REAL ESTATE COMMISSION DISPUTES AND PROCURING CAUSE
ENFORCING REAL ESTATE COMMISSIONS IN CALIFORNIA – THE REQUIREMENT TO HAVE AN AGREEMENT AND BE THE PROCURING CAUSE OF THE SALE.
The following is general legal information only and is not intended to serve as legal advice or to be a substitute for legal advice.
Generally speaking, there are three requirements necessary to assert a right to enforce a real estate commission in California:
- Proper licensing of the broker / salesperson
- A valid and enforceable written commission agreement obligating either the buyer or seller, to pay a commission (this is a statute of frauds requirement Under California Civil Code Section 1624), or, an agreement (oral or written) with the Listing Broker to pay a commission.
- The broker or salesperson seeking the commission must be able to prove, by a preponderance of the evidence, that he or she is the “procuring cause” of the sale.
Note: Agency Relationships do not determine whether or not a party is entitled to compensation. Agency is a separate issue. The issue is whether or not there is an enforceable agreement for compensation between either: (a) the cooperating broker and the listing broker that would entitle the cooperating broker to recover a portion of the commission from the listing broker (in this event there must be an express agreement between brokers to share the commission, but the agreement need not be in writing), or (b) whether the cooperating broker has an enforceable right to recover compensation from either the owner or buyer directly based on contract principles that require a written agreement in that event.
Let’s look at each of these issues briefly.
I. Requirement of a Valid Real Estate License at the time of the real estate transaction: This pretty much goes without saying, but a brokerage is only entitled to a real estate commission if it is properly licensed at the time of the real estate transaction (basically meaning at the time the compensation agreement was signed with the Seller). If there is no valid license then the compensation and listing agreement would likely be deemed void and unenforceable thus quashing the broker’s claim for a commission.
A salesperson can only be paid through a broker who has a duty to supervise the activities of the salesperson. By contacting the DRE, it is possible to obtain a licensing history on any individual claiming to be properly licensed and working for a broker and this can be verified. You may also want to check for basic licensing information on the California Department of Real Estate website which can be searched here: http://www2.dre.ca.gov/PublicASP/pplinfo.asp
II. There must be a writing creating a commission obligation. This is a statute of frauds requirement in California (Civil Code Section 1624) and a pre-requisite to obtaining commissions claimed.
This section of the code states:
1622. All contracts may be oral, except such as are specially required by statute to be in writing.
1623. Where a contract, which is required by law to be in writing,is prevented from being put into writing by the fraud of a party thereto, any other party who is by such fraud led to believe that it is in writing, and acts upon such belief to his prejudice, may enforce it against the fraudulent party.
1624. (a) The following contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party’s agent:
(1) An agreement that by its terms is not to be performed within a year from the making thereof.
(2) A special promise to answer for the debt, default, or miscarriage of another, except in the cases provided for in Section 2794.
(3) An agreement for the leasing for a longer period than one year, or for the sale of real property, or of an interest therein; such an agreement, if made by an agent of the party sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged.
(4) An agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser or seller of real estate or a lessee or lessor of real estate where the lease is for a longer period than one year,
for compensation or a commission.
Pursuant to this Section, a broker’s real estate agency/commission agreement, with either the buyer or seller of the property must be in writing (as per California Civil Code Section 1624(d)), and the writing must unequivocally show on its face the fact of employment of the broker if the broker seeks to recover a real estate commission. It is for the court to determine whether letters, memos, and other documents passed between parties constitute an agreement between them.
In order for a memorandum to satisfy the statute of frauds, only the essential terms must be stated, while details or particulars need not be, and what is essential depends on the agreement and its context and also on the subsequent conduct of the parties. Restatement Second of Contracts Section 131. A memorandum of a contract for the sale of real property must identify the buyer, the seller, the price, and the property. See Sterling v. Taylor, 40 Cal.4th 757 (2007).
A licensed real estate broker’s presumed knowledge of the statute of frauds precludes him from showing the reasonable reliance on an oral agreement that is necessary to assert equitable estoppel.
