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Horning v. Shilberg: No Commission for Broker in Personal Transaction

A California court has considered whether a broker could collect a commission as damages from a personal real estate purchase contract when the seller breached the contract.

Harold Shilberg (“Owner”) entered into a purchase agreement with Thomas Horning (“Broker”) for a multi-unit building owned by the Owner. The Broker was a licensed real estate broker who was representing himself in the transaction, and he prepared the purchase agreement on a preprinted form. The agreement required the Owner to pay the Broker a percentage of the purchase price at the close of escrow as “compensation for services”. The purchase agreement also required the Broker to send the Owner a prequalification letter within three weeks of signing the purchase agreement. When the Broker did not send the letter to the Owner within three weeks, the Owner canceled the purchase agreement.

The Broker filed a lawsuit against the Owner, seeking specific performance of the purchase contract, payment of a commission, and also damages from his claimed inability to complete a tax deferred exchange. Following a bench trial, the trial court issued an oral ruling in favor of the Broker, finding that the Owner had breached the purchase agreement and that the Broker was entitled to recover a commission. The trial court directed the Broker to prepare a judgment order.

Following the oral ruling, the Owner filed a notice of objection and sought a hearing on whether the Broker could recover a commission from a transaction in which the Broker was representing himself. The trial court held an additional hearing on this issue. Following the hearing, the trial court agreed that it was improper to award the Broker damages of a lost commission when the Broker was representing himself in a transaction. The trial court also stated that its earlier ruling had been tentative and was not conclusive because no judgment had been entered by the court. Since the Broker was not entitled to recover any damages, the trial court found that the Owner was the prevailing party in the lawsuit and so awarded the Owner his attorney fees and costs. The Broker appealed the trial court’s judgment.

The California Court of Appeal, Fourth District, affirmed the rulings of the trial court. The Broker first argued that the trial court lacked the authority to modify its initial ruling. The court rejected this argument. Looking at the relevant court rules, the court found that California law requires a judge to announce a tentative ruling at the end of a bench trial, but this tentative ruling does not constitute a judgment and it is not binding on the court. The court is permitted to enter a wholly new ruling if it so chooses up until the entry of judgment.

Next, the court considered whether the trial court improperly denied the Broker damages for a lost commission. The definition for a real estate broker is an individual “who, for a compensation…negotiates to do [certain specified] acts for another or others.” Since the Broker was acting on his own behalf in this transaction and not on behalf of any third parties, the court ruled that he was not offering brokerage services and therefore the Broker was not entitled to receive any compensation from the transaction. Instead, the court stated that the Owner’s agreement to pay a “commission” was simply an agreement by the Owner to reduce the sales price by the listed amount. Since the Broker was not acting as a licensed real estate broker in this transaction, the court ruled that he was not entitled to recover a commission as damages.

The court then considered what the proper measure of damages would be for the Broker. California law provides that when a seller breaches a real estate sales contract, the measure of damages is the difference between the purchase price and the fair market value of the property on the date of breach. Since the Owner had agreed to give the Broker a rebate on the sales price, that reduced amount was the “purchase price” to be used for determining damages. However, the Broker had failed to offer any evidence as to what the fair market value of the property was at the time of the Owner’s breach. Since there was no evidence on the property’s fair market value, the court agreed that it could not award the Broker damages for the Owner’s breach. Thus, the court affirmed the trial court’s refusal to award the Broker damages.

Finally, the court considered the trial court’s award of attorney fees and costs to the Owner. The basis of the challenge was that the Owner’s attorney charged $200/hour, but was entitled to an additional $50/hour if he succeeded in defending the lawsuit. The Broker argued that this so-called “victory bonus” was inappropriate and exceeded the statutory intent of awarding attorney fees to the prevailing party. A court will only set aside an award of attorney’s fees if the award is “manifestly excessive”. The court did not find the Owner’s attorney fees to be “manifestly excessive”, and so the court affirmed the award.

Horning v. Shilberg, 29 Cal. Rptr. 3d 717 (Cal. Ct. App. 2005).