Over the past year or so, we have seen an uptick in questions relating to commission disputes between brokers and their clients. This may be the result of fewer listings and slower sales, but we do not know for certain.
A typical commission dispute arises when, after signing a listing agreement or buyer-broker agreement:
- A seller-client “cancels” a valid purchase contract.
- A seller-client cancels a listing.
- A seller-client permits the property to be foreclosed upon.
- A seller-client refuses to pay the full amount of the agreed upon commission. Similarly, commission disputes can arise when a buyer-client ultimately purchases a property shortly after the relationship with their real estate agent ends.
Consider the following, fairly common scenario and the result:
A seller signs a listing contract with a real estate brokerage for six months. The listing agreement contains a liquidated damages clause providing that “[t]he same amount of sale or rental commission shall be due and payable to Broker if, without the consent of Broker, the Premises is withdrawn from this Listing, otherwise withdrawn from sale or rental or rented, transferred, or conveyed by Owner.”
The listing contract further provided that “[i]f completion of a sale or rental is prevented by default of Owner, or with the consent of Owner, the entire sale or rental commission, as appropriate, shall be paid to Broker by Owner.”
Three months into the listing, the seller decides they no longer wish to sell the property but refuses to pay a commission. Under such a scenario, the broker usually has the right to seek a commission based upon the liquidated damages clause (which is found in most “standard” listing agreements in most states).
If you are an agent or broker involved in a commission dispute, you should consider doing the following prior to initiating any action against your former client for a commission:
- Confirm that a proper listing agreement or buyer-broker agreement exists. Listing agreements must usually be in writing and contain various mandatory provisions, including a definite duration or expiration date, the amount of broker compensation, and signatures. If there is no writing, courts may dismiss an action for a commission.
- Be certain you want to initiate an action against a former client. When something like this occurs, it may be more beneficial to save the relationship than to seek a payment. These disputes can be ugly and lengthy, so be certain that the amount you seek is worth pursuing.
- Confirm that the likelihood of a counterclaim or other action initiated by your former client is low. Sometimes, the initiation of a commission claim is met with a retaliatory claim that the agent or brokerage did something wrong. In many instances, such claims are without legal merit but they nonetheless should be taken seriously.
- Confirm that your brokerage documents (e.g., policy and procedure manuals, etc.) permit the filing of a commission claim. Some brokerages flat out prohibit the initiation of these types of disputes.
If you are an agent and your broker permits you to seek the payment of a commission, be sure to have this approval in writing. Additionally, brokers should consider providing a formal, written assignment of a commission claim to an agent and request to be indemnified and held harmless if named in a claim brought by a client.
Based on the law in most states, brokers usually have the upper hand and strong remedies available if a client cancels a listing, backs out of a sale, or purchases a property shortly after the expiration of a buyer- broker agreement. That said, pursuing a former client should only be done after careful consideration of the points noted above.
Patrick MacQueen is the founder of Medalist Legal in Chandler, Arizona.
This article is for information purposes only and should not be deemed as legal advice. Always seek the help of an attorney in your state to consult on commission matters.
