When Is a Real Estate Commission Earned?

When is a real estate commission earned?  This is a most important legal issue for real estate brokers and agents to know about and understand.

Real estate law in some states of the U.S. is that a real estate commission had been earned if a buyer was procured who made an offer that matched the price and terms specified in the listing agreement, or on other price and terms the seller might find acceptable.

According to those laws, a completed transaction was not a required condition for a real estate commission to be earned by the agent.

The California Appellate Court ruling in 2012 (RealPro, Inc. v. Smith Residual Company, Fourth Appellate District Court) changed that in CA. In the RealPro case, the buyer had made a full-price, per the listing, $17 million offer on terms that the seller found acceptable. However, the seller then increased the listing price to $19.5 million. The buyer declined the price increase. But after that the buyer’s broker, as a third-party beneficiary, sued for his commission.

The trial court in RealPro focused on that part of the listing that set forth price and terms, which said “$17,000,000 cash or such other price and terms acceptable to Sellers…” The court of appeal said that it would be a mistake to say that the listing was for $17 million. Rather, it “was for $17 million cash or such other price, plus terms acceptable to Sellers.”

The Appellate Court in RealPro further said, “we, like the trial court, conclude that the $17 million price was merely an invitation to submit offers. Although RealPro submitted an offer to purchase the Property, such offer never materialized into a sale that would trigger RealPro’s right to a commission.”

That court of appeal in RealPro essentially said that it is a sale — not just an acceptable offer — that triggers a real estate commission.

The California Association of Realtors (CAR) was concerned about that new law and changed its Residential Listing Agreement (RLA) the next year to clarify. That listing agreement form now reads in essence that a real estate commission is due if anyone procures a ready, willing, and able buyer(s) whose offer to purchase the Property on any price and terms is accepted by Seller, provided the Buyer completes the transaction or is prevented from doing so by the Seller.

There has been a recent California court of appeal decision CGI v. City of San Francisco and Ellis Parking with a new twist.  However, that court decision has not been published and cannot be cited as authority.

By Harrison K. Long, real estate broker and Realtor® associated with HomeSmart Evergreen Realty, Irvine, CA.  CALBRE #01410855. Also an attorney member of the California State Bar Association #69137.  

Source of information for is article by Bob Hunt, real estate broker and Realtor® who serves as a director of the California Association of Realtors® – who is also the author of his book “Real Estate the Ethical Way”.

This article is for information only and is not the providing of legal services. If you have questions about your situation involving real estate commissions, you should contact an experienced real estate attorney.

“When is real estate commission is earned?”