But what happens when a purchase and sale agreement is signed, but the transaction fails to close? Can the listing broker still recover a commission for having procured a buyer? The answer depends both on the facts of the transaction and on the terms of the agreements in place between the listing broker and the seller.
To maximize the listing broker’s rights, it is important to utilize an agreement that explicitly calls for the commission to be paid even when a closing has not occurred. The broker will also want to make sure that the favorable terms of the listing agreement are not superseded by less favorable terms that the broker has agreed to in the purchase and sale agreement. If the paperwork is in order, there may be an opportunity in appropriate situations to collect a commission despite the deal having fallen apart.
Background
In the good old days, which in this case means before 1975, a broker was generally deemed to have earned a commission from a seller merely by virtue of having secured a buyer who was ready, willing, and able to purchase the property. The law was clear that the transaction did not necessarily have to be culminated for a commission to be due.
But in Tristram’s Landing v. Wait, 367 Mass. 622 (1975), the Court changed the rules. Recognizing that sellers typically expect to pay the broker’s commission from funds obtained in the transaction from the buyer, the Court held that unless the broker’s agreement explicitly stated otherwise, a commission would be due only if the transaction closed, or if it had been thwarted by the seller’s wrongful conduct. The Court also warned in Tristram’s Landing that a written agreement that purported to require the seller to pay a commission even where the buyer failed to perform would be set aside if it was unfair or overreaching.
MAR Responds – Right to Sell Agreement Form
MAR’s standard form Exclusive Right to Sell Agreement evolved in response to Tristram’s Landing and subsequent cases. The current version says that a commission is earned when the broker procures a ready, willing, and able buyer at the agreed upon terms “whether or not the transaction is completed or title passes.” The MAR agreement also states that if the Seller retains the buyer’s deposit as liquidated damages, the broker is entitled to half of it, but not more than what a full commission would have been. This provision should pass the fairness test alluded to in Tristram’s Landing because the seller is paying the commission out of funds that the defaulting buyer has provided.
MAR’s Exclusive Right to Sell Agreement goes on to state that a broker’s right to a commission under the listing agreement will not be affected by any conflicting terms contained in the subsequent purchase and sale agreement, unless the broker has agreed to those new terms. This provision will obviously not protect the broker’s rights if the broker later expressly agrees in writing to be bound by less favorable commission terms contained in the purchase and sale agreement.
Negotiation Issues and How to Handle Them
It is very common for the lawyers for the buyer and seller to insert a provision in the purchase and sale agreement stating that a broker’s fee will be due from the Seller only “if, when, and as the deed is recorded and the purchase price is paid, and not otherwise.” This restrictive language often goes hand in hand with a provision that says that the brokers identified in the Purchase and Sale Agreement are parties to the Agreement with respect to those provisions that concern the brokers. These two provisions are typically accompanied by a signature line for the brokers. If the brokers sign on the dotted line of a purchase and sale agreement containing the foregoing terms, they will likely be bound by them, and the added protections of the listing agreement will be lost.
What should a listing broker do if the parties present such an agreement for the broker’s signature? The broker can ask that the offending language be stricken, or that it be changed to provide that a commission will be payable in accordance with the terms of the Exclusive Right to Sell Agreement. The broker does not have to sign an agreement that lessens the broker’s rights. Hopefully, the issue can be addressed at the purchase and sale stage without jeopardizing the transaction.
Buyer’s Rights – Exclusive Buyer Agency Agreement Form
What about the rights of a buyer’s agent when a transaction does not close? MAR’s standard form Exclusive Buyer Agency Agreement provides for a Success Fee upon the “successful completion of this Agreement.” It does not contain clear and unambiguous language specifying that the buyer must pay this fee even if the transaction does not close. Without such language, Tristram’s Landing and subsequent cases make it doubtful that the buyer’s agent can recover a commission funded by the buyer when the buyer’s inability to acquire the property was attributable to the seller. It would seem that at best in that situation, the buyer’s agent might be able to share in the net proceeds of a claim by the seller’s agent against the seller.
If the buyer is the one who has breached the obligation to close, the buyer’s agent would appear to have a better claim against the buyer under the reasoning of the Tristram’s Landing case. Just as a selling broker can recover a commission from a seller if the seller’s wrongful conduct prevented a transaction from closing, a buyer’s agent, if not made whole by a share of the deposit, might have a right to recover a commission from the buyer where the buyer’s wrongful conduct prevented the transaction from closing.
As a final clarification, many purchase and sale agreements contain contingencies, which if not met, render the agreement null and void. In situations where an agreement is canceled due to an inspection or financing contingency and not due to either parties’ misconduct, there would typically not be a right to a commission. In those situations, in the final analysis, the selling broker has not procured a “ready, willing and able” buyer, nor have the typical requirements for a payment to the buyer’s agent been met.