For many people, buying a home will be the biggest purchase one makes during their lifetime. While most recognize the significance of signing an agreement of purchase and sale on the dotted line, many might be surprised to know there are substantial legal consequences that can flow from dealings at much earlier stages of the process.
In particular, if you are a seller, it is important to have complete knowledge of what your obligations might be when you first engage with a real estate broker and when you sign a listing agreement. If you are a broker, ensuring that your client understands the listing agreement and that the agreement has the necessary terms to reflect your goals can avoid lengthy and costly disputes in the future.
Listing agreements set out the terms and conditions upon which a broker’s commission for the sale will be payable, and in some cases, may not require the sale to actually close. For example, the standard terms listed in the Ontario Real Estate Association (“OREA”) Listing Agreement, used frequently in Ontario as a baseline, includes in relation to commissions that,
“In consideration of the Listing Brokerage listing the Property, the Seller agrees to pay the Listing Brokerage a commission … for any valid offer to purchase the Property from any source whatsoever obtained during the Listing Period and on the terms and conditions set out in this Agreement OR such other terms and conditions as the Seller may accept.”
While it might be up to interpretation what a “valid offer” means in various circumstances, if this clause is not negotiated and remains unchanged before it is signed, the explicit language can make it difficult for a seller to avoid paying commissions where a broker procures a ready and willing purchaser at fair market value, even if there is a failure to close. This was the case in T. L. Willaert Realty Ltd. v. Fody, where the broker was ruled to be entitled to the commissions set out in the listing agreement after a full asking price offer was presented to Mr. Fody within the listing period. The deal did not close as Mr. Fody, the seller, refused to accept the offer. Despite this, the court noted that “the terms of the listing agreement were clear and unambiguous” and that “the listing agreement clearly contemplated payment of the commission upon presentation of an offer at the full listing price.” It follows that once an agreement between a seller and purchaser has been entered into and the seller backs out, a common trend is that the broker’s commission for the seller will more than likely be payable. However, this still requires clear contractual language, and can also be distinguished from cases where it is the purchaser who backs out, which can be much more complicated.
Absent explicit terms in the listing agreement about commissions being due on procurement of an offer (and not completion of the sale), it will be much harder for brokers to enforce commissions where it is the purchaser who defaults. In Green v. Shamash, the purchaser reneged on the deal after a employment opportunity fell through. Here, the Buyer Representation Agreement even required the purchaser to pay commission if the transaction failed to close because of the purchaser’s default or neglect. However, the vendors released the purchaser from the closing obligations of the purchaser when a job opportunity he was relying upon fell through, and accordingly, there was no agreement on the closing date. The circumstances were not seen as those within the purchaser’s control, and the agent was not able to recover commissions. In contrast, there are examples such as a recent decision in British Columbia, Century 21 Seaside Realty Ltd. v Armstrong, which saw the sellers ordered to pay $52,500 in commissions even though a buyer backed out of the deal. There, the listing agreement specified that “The Commission Clause does not refer to a closing or completion … The Commission Clause read on its own discloses that commission is tied to the existence of an enforceable contract.” In that case, there was seen to be an enforceable sale agreement, and the broker was entitled to commissions.
Ultimately, if you are a broker and you wish to get full commissions on offers, or you are a buyer who only seeks to pay commissions on closing, it is imperative you have explicit terms in any listing agreement. Courts have rejected the notion that it can be assumed that the seller must pay a commission for the presentation of an offer, absent clear and unequivocal language to the contrary. If you are the seller of a property and your sale fails to close, or you a real estate broker seeking to enforce unpaid commissions, Walker Law real estate litigation lawyers can support you ascertaining your rights and enforcing or defending your claim.