When Is A Listing Commission Earned?

Of course, different listing contracts may contain unique or unusual conditions, but, for many years in many parts of the country, listing agreements have held that a commission had been earned if a buyer was procured who made an offer that matched the price and terms specified in the listing agreement, or on other price and terms the seller might find acceptable. A completed transaction was not a required condition for a commission to have been earned.

But a 2012 California Appellate Court ruling (RealPro, Inc. v. Smith Residual Company, Fourth Appellate District Court) changed that understanding in the Golden State. In the RealPro situation, a buyer had made a full-price, per the listing, $17 million offer on terms that the seller found acceptable. However, the seller then increased the listing price to $19.5 million. The buyer declined the price increase; but, subsequently, the buyer’s broker, as a third-party beneficiary, sued for his commission.

The trial court focused on the portion of the listing that set forth price and terms, which said “$17,000,000 cash or such other price and terms acceptable to Sellers…” The court’s view was that it would be a mistake to say that the listing was for $17 million. Rather, it “was for $17 million cash or such other price, plus terms acceptable to Sellers.”

The Appellate Court said, “we, like the trial court, conclude that the $17 million price was merely an invitation to submit offers. Although RealPro submitted an offer to purchase the Property, such offer never materialized into a sale that would trigger RealPro’s right to a commission.” Pretty clearly, the appellate court was of the view that it is a sale — not just an acceptable offer — that triggers a commission.

You can’t fight them; so you might as well join them. The California Association of Realtors (CAR) changed its Residential Listing Agreement (RLA) the next year. It currently reads that a commission is due if anyone “…procures a ready, willing, and able buyer(s) whose offer to purchase the Property on any price and terms is accepted by Seller, provided the Buyer completes the transaction or is prevented from doing so by the Seller.” [my emphasis]

But wait! Now a different California Appellate Court has come forth with an opinion (Carol Gilbert, Inc. v. City of San Francisco Ellis-O’Farrell Parking Corp., First Appellate District, June 2, 2017) that pretty clearly supports the “old way” of thinking about these matters.

Carol Gilbert, Inc. (CGI) entered into a listing agreement with Ellis Parking to find a tenant for restaurant space in a parking garage that has retail space on the ground floor. The City of San Francisco owns the building and Ellis Parking has a master lease. The listing agreement said that “If a lease is entered into during the Term of this Agreement, or any extensions hereof, [Ellis Parking] will pay [CGI] a sum based on [a complex schedule in the agreement]… When Commission Due: Commissions shall be deemed one half due and payable upon the later Lease Execution or Removal of Contingencies, and one half on the earlier of Tenant’s Opening for Business or Commencement of Rent…”

CGI procured an offer on behalf of Lori’s Diner, and in October of 2012, Ellis Parking signed a lease agreement with Lori’s Diner for a twenty-year sublease of the space. The sublease contained language saying that it was subject to the master lease which, among other things, required that the city of San Francisco would not unreasonably withhold consent.

Whether reasonable or not, the city did withhold consent. Instead it renewed a lease with the existing tenant. Ellis parking declined to pay CGI any commission, so CGI sued for breach of contract. (The ½ commission owed, by the way, was $245,717.38)

The trial court held that “Because there was nothing in the Exclusive Listing and Sale Agreement which mentioned or referenced the City’s approval as being a contingency that needed to be removed in order for CGI to receive the commission, [CGI] is entitled to one half the commission.”

The Appellate Court agreed. Quoting an earlier case, they wrote “The broker’s right to compensation ‘must be found within the four corners’ of the listing agreement, which will be ‘strictly enforced according to the lawful terms.” The court acknowledged that, of course, some condition or contingency could limit or void the broker’s right to a commission. But such language would have to be clearly stated within the listing agreement. In this case, it was not.

The court wrote, “The only condition precedent to CGI’s right to a commission under the listing agreement was that a lease be ‘entered into.’ A lease was ‘entered into’ when Ellis Parking and Lori’s Diner signed the sublease…”

This case, and much of the reasoning in the opinion, could lend weight to the idea that maybe the “old way” — in which a sale did not have to be completed for a commission to be earned — could be revived. Right now, though, that would be premature. CGI v. Ellis Parking has not been published, and cannot be cited as law. That would have to be changed. There is a time period during which the court can be asked to publish its opinion. You can bet that there are interested parties working on such requests.

Written by Bob Hunt for www.RealtyTimes.com Copyright © 2017 Realty Times All Rights Reserved, he is a former director of the National Association of Realtors and is author of the recently published book, “Real Estate the Ethical Way.”