Likewise, an oral promise by a broker’s principal to execute the required writing at a later date will not give rise to estoppel. Likewise, a broker’s reliance on an oral promise to pay a commission or an oral promise to execute the required writing at a later date cannot be sufficiently reasonable to support an action for fraud. A broker’s reliance, however, on a representation that the necessary contract has in fact been executed may be reasonable and thus support an action for fraud or the assertion of equitable estoppel. Phillippe v. Shapell Industries, 43 Cal.3d 1247 (1987).
To summarize the above material another way, If the agreement is to employ a real estate agent for the purpose of obtaining a commission, this agreement must be in writing per California Civil Code Section 1624. To enforce a right to commission against an owner or property (or against the Buyer who may employ you as an agent), a written agreement would be required. Many Buyer representation agreements provide that the Buyer agrees to pay the commission if the Seller does not. What this means is that at the end of the day if you are a Broker and you want to enforce a real estate commission against either the buyer or seller directly (where you have procured a ready, willing, and able buyer on terms and conditions of the listing), you are wise, and indeed usually required, to have a signed written agreement setting forth the fact of employment and other important details of the representation.
As an example, a Buyer’s agent may submit an offer directly to the seller. If the written offer contains a commission obligation, and the Seller agrees to the price and terms set forth in the offer this agreement will create an express contractual right of the Buyer’s agent to enforce the commission against the seller. Also Note, There may be limited grounds to enforce the commission against the seller – who signed a written contract with the listing agent, which contract expressly sought and authorized (appointed) the participation of the 3rd party co-operating buyer’s brokers (A third party beneficiary of the seller / listing agent contract). See Steve Schmidt & Co v. Berry, 183 Cal.App.3d 1299 (1986) and Smith v. Wright, 188 Cal.App2d 790 (1986).
If, however, a co-operating broker (ex. Buyer’s agent) is seeking to enforce a commitment to pay a commission against the other broker (ex. listing agent), an express writing / contract is NOT required. An oral/verbal or written agreement (ex. MLS Listing that seeks cooperation from other brokers and which assert/agrees to pay a commission if a seller ready, willing and able to complete the transaction on terms acceptable to the seller is procured) with the co-operating broker is a sufficient agreement to enforce a right to commission against the listing broker directly. When the listing broker receives their compensation, they are obligated, pursuant to the duty to execute contracts in good faith, to ensure your commission is paid as agreed.
Basically, a brokerage MLS listing is an offer of a unilateral contract, the act requested being the procuring by the broker of a purchaser ready, able and willing to buy upon the terms stated in the offer and is revocable at will of owner in good faith at any time before performance, regardless of broker’s efforts. Baumgartner v. Meek, 126 Cal.App.2d 505, 508 (1954).
III. The Broker must be the “Procuring Cause”
Assuming the Broker/Salesperson is properly licensed, and assuming a right to enforce the commission exists, the Broker (whether listing agent or buyer’s agent) still needs to be able to show that they were the “procuring cause of the sale.” One or more licensees / entities may be claiming to be the procuring cause of a sale, thus initiating the commission dispute.
Although there is no easy way to answer the question as to what PROCURING CAUSE OF A SALE actually is, and therefore identify who is entitled to the commission, here are a few general guidelines. We also have a few “factors” and “considerations” that may provide some measure of guidance.
Procuring cause’ has been defined as the cause originating a series of events that, without break in their continuity, result in the accomplishment of the prime object of the employment.‘ (9 Cal.Jur.2d, Brokers, § 80, pp. 242-243).
Where several agencies have been active in bringing about a sale the crucial question is, which broker was the predominating efficient cause? The Sessions case case held that: “Predominating efficient cause may be defined as the broker who set in motion a chain of events, which, without their break in continuity, cause the buyer and seller to come to terms as the proximate cause if his peculiar activities, the mere fact that he contributes indirectly or incidentally to the sale by imparting information which tends to arouse interest being insufficient.” A Broker who is, in fact, the primary procuring cause, will not be deprived if his commission merely because negotiations were completed through someone else, even perhaps, without broker having personally met or communicated with the Buyer. See Sessions v. Pacific Imp. Co. 57 Cal.App 1, 18.
