DOING BUSINESS: The Law & You
Seven tips for getting paid
Dot your i’s and cross your t’s or risk losing commission
By Laurie Janik
Law books are filled with cases brought by real estate brokers against property owners—and more recently, prospective buyers—trying to recover unpaid commissions. NAR research shows more than 100 reported decisions involving commission disputes in the past two years.
What can you do to ensure you get paid for your services without having to go to court? Here are seven tips:
1. Maintain your license at all times. In order to protect the public, laws in every state make it unlawful to engage in real estate brokerage without a current license. Courts are quick to reject claims by unlicensed individuals seeking compensation for performing services that require a license. So be cautious if you’re leaving one brokerage to join another. One salesperson, whose license was inactive during such a three-week transition period, unsuccessfully attempted to convince a court that prospective purchasers didn’t become “ready, willing and able to purchase” until after she was re-licensed, thereby entitling her new broker to a commission.
2. Always get commission agreements in writing. Most states’ statutes prohibit brokers from bringing an action for commission payment unless the agreement to pay is in writing and has been signed by the party charged with paying it. While several legal theories allow for recovery of compensation in the absence of a written agreement, it’s far more difficult, and costly, to proceed under these theories.
3. Make sure both parties initial any change to the listing agreement. In one recent case, the broker prepared a listing agreement that authorized him to quote a sales price of $2,200,000 and provided for a commission of 4.5 percent of the ultimate sales price. The seller crossed out those terms and hand wrote the figures “$2,550,000” and “2.5 percent”. The seller initialed these changes and returned the listing agreement to the broker, who didn’t initial the changes.
The broker claimed to have accepted the reduced commission in a telephone conversation with the seller. After the seller accepted an offer of $2,250,000 from a purchaser introduced to the property by the broker, the broker attempted to collect the 2.5 percent commission, but the seller refused to pay. Without the broker’s signature, the listing agreement didn’t meet the state’s statutory requirements. However, the court allowed the broker’s claim to go to trial because the statute had recently been amended to permit “substantial compliance” with the requirement that the broker’s signature be on the listing agreement.
4. Don’t let listing agreements expire. Although there’s generally no requirement that the purchase contract be finalized prior to the expiration of the listing agreement, make sure the services entitling you to a commission are rendered during the term of a valid listing agreement by renewing or extending it.
5. Be sure the listing agreement is signed by the property owner. While this may seem obvious, in one recent case a husband signed the listing agreement but the wife claimed to be the sole owner of the property. In this vein, exercise extra caution when listing a property owned by a corporation or partnership. Ensure that the individual signing the listing contract has written authorization from the corporation or partnership to execute the listing agreement on its behalf.
6. Avoid ambiguous language regarding your entitlement to compensation. Does the language in your listing contract provide for your compensation to be earned when you produce a ready, willing and able purchaser upon terms and conditions set forth by the seller? Or must the buyer and seller enter into a contract of sale before you have earned your commission? Or must the transaction close? These two additional conditions (execution of a sales contract or closing) shift to you the risk of the buyer’s default, the seller’s title deficiencies, or any other obstacles that prevent the formation of a contract or the transaction from closing. Case law varies on this issue, but it’s universally acceptable to condition commission on a particular event such as the transfer of a deed or the payment of the purchase price. Whatever trigger you select, make sure the language is clear.
7. Finally, make sure your listing agreements comply with statutory requirements regarding the information or terms that must be included. Some courts require strict compliance with such statutory requirements, while others will settle for something less than perfection if the broker can show substantial compliance.
As a real estate professional, you work too hard to let commissions slip away due to faulty paperwork and easily avoided errors. Review your listing contracts to assure that you’ll be compensated for your efforts.
Janik is general counsel of NATIONAL ASSOCIATION OF REALTORS®.
