Commission and the Real Estate Broker

Almost every buyer or seller of real estate has dealt with a real estate broker as part of the transaction. Most real estate brokers are compensated through the payment of a commission, generally based upon a percentage of the purchase price. The broker’s ability to receive this compensation is generally contingent upon the sale taking place and funds changing hands. Whether the buyer or the seller pays the real estate broker the commission, is ordinarily governed by the contract for sale. Separate and apart from the contract for sale, is the broker’s commission agreement (or listing agreement) which should set forth the terms and conditions of the broker’s representation including, but not limited to, the length of the agreement, whether it is “exclusive,” the commission percentage, a clear identification of the property subject to the listing, and any other relevant terms and conditions.
Problems arise when there is no written broker’s agreement. This can occur when the buyer or seller of real property has informal “discussions” with a broker or brokers regarding a particular piece of property. If a sales transaction ultimately results, a dispute may arise as to whether the buyer or seller and a particular broker had reached an “agreement” regarding a commission arrangement for that broker. Generally, the law (specifically the “statute of frauds”) requires a written document memorializing the terms of such an agreement, since it is connected to the sale of real estate, as a prerequisite to a successful claim by a broker for the commission on a real estate transaction. Over the years, the law has recognized certain variations on the traditional contract, such as a confirming letter from the broker to the broker’s alleged customer, sent in a timely manner, memorializing the terms of the agreement.

However, further disputes may arise if the alleged customer disputes the terms of the “confirming letter.” In the absence of a clear agreement on the terms and conditions of a commission arrangement, litigation may result. These lawsuits may interfere with an otherwise smooth sales transaction, as well as increase the costs to all parties.

It is in the best interests of each participant in a sales transaction to insure that a clear and complete broker’s agreement is signed by the parties prior to the broker engaging in efforts to facilitate a sale or purchase, in order to diminish the chances that litigation might arise. From the buyer’s or seller’s perspective, it is also wise to eliminate “informal” discussions with real estate brokers regarding specific pieces of property unless, and until, that broker has been engaged as that parties’ representative in the potential deal. Not only will this insure a clear understanding regarding the “rules” under which the parties will operate, but it will also diminish the possibility of conflicting brokers’ claims against the same party relating to the same piece of property, which will surely increase the likelihood of litigation, and its related costs.

James M. Maggio, Jr. is a Senior Associate of WJ&L, LLP who practices in the Business & Corporate and Transactional areas.

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