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Combs Law Group

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Real Estate Agent with Keller Williams

KW LOGOI want to share with you a recent court decision that impacts all Realtors® and real estate companies here in Arizona.

As you begin reading you might start out thinking how cool this is…. FINALLY a victory for the buyer’s agent. I would like you to suspend that idea for just a moment and consider the whole picture. 

According to the following statement published by Combs Law Grouphere’s what happened…

A Maricopa County Superior Court judge recently ruled that a Scottsdale real estate agent was entitled to her commission under Multiple Listing Service ("MLS") rules even though the seller did not close escrow or pay the listing broker's commission.

The agent was represented by Combs Law Group attorney Adam D. Martinez

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After the buyer was ready to close escrow, the seller breached the purchase contract with the buyer and refused to close escrow. The buyer decided to find another home and not pursue any claims against the seller. The agent representing the buyer then requested her commission from the listing broker pursuant to MLS rules. The listing broker refused to pay the agent, and told the agent that the listing broker would not request any payment of the listing commission from the seller.

MLS rules do not make payment by the listing broker of the co-brokerage commission contingent on the close of escrow or payment of the listing commission to the listing broker. A buyer's agent is only required to produce a "ready, willing and able" buyer to earn a co-brokerage commission. 

The agent was unable to arbitrate this commission dispute through her local Realtor® association. The reason was that only commission disputes on "successful" transactions, i.e., "a transaction that closes escrow," may be arbitrated. Therefore, the agent filed a lawsuit against the listing broker for the amount of the co-brokerage commission.

The listing broker admitted that the agent had earned the co-brokerage commission, but argued that the agent, after showing the buyer other homes, should not be paid this co-brokerage commission because the agent was paid a co-brokerage commission by another listing broker on the purchase of another home several months later by the buyer.

Upholding the agent's right to a commission, the judge ruled that any co-brokerage commission later earned by the agent on the purchase of another home by the same buyer was unrelated to the commission owed by the listing broker in this transaction. In other words, a buyer's agent that produces a ready, willing, and able buyer pursuant to MLS rules is entitled to the co-brokerage commission from the listing broker when all contract contingencies such as home inspection are satisfied, regardless of whether the transaction closes. See Maricopa County Superior Court Case No. CV2009-037953. Finally, the judge awarded the buyer's agent 100% of her attorney fees and court costs.

Until this court case, it has been commonly understood by brokers that a co-broke commission is earned at close of escrow and we have conducted business and counseled clients based on that belief.

The lawsuit was not and could not be filed against the seller because there was no compensation agreement between the buyer’s agent and the seller. Therefore the lawsuit was correctly filed against the listing broker.

Here’s why I believe this decision is a dangerous decision for our industry and where it get’s complicated.

Let’s assume for a moment that the broker has E&O and there is no exclusion for commission disputes:

As soon as the initial lawsuit was filed, the broker would have notified their insurance carrier of the claim. The insurance carrier would probably have assigned an attorney to represent their interests. Sounds good so far right? But let’s drill this down and see what the cost is. 

Like all insurance, E&O carries a deductible and brokers commonly require agents to pay their pro-rata share of the deductible. This is uniformly addressed in the Independent Contractor Agreement. At KWEV our deductible is$2500.00 and the agent split according to the ICA is 70/30. Not looking quite so good now….

Read OnBut here is the sad reality--considering that E&O is intended to cover errors and omissions it is probable that a commission dispute between brokers would be exempt. If this were the case the broker would then be liable to pay the entire commission plus defense costs.

Also, remember that since the seller did not pay the broker the listing commission because the seller failed to close the transaction this means that the broker can choose between two bad choices:

• Settle the claim and pay all expenses
• File their own lawsuit against the seller for commission and damages

In most cases it is probably not either feasible or desirable to sue the seller in order to offset the commission paid to the buyer’s agent.

HmmmmHere are the things I would like you to keep in mind going forward: 

  •  This court decision was based on specific facts. Don’t think that every failed transaction means the buyer’s agent is entitled to commission
  •  Understand that the court forcing the broker to pay for the breach of the client creates a financial burden and liability on brokers and may have far reaching implications in our industry
  • Be clear with the seller that there may be legal ramifications for breach of contract and that they should seek legal counsel before breaching the contract
  • Be aware that now this door has been opened more brokers will walk through it
  • Be aware that how you handle a seller breach/cancellation may impact you financially
  • Always involve your broker if you have any questions 

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'The Diamond Group' 'A Cut Above The Rest'
The Diamond Group @ Keller Williams - Lubbock, TX
Lubbock Texas Real Estate

Hi Scott, I don't think I would have taken it that far but I agree that the buyers' agent was owed the commission because the seller backed out.......do the right thing, hmmmm; maybe not

Nov 17, 2010 04:35 AM
Ricky Khamis
EPiQ Lending - Gilbert, AZ
NMLS 173141 | CADOC 173141 - 602-758-7425

WOW!  Nice post, very informative Scott you are a true leader.

Nov 17, 2010 04:37 AM
Anonymous
Ben Skinner

Scott,

In the interest of full disclosure I am also an attorney with Combs Law Group and one of AAR's legal hotline attorneys. I think your analysis is quite good. I have two observations and would appreciate your thoughts

1. "Understand that the court forcing the broker to pay for the breach of the client creates a financial burden and liability on brokers and may have far reaching implications in our industry."

I think this misstates the holding. The court was enforcing the MLS contract, which is distinct from the listing agreement. The unconditional nature of the MLS co-broke contract is vital to the continued viability of the industry. I view the court's decision as a ratification and reinforcment of the strength of this contract. To be clear it was not the seller's breach that the broker had to pay for, it was the broker's breach of the MLS contract that triggered the lawsuit. The listing agent's decision not to seek indemnification in this case may have been based on sound reasons, however, the listing broker certainly had the legal right to pursue the defaulting seller.

2. "In most cases it is probably not either feasible or desirable to sue the seller in order to offset the commission paid to the buyer’s agent."

I am unclear why this would be. Most exclusive listing agreements I have drafted or reviewed contain provisions clearly stating the seller's liability if they breach the agreement. Why have such provisions if the statement above is true.

I think the take away points from this case are. (1) that the MLS contract is serious and unconditional, and (2) that agents should advise their clients of the nature of the listing agreement and ramifications of choosing not to go forward with a transaction once they have contracted to sell.

I appreciate your comments and will now read your blog regularly.

Thanks,

Ben Skinner

Combs Law Group

Nov 17, 2010 08:26 AM
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