‘The word ‘procure’ does not necessarily imply the formal consummation of an agreement. … In its broadest sense, the word means to prevail upon, induce or persuade a person to do something. … The originating cause, which ultimately led to the conclusion of the transaction, is held to be the procuring cause. Rose v. Hunter, 155 Cal.App.2d 319 (1957).
If the broker is, in fact, the procuring cause ‘it is unnecessary for the broker to prove that he was the first one to bring to the attention of the purchaser the fact that the property in question was for sale. …‘ Webster v. Parra, 72 Cal.App 639.
FOR MY ARIZONA BROKER CLIENTS: A broker is the “procuring cause” of a sale, (entitled to commission), if her efforts are the foundation on which the negotiations resulting in a sale are begun. A cause originating a series of events which, without break in their continuity, result in accomplishment of the prime objective of the employment of the broker who is producing a purchaser ready, willing, and able to buy real estate on the owner’s terms. Mohamed v. Robbins, 23 Ariz. App. 195.
According to the National Association of Realtors (NAR) – Professional Standards in regard to procuring cause:
A broker is the “procuring cause” if the broker’s efforts are the foundation on which negotiations resulting in a sale begin.
They go on to state: “it is the cause originating a series of events which, without break in their continuity, result in the accomplishment of the prime objective of the employment of the broker who produces a ready, willing and able purchaser to buy real estate on the owner’s terms.”
Whether a broker is deemed to be the procuring cause of a sale depends on looking at and analyzing a wide variety of factors. There is no simple solution in most cases, but a case-by-case, fact-by-fact analysis is normally required. Here are a few factors to think about in regard to who is the procuring broker of a sale (a hypothetical broker #1 and the subsequent, or perhaps simultaneous broker #2). No fact should be deemed conclusive, but rather, just tipping the scale in favor of one broker or the other. Procuring cause is complicated and not always predictable.
In addition, in an arbitration or commission dispute hearing the arbitrator or hearing panel will likely consider all available facts and evidence and seek to achieve a fair and just outcome. They may also find that two or more brokers are “partial procuring cases” thus requiring a split of the commission.
Factors Leading toward a Finding of Procuring Cause for Broker #1 (Intro Broker)
- Broker #1 was the first to show or introduce the actual property to be purchased to the buyer (more than merely mentioning the property is listed for sale). Closing Broker never showed the Property. Note: merely being the first to show the property or present an offer will not automatically make a broker the procuring cause;
- Buyer was ready, able and willing to buy and a written offer was communicated to the Seller even if not accepted;
- Closing Broker submitted a similar offer within a short time frame of Broker #1’s offer;
- The introduction by Broker was instrumental in creating the desire to purchase (broker motivated the buyer);
- Broker gave proper agency disclosures when making an offer;
- Broker makes continued efforts and continued contacts with buyer after showing the property (didn’t withdraw from the representation in the eyes of the buyer) and/or removed impediments to the sale;
- Broker made a proposal upon which the final transaction was based;
- Broker exerted more effort than any other broker (ex. provided significant information about the property, neighborhood, schools, financing, etc. (things that contribute to the Buyer’s interest);
- Broker acted in good faith at all times during the transaction;
- There was a continuous and uninterrupted closing of the sale (buyer did not come back and buy the property many months or years later);
- Subsequent broker interferes in bad faith (ex. before representing Buyer, Closing Broker never asked if Buyer had dealt with any other brokers or signed any agreements with anyone);
- Seller “locks out” or “freezes out” the Broker in an attempt to avoid paying a commission;
On this topic note: Normally, the price at which a broker is authorized to sell the property (i.e. the asking price listed in the MLS) is usually just a guide for the broker to consider in conducting her negotiations with co-operating brokers. Therefore, if the broker procures a purchaser willing to pay a lower price to purchase the property, the owner cannot deprive the broker of a commission simply by eliminating the broker and conducting the final negotiations himself, and, selling at a lower price to the purchaser who was actually procured by the broker. See Palmtag v. Danielson, 30 Cal. 2d 517, 521, Bail v. Glantz, 78 Cal. App. 49, and Rutherford v. Berick, 82 Cal. App. 2d 331.
