Is Your Exclusive Sale Listing Agreement the Full Bundle of Rights?

Is Your Exclusive Sale Listing Agreement the Full Bundle of Rights? by James A. Hochman, Arnstein & Lehr The longer I am in the profession of representing real estate brokers, the more amazed I am to learn of the many ways, and new ways, that sellers seek to avoid or reduce their liability for sale commissions.  To be sure, broker lien rights are the “big stick” in many states, and, often there is case law which supports the broker’s claim.  However, there is no substitute for a well-drawn, comprehensive, and clear exclusive sale listing agent to assure timely and full payment of your sale commission. The purpose of this article is to help you make sure that your definition of “sale” is comprehensive and includes the many different methods by which a property owner might dispose of the property.  Here’s a checklist, in the form of questions, to help you make sure that you are covered, no matter what form the transaction takes.

1. If the property is the subject of an installment sale, also known as agreement for deed, does your listing require that the full commission is earned and paid upon execution of the installment sale agreement, as opposed to either: (a) as partial periodic payments are made; or (b) worse, at the time (eventually, if ever) when all installments are paid and legal title is conveyed? In the latter case, I have seen installment buyers raise claims against sellers and worse default, walk away from the deal and forfeit prior payments, leaving the broker without his commission.
2. Does the listing agreement require the seller to pay the fee if, after execution of a purchase and sale agreement, the seller either refuses or is unable to complete the sale? The old “no closing, no commission” agreement can really bite you in the hind end when a seller defaults.
3. Does the broker receive compensation if the seller has a change of circumstances or a change of heart, after you have spent time (and perhaps money) marketing the property?
4. When a municipality buys the property, either by eminent domain or threat thereof, are you covered? Many states’ case law view a taking as something “less” than an arm’s length transaction, and hold that unless a broker’s listing agreement specifically includes eminent domain, than such a disposition is not commissionable.
5. The contribution of the property to a joint venture bears consideration, even if the likelihood of a JV is low. Valuation of the property for computation of the fees should also be addressed.
6. While I would like to believe that the wave of commercial property foreclosures has decreased, conveyance of the property by judicial sale, or especially by deed-in-lieu of foreclosure should be addressed. It’s often the case that the mortgage lender takes title and then sells to a prospect that you procured; and unless you have an agreement with the mortgage lender, you will not succeed in recovering a fee from the lender.  See Owen Wagener & Co. v. U.S. Bank, 297 Ill. App 3d 1045 (1^st, 1998) for a really disheartening result.
7. An internal transfer, i.e. sale of a partial interest from one partner to other, or sale of a member’s interest to another member of the LLC does not transfer title to the real estate. Unless covered as a defined sale, you could find that such a transaction yields no commission, and likely takes the property off the market.
8. There are some properties with value which result in donation rather than sale. The owner usually obtains an appraisal and a tax deduction, but without actual “consideration,” the Donor is likely to decline your request for commission, unless donation is included as a sale in your listing agreement.
9. Sometimