Laying Down The Law: Caselaw Update Regarding Broker Responsibility
August 11, 2021
|Christopher J. Charles, Esq.||Blake Wilkie, Esq.|
Christopher J. Charles, Esq.
Blake Wilkie, Esq.
Do Brokers Risk Forfeiting Commissions for Neglecting to Review Listing Agreements?: Caselaw Update Regarding Broker Responsibility
Designated brokers in Arizona are exceedingly busy these days in the frenzied real estate market. Pulled in many different directions throughout their day, it may be tempting to allow administrative tasks to slide down their priority list. One of the many important obligations assigned to designated brokers is to review all real estate listing agreements procured by their agents and to initial each listing within ten days of its execution. However, when that seemingly innocuous and simple task is not performed, is the broker risking the commission that has been contracted for? In other words, can a seller of real estate be excused from paying a real estate commission due to a designated broker’s failure to timely initial a listing agreement within ten days, as required by Arizona law?
The Arizona Court of Appeals recently examined that question. In CK Family Irrevocable Trust No.1 v. My Home Group Real Estate, LLC et al., 249 Ariz. 506 (Ct. App. 2020), the plaintiff Trust sought to sell a residential property in Chandler. The Trust entered into a listing agreement with My Home Group Real Estate, LLC and its sales agent to market and sell the property. Pursuant to the listing agreement between the parties, My Home Group was due a 6% sales commission upon the close of the transaction, totaling $89,700.00. However, My Home Group’s designated broker did not review and initial the listing agreement within ten days of its execution. Therefore, the Trust argued, due to the designated broker’s failure to timely review and initial the listing agreement, the Trust was no longer obligated to remit the commission specified in the agreement upon the close of the sale.
Under existing Arizona law, the Trust had a cognizable argument. After all, the Court of Appeals ruled earlier in Young v. Rose, 230 Ariz. 433, 437, 286 P.3d 518, 522 (App. 2012), that a real estate agent who does not sign a listing agreement may not sue to collect a commission under that agreement. So, would the Court of Appeals extend that prohibition to designated broker’s failure to timely review and initial a listing agreement?
In CK Family Irrevocable Trust No. 1, the Court examined A.R.S. § 32-2151.01(G), which provides in pertinent part that “[t]he designated broker shall review each listing agreement, purchase, or nonresidential lease agreement or similar instrument within ten business days of the date of execution by placing the broker’s initials and the date of review on the instrument on the same page as the signatures of the parties.” In its analysis, the Court pointed out that this regulation does not address a broker’s right to recover a commission or convey any right to avoid paying an earned commission simply because a broker failed to comply with the directive. Nor does the statute expressly provide any sort of sanction for failing to timely review the agreement. Rather, the court reasoned, the statute focuses primarily on the obligation of the designated broker to oversee “the substance and documentation of the real estate transaction itself.”
The Court explained further that had the Arizona legislature wished to preclude recovery of a commission, it would have done so, noting that the Arizona legislature had precluded recovery of a commission in different provisions of the same statutory scheme. Moreover, the Court declined to extend Young’s rationale to this matter because Young dealt with a different provision of the statute. A.R.S. § 32-2151.01 regulates the conduct of designated brokers, while the statute examined in Young, A.R.S. § 32-2151.02, establishes the concrete, substantive requirements for a valid listing agreement. Additionally, Young dealt with a transaction in which the listing agreement had not been signed by both parties to the accord, and was therefore deemed unenforceable under basic contract principles. By contrast, the listing agreement here had been duly executed by both parties and indisputably constituted a valid contract for value—it was merely missing written proof of review. As a result, the Court ruled that the designated broker’s failure to comply with a regulatory statute does not require forfeiture of a commission under an otherwise valid listing agreement.
These days, any industry that touches real estate, even tangentially, is very busy. Regardless of how many tasks designated brokers may have in front of them, the Court’s ruling here does not excuse the responsibility of designated brokers to timely review and initial each listing agreement that comes through their doors. Nor does the Court’s ruling invite designated brokers to minimize the importance of their review obligations—and it even highlights the Arizona Department of Real Estate’s jurisdiction to penalize such violations. However, the failure to timely review an agreement will likely not cost the brokerage a commission due on a sale. And with the demands of today’s market, designated brokers can breathe a sigh of relief.
If you or someone you know has questions regarding real estate listings, broker regulation and compliance, or any other real estate related questions, contact us today to schedule an office meeting or virtual consultation with Mr. Charles or one of our other real estate attorneys.
Christopher J. Charles is the founder and Managing Partner of Provident Law ®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS ® (the “AAR”). Mr. Charles holds the AV ® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. Christopher regularly teaches continuing education classes at the Arizona School of Real Estate and Business and he can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.
Blake Wilkie is an Associate Attorney with Provident Law®. His practice focuses primarily on real estate litigation and preventive counsel. Blake is also a licensed Arizona real estate agent, allowing him the unique perspective of serving clients from both a legal and business point of view. He has represented commercial landlords, homeowners, and tenants in numerous transactions and cases, as well as advised on and prepared business formation documents and performed lending agreement legal analysis. From pre-litigation matters through final resolution, he is trained to identify a wide variety of legal issues that arise on a day-to-day basis, how to respond to them, and how to prevent them before they arise in the future. After graduating from the W.P. Carey School of Business at Arizona State University, Blake obtained his J.D. from the Sandra Day O’Connor College of Law at Arizona State University, where he was a Managing Editor of the Arizona State Law Journal.