A Listing Agent’s Right to Get Paid
January 2, 2020
Partner, Jaburg | Wilk Attorneys at Law
One of the great things about being a real estate agent is that when a transaction closes, the agent gets paid his or her commission regardless of how much time and effort expended by the agent in connection with the transaction. Commission is usually computed as a percentage of the sales price. The other side of that coin, of course, is that the agent does not get paid anything if the transaction does not close, regardless of time and effort spent. But is that always the case?
What if a listing agent procures a potential buyer, who is almost certainly going to purchase the listed property, but before a formal offer is made, the Owner decides to cancel the listing agreement and withdraws the property from the market? Does the listing agent have any recourse to recover the commission that they would have earned, had a sale been consummated? In such a situation, the listing agent actually has two distinct potential claims they can assert to be paid their commission from the Owner. Those claims are based upon the following language found in some form in most listing agreements:
If Broker produces a ready, willing and able purchaser in accordance with this Contract… during the term of this exclusive listing, for services rendered Owner agrees to pay Broker a commission of six percent of the sales price. The same amount of commission shall be payable to Broker if, without the consent of Broker, the Property is withdrawn from sale, or transferred or conveyed by Owner.
Based upon the first sentence above, if the listing agent can establish that the potential buyer that they procured was, in fact, “ready, willing and able” to purchase the property on the exact terms (or better) than the terms set forth in the listing agreement, then the listing agent is entitled to be paid their commission, regardless of whether or not an actual sale takes place. In order to be entitled to be paid on this basis, the buyer must have been ready, willing, and able to unconditionally pay the full listing price. If the buyer was going to include any conditions, such as obtaining “satisfactory financing,” as part of its offer, then the broker cannot successfully assert a claim on this basis.
The second sentence in that paragraph does, however, allow a listing agent to assert a claim for their commission, regardless of whether or not a “ready, willing and able” potential buyer was ever procured, on the basis that the Owner breached the contract by withdrawing the property from sale prior to the expiration of the listing agreement. Although an owner may argue that such a provision is an unenforceable “liquidated damages” clause, in Arizona, a liquidated damage provision is enforceable if it is a reasonable forecast of just compensation for the harm caused by the breach, and if the harm caused by the breach is difficult to estimate. If the amount of the claim is generally in line with standard real estate commissions, the first element is met. And the second element can arguably be met by proving that there is no other reasonable means to compensate the listing agent for its lost opportunity to earn a full commission resulting from the owner’s withdrawal of the property from the market.
As an alternative to arguing that such provision is a valid liquidated damages clause, a listing agent can also argue that such provision is merely a bargained for alternative form of performance that can be chosen by the owner. In other words, by choosing to remove the property from the market, the owner has contractually chosen to pay the broker its agreed upon commission that would have been earned had the broker fully performed. Although not directly addressed in any Arizona case, this argument is supported by a well-established California case, and avoids having to address the liquidated damages issue.