JUDGMENTS ONLINE

Below are summaries of recent court cases affecting the real estate industry. For more detail and additional cases, visit "The Letter of the Law," NAR's online legal newsletter.

Contract—Not Procuring Cause—Decides Commission

A North Carolina appellate court has determined that because two commercial licensees had a business agreement on a commission split, whether or not one of the brokers was a procuring cause in the sale was not the deciding factor on whether he should receive a commission.

In the case, the listing broker, Michael Doyle, had tried unsuccessfully to solicit a listing from an apartment building owner. He eventually asked another licensee, William Maxwell, who was acquainted with the owner, to arrange a meeting so that Doyle could make a listing presentation and to share with Doyle all information he had on the property. For this service, Doyle verbally agreed to give Maxwell a portion of the commission. Doyle got the listing and eventually sold the apartment building but then refused to pay Maxwell a share of the commission.

Maxwell sued for half the commission, but the trial court ruled in favor of Doyle.

The Court of Appeals of North Carolina reversed the trial court, finding that Maxwell could be entitled to a portion of the commission if the contract terms were performed in a timely manner. The court determined that the procuring cause standard contained in the N.C. real estate license law did not apply because the building owner had paid a commission to the listing broker. Instead, said the court, the dispute was governed by general contract principles. Doyle and Maxwell had agreed to split the commission if Maxwell made the introduction and provided research on the owner or property. Maxwell also presented letters between himself and Doyle in support of his claim, showing that he and Doyle had corresponded on details of the transaction and on what commission rate to charge. Since he had done the tasks required in the contract, Maxwell might well be entitled to a commission even though the parties had not agreed upon a date by which the task had to be performed, said the court. Such a date is generally required for a valid contract, but courts will fill in this contract term in certain situations.

The appellate court returned the case to the trial court to determine if the business contract had been completed in a reasonable time and therefore was valid without a specific date. If so, Maxwell would be entitled to half the commission.

To read the entire summary, click here.

Seller Waived Right to Cancel Purchase Agreement

A California appeals court has affirmed a lower court ruling that sellers of a home had waived their right to cancel a purchase contract when the buyer was delayed in his efforts to secure financing.

On Feb. 5, 1998, Manouchehr Galdjie entered into an agreement to purchase property held in a trust of which Barbara and David Darwish were the trustees. The purchase agreement required Galdjie to be prequalified for a loan within 10 days of the acceptance of the contract. The agreement stated that "[t]ime is of the essence" and that the agreement could not be modified except in writing by the parties. The escrow instructions in the purchase agreement stated that if the conditions for release of the escrow funds were not complied with, the escrow agent was to wait until such conditions were complied with unless one of the parties made a written demand for cancellation of the escrow and the distribution of the escrowed funds.

By April 1, 1998, Galdjie still had not secured a prequalification letter. Around this time, one of the sellers faxed Galdjie some additional documents, on which she wrote that April 9 was the date that "everything should be wrapped up." On May 11, the Darwishes sent a letter to the escrow agent requesting that the escrow be closed and the funds distributed because Galdjie had failed to arrange financing within the required time period. The next day, Galdjie obtained a prequalification letter from a lender. When the Darwishes refused to proceed with the transaction, Galdjie sued to enforce the purchase contract.

The trial court ruled in favor of Galdjie, and the Darwishes appealed. The California Court of Appeal, Second Division, affirmed the trial court’s ruling.

The appeals court ruled that Galdjie was entitled to the completion of the purchase agreement because the Darwishes had waived their ability to enforce the financing provisions in the purchase contract by being in constant communication with Galdjie up to May 11 and encouraging him to continue to try to obtain the prequalification letter. The court also noted that the sellers had not declared Galdjie in default of his contractual obligation to obtain financing prior to that date.

The court also disagreed with the Darwishes’ argument that the trial court had entered judgment against the wrong party, as Galdjie’s lawsuit had sought relief from them rather than their trust, which owned the property. The court found that trustees like the Darwishes could be named in lawsuits where the lawsuit was the result of some action taken by the trustee. Here, the Darwishes were the trustees and had the power to cause the trust to sell the property owned by the trust. Thus, the court found that the trial court had not erred entering judgment against the Darwishes and ordering them to complete the sale of the home to Galdjie.

To read the entire summary, click here.

Brokers Don’t Have to Be Tax Experts

The California Court of Appeal, First District, has affirmed a ruling that a brokerage company is not liable for failing to inform a buyer about the tax advantages of using a 1031 exchange rather than selling an investment property.

Under Internal Revenue Code 1031, an individual may exchange a business or investment property for another investment or business property without incurring immediate tax liability on any capital gains, providing the exchange is made within a specified time period and meets other criteria of the code. In the California dispute, the owner of an investment property sued a broker, contending that the broker had negligently failed to inform him about the possibility of deferring taxes by using a 1031 exchange.

The trial and then the appellate court both held that the broker had no responsibility to provide tax advice. The appeals court noted that the owner had received an agency disclosure agreement required by California real estate law, which states that clients should seek legal or tax advice from a “competent professional.” The court also stated that requiring real estate professionals to spot “legal issues” for their clients could vastly expand their liability.

To read the entire summary, click here.