Legal Memorandum LI10

DEFINING WHEN A REAL ESTATE BROKER'S COMMISSION IS DUE

When listing their home with a real estate broker, few sellers take the time to carefully read and possibly negotiate the terms of their listing agreement with their broker. The listing agreement sets forth not only the duties and responsibilities that the broker owes to the seller, it establishes the duties and responsibilities the seller owes to the broker, particularly with respect to if and when the broker has earned his/her brokerage commission.

The listing agreement defines the relationship between the real estate broker and the seller and establishes the point at which the broker is deemed to have earned its commission. “Although a broker is generally entitled to a commission when he produces a buyer ready, willing and able to purchase the subject property on terms acceptable to the seller (citations omitted), the broker’s right to a commission may be varied by agreement (citations omitted).” Bigman Associates v. Fox, 133 AD2d 93, 518 NYS2d 630, 631 (2nd Dept. 1987); see also Brodsky v. Gazzola, 183 AD2d 1051, 583 NYS2d 641 (3rd Dept. 1992).

There are numerous cases in which the broker has successfully sued the seller for a commission even though no closing of property takes place or where the closing of property is irrelevant to the analysis of the transaction. See, Realty Investors of USA Inc. v. Bhaidaswala, 254 AD2d 603, 679 NYS2d 179 (3rd Dept. 1998) (Court concluded that broker earned commission upon procuring a purchaser who had reached agreement with seller on essential terms and was ready, willing and able to perform. It was not based upon an actual sale or transfer of title to the property. In this case, seller and buyer never entered into a formal binding contract of sale and no sale ever took place); Paul J. Boyer Realty v. Perry, 208 AD2d 1024, 617 NYS2d 393 (3rd Dept. 1994) (Court held that broker earned its commission because it produced a ready, willing and able buyer and it was irrelevant that no closing took place. In this case, the listing agreement did not condition the seller’s liability for a commission on the closing of title); Prime City Real Estate Co, Inc v. Hardy, 256 AD2d 80, 681 NYS2d 245 (1st Dept., 1998) (Court held that the broker had earned its commission because it brought about a meeting of the minds on the essential terms of the sale and that the seller could not avoid paying the commission after subsequently receiving a higher offer and refusing to negotiate the remaining details of the sale.)

A seller is able to better protect him or herself by making the earning and receipt of the broker’s commission conditioned upon the actual closing of title or consummation of sale, not upon the broker’s production of a ready, willing and able purchaser. This will provide the seller with greater flexibility to handle any of the problems that typically arise during a real estate transaction.

The seller may also request language in the listing agreement which permits him/her to unconditionally accept or reject any offer presented to him/her by the broker. This may prevent the seller from being unduly pressured into accepting one particular offer over another.

One note of caution is that in all contracts, there is an implied covenant of good faith and fair dealing which requires each party to the contract to use their best efforts in performing their obligations and to not intentionally do anything to thwart the other party from performing. Sellers should not use the language of a listing agreement as a means to act in bad faith or to willfully default in bringing a transaction to its fruition.