- The sale would not have occurred “but for” the efforts of the broker #1;
- Intro Broker knows Client will be attending open houses and informs Buyer to tell any other broker that they are represented by Broker #1;
- Closing Broker is not a member of the MLS wherein the property was listed; or a reciprocal MLS, and had no other commission agreement with the Listing broker for a commission;
- Intro Broker has a written right to represent buyer (either exclusive or non-exclusive), signed and dated before Broker #2 enters the scene.
These are just some of the factors that will weigh into a finding that Broker#1 was the procuring cause of the sale and thus owed a real estate commission.
Factors that Mitigate against a finding of Procuring Cause for Broker #1 (Meaning, Broker #2 – Closing Broker – is more likely to be deemed the procuring cause)
(17) Buyer knew of Property before Intro broker introduced (buyer found property on his own) and Closing Broker also showed property;
- There were previous dealings between the buyer and the seller so that Intro Broker’s Claims of introduction are not as strong;
- Buyer Found property via an open house through no help of Broker #1;
- Broker #1 engaged in some type of mis-conduct (act or ommission, lack of knowledge, misrepresentations, lack of professionalism etc.) that made the buyer seek out a second broker. A buyer who has not signed a buyer’s agency agreement is free to choose a new broker to work with;
- Closing Broker set forth events that created the desire to purchase the subject property (broker #2 motivated buyer to purchase);
- Closing Broker made offer to purchase after significant passage of time from the previous offers and exerted greater effort in getting the deal done;
- Original negotiations broke down with Broker #1 (gap in continuity) and were revived in good faith and without intentional interference by Broker #2;
- Closing broker wrote and negotiated offer and performed all closing services while escrow was closing;
- Intro Broker failed to keep in touch with Buyer after first offer was rejected;
Again, these are all just factors that are weighed along with the facts of the case to make the factual determination of who the procuring broker was entitled to a commission. An arbitrator will hear and weigh all of the facts surrounding the case.
Typical Defenses Raised by Sellers in an attempt to defeat a commission dispute:
- The commission contract is not valid and enforceable;
- The broker was not the procuring cause of the sale;
- Breach of fiduciary duty by Broker (ex. broker breaches duty of reasonable care, skill, loyalty, etc.);
- Broker had knowledge the Seller was not able to convey the property (ex. Broker knew Seller could not convey marketable title);
- Broker did not fulfill the terms and conditions of the Broker agreement;
- Buyer was not ready, willing and able to buy the property on Seller’s terms;
- Brokers claims for commission are outside the statute of limitations period.
Potential Damages a Seller / Broker May face who refuses to Pay the commission owed (this assumes for the most part that litigation of the dispute, rather than arbitration, is possible):
- Commission owed;
- Interest on Commission;
- Reasonable Attorney Fees;
- Punitive damages where the property owner / Broker has committed bad faith acts (willful, wanton, and/or malicious) designed to interfere with the Listing Broker’s / Co-operating broker’s entitlement to a commission.
IF YOU ARE IN NEED OF LEGAL REPRESENTATION TO ANALYZE YOUR COMMISSION DISPUTE, OR ASSERT A CLAIM FOR COMMISSIONS OR DEFEND A CLAIM OF PROCURING CAUSE, CONTACT US TO DISCUSS YOUR SITUATION. WE CAN OUTLINE YOUR LEGAL POSITION TO YOUR OPPONENT AND HOPEFULLY DETRACT THEM FROM PURSUING THE MATTER. IF FORCED TO ARBITRATE OR LITIGATE YOUR CLAIM, WE ARE HERE TO HELP FRAME YOUR CASE IN THE BEST POSSIBLE LIGHT.
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