Most people tend to believe that a real estate sales commission is owed when the transaction closes and the property is officially sold. This belief makes sense since that is when the real estate agents actually get paid from the sale proceeds. But that is not necessarily the case and certainly is not the understanding within the real estate brokerage industry.

In placing their real estate on the market for sale, most people use a real estate broker and they sign a Listing Agreement. This Listing Agreement hires the broker (and agent) to perform real estate marketing services. Generally this includes advertising the property in the Multiple Listing Service and cooperating with other brokers to find a buyer who is “ready, willing, and able” to purchase the property. And that’s where the confusion begins.

Almost everyone in California uses the California Association of Realtors Residential Listing Agreement (“CAR-RLA”) for home listings. The current version of that document (11/10) defines the commission as being owed: “If Broker, cooperating broker, Seller or any other person procures a buyer(s) who offers to purchase the property on the above price and terms, or on any price and terms acceptable to Seller. (Broker is entitled to compensation whether any escrow resulting from such offer closes…” Nowhere in the Listing is the obligation to pay the commission dependent upon the escrow actually closing. So, in effect, whichever broker brings the buyer willing to purchase on the price and terms stated in the Listing is entitled to get paid. This yields some unexpected results:

What happens if there is a bidding war that drives the price up? Must the Seller accept the first offer at the list price and forego the higher price?

What if the Seller accepts the highest offer? Must they pay a commission to every broker that submitted an offer at the Listing Price or above

What if the Buyer fails to close? Is the commission still owed?

Under the present CAR Listing form the answer appears to be Yes. And that is what the California Court of Appeal (4th District) examined in the 2012 case of RealPro, Inc. v Smith Residual Company, LLC (203 Cal.App.4th 1215). Here the Sellers listed their real property for sale for $17 million cash. The next day, RealPro’s Buyer submitted an offer at $17 million cash so they thought they had a deal. But before accepting the offer, the Seller got an offer for $19.5 million. So they countered RealPro’s Buyer at the higher price. That Buyer refused to go up to Seller sold to the higher priced Buyer. Then RealPro sued for the commission arguing that they were entitled to this under the Listing Agreement. The Court disagreed citing similar questions to those I set forth above.

While the Court’s decision was based in part in wiggle room allowed in the actual Listing Agreement used in that case, the more significant point in may opinion was the Court’s interpretation of contract law: “The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the ‘mutual intention’ of the parties.… Given the record before this Court, we… conclude that the $17 million price was merely an invitation to submit offers”. The Court then went on to cite a 1947 case, Palmtag v Danielson: Ordinarily, the price at which a broker is authorized to sell property is considered merely an asking price to guide the broker in his negotiations with prospective purchasers”.

The bottom-line of the RealPro decision is that a Listing is not a Seller’s invitation to form a contract to which a Buyer need only match the price and terms to obtain binding rights. Instead, this decision equates a Listing with an advertisement, ie: a solicitation for offers to be considered by the Seller and which only forms a contract if and when a Seller accepts an offer.

Obviously the RealPro decision is very different from the language of the CAR Listing Agreement because under RealPro the commission would only be earned if the Seller accepted the Buyer’s offer. Presently efforts are underway to clarify or amend the commission language in the CAR-RLA to possibly work-around this conflict. Whether it works or is even worth attempting will remain to be seen.

Meanwhile, nothing in RealPro addresses whether the deal must actually close for the commission to have to be paid. That will be the topic for another Article yet to come.

BPE Law has been assisting our clients with their real estate, business, and other legal needs ever since we started doing business. And, we’ve advised over 6,000 upside down property owners and their brokers and for over 20 years have been representing owners and brokers in their legal disputes. If you have questions concerning your rights and obligations in real estate transactions or any other legal matter, give us a call at (916) 966-2260 or e-mail me at sjbeede@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.