Mountain Law: Commission on real estate deals not always clear cut
December 26, 2012
When is a real estate broker entitled to a commission? The traditional rule and Colorado’s version: The traditional rule is that brokers earn a commission when they bring to the seller a buyer who is ready, willing and able to buy the property on the terms set out in a listing agreement. Most states require the seller to pay a commission even if the closing does not occur through no fault of the seller (such as the buyer being unable to obtain financing or the title being defective). However, Colorado law excuses a seller from paying a commission so long as the failure of closing is not the seller’s fault.
The purchase and sale agreement controls: If a seller accepts an offer delivered by a broker, the broker is entitled to a commission even if the offer differs from the terms of the listing agreement. For example, if the listing agreement requires the seller to approve the buyer’s credit, but the accepted offer omits that requirement, the seller cannot later avoid paying a commission on the basis that she does not approve the buyer’s credit.
Broker does not guarantee buyer’s performance: Unless the listing agreement provides otherwise, a broker is not responsible for the buyer’s default under the purchase and sale agreement. For instance, if a purchase price is to be paid in installments, the broker has earned the commission at closing even if the buyer eventually defaults on one or more of the required payments. The seller could address this issue by requiring the commission to be paid over time following receipt of anticipated payments.
Extension clauses: Listing agreements often provide that the seller remains liable for paying a commission for a stated period of time beyond expiration of the listing period (called the holdover period) if the sale is to a prospective buyer identified by the broker during the listing period. Such extension clauses prevent a seller from unfairly timing a closing with a broker’s prospect so as to avoid paying a commission. If a seller enters into a listing agreement with a new broker while a holdover period remains in effect under a previous listing agreement, the new agreement should address how to handle a closing during the holdover period to ensure that the seller does not unwittingly agree to pay two commissions for the same sale. Of course, the new broker has little incentive to market the property if an identified prospect appears likely to purchase the property and the new broker will not receive a commission for that sale.
Procuring cause doctrine: Courts are often called upon to decide issues such as which of multiple brokers has earned a commission for a given sale, whether a broker is entitled to a commission following expiration of a listing agreement in the absence of an extension clause, or whether a broker is entitled to a commission for a contract entered into with a given buyer. The aim in such cases is for brokers to get their fair commissions based on the facts and circumstances. To assist with these determinations, courts often look to whether a broker was the “procuring cause” of a sale, meaning that the broker set in motion a chain of unbroken events leading to the sale and should therefore receive a commission.
Colorado law permits oral listing agreements, but sellers and brokers should take the time to draft written listing agreements that clearly identify the parties’ rights. Even when using standard listing agreement forms, it may be advisable for sellers to obtain legal advice.
Noah Klug is principal of The Klug Law Firm, LLC, in Summit County, Colorado, emphasizing real estate, business, and litigation. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.