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Jameson Realty Group v. Kostiner: Liquidated Damage Clause in Listing Agreement Enforced

An Illinois court has considered whether a liquidated damages provision was enforceable in a listing agreement specifying that brokerage would receive a commission amount for all unsold units in condominium development if developer terminated listing agreement prior to expiration date.

The Jameson Realty Group (“Brokerage”) and Lewis Kostiner (“Kostiner”) entered into a listing agreement to sell the remaining units in a condominium development. The listing agreement lasted for a year and contained a provision that if the listing agreement was terminated early, then the Brokerage would receive as liquidated damages a commission at the rate specified in the listing agreement based on the listing price for all remaining unsold units in the development at the time of termination. A sheet of the listing prices for the development’s units was attached to the listing agreement. The listing agreement also contained a provision that all disputes between the parties would be resolved through an arbitration conducted by the Chicago Association of REALTORS® (“Association”). The agreement also included the names of two sales associates with the Brokerage, one of which was replaced early in the project by the Brokerage.

After nearly six months, Kostiner terminated the listing agreement. At that point, four units had been sold and thirteen units remained unsold. Following the termination, the Brokerage filed a complaint with the Association, seeking to recover commissions for the unsold units. A grievance committee of the Association dismissed the Brokerage’s complaint, determining that the complaint failed “to merit further consideration”. The Brokerage appealed, and the Association allowed the appeal for only three of the four units which had sold prior to the termination of the listing agreement. Meanwhile, the Brokerage also filed a lawsuit alleging breach of contract against Kostiner.

Two days before the arbitration proceeding was to take place, Kostiner’s attorney wrote a letter to the Association stating that since the arbitration was voluntary, his client was declining to participate in the arbitration. The Association did not hold an arbitration hearing. The trial court ruled that the Brokerage was entitled to liquidated damages, as specified in the listing agreement, and so the court awarded the Brokerage damages of $261,820. Kostiner appealed the trial court’s ruling.

The Illinois Appellate Court affirmed the ruling of the trial court. Kostiner first challenged the enforceability of the liquidated damage clause in the listing agreement. Courts will only enforce liquidated damage clauses if the clause is not a penalty. For a clause to be enforced, it must pass the following test: first, the parties agreed in advance as to the amount of damages that might arise from a contractual breach; second, the damages were reasonable at the time of contracting and bear some relation to the amount of damages that the party might sustain in light of a breach; and finally, the actual damages would be uncertain and difficult to prove.

While Illinois courts have allowed liquidated damage clauses in real estate contracts, the enforceability of these provisions in brokerage agreements had not been considered by any Illinois courts. However, the court found no reason why a liquidated damage clause shouldn’t be enforced in a real estate brokerage contract and found that this view was supported by courts in other jurisdictions. The court determined that because damages are difficult to ascertain for breach of a real estate brokerage agreement, this type of contract is ideal to use a liquidated damages provision. The court also found that the liquidated damage clause in the listing agreement passed the test set forth above, as the clause was clear in its terms and the damages provided for in the clause equaled what the Brokerage would have received if had been given the opportunity to sell the remaining units. The court rejected Kostiner’s argument that the damages were excessive because the Brokerage would have likely had to split the commission for the sales with cooperating brokers, stating that such uncertainty demonstrated exactly why this contract had a liquidated damage clause. Thus, the court enforced the liquidated damage clause and affirmed the award to the Brokerage.

Next, the court considered Kostiner’s argument that the arbitration clause in the agreement entitled him to judgment. Since the Association’s grievance committee had dismissed the Brokerage’s claims for commissions for the unsold units and the parties had agreed to be bound by an arbitration conducted by the Association, Kostiner argued that he was entitled to judgment on those claims. The court found that since Kostiner had refused to participate in the Association’s scheduled arbitration, he had waived his right to rely on the arbitration clause in the listing agreement. Thus, the court rejected this argument by Kostiner.

Finally, the court considered Kostiner’s remaining arguments. The court rejected the argument the Brokerage had breached the agreement because one of the named sales associates was replaced early in the project. The court found that nothing in the listing agreement supported this argument and since Kostiner had allowed the Brokerage to continue marketing properties for five months after the sales associate was replaced, he waived any argument to challenge this provision of the agreement. The court also considered Kostiner’s argument that the judgment should be against the true owner of the properties, as he was merely serving as the project’s manager when he signed the listing agreement. The court found that Kostiner had signed the agreement in his own name, provided his own social security number, and provided other personal information such as his home telephone number. Based on this, the court ruled that Kostiner was properly found liable, but if he was acting as the undisclosed agent for the property owner, then the owner would be required to reimburse him for the judgment under the principles of agency law. Thus, the court affirmed the trial court’s judgment in favor of the Brokerage.

Jameson Realty Group v. Kostiner, 813 N.E.2d 1124 (Ill. App. Ct. 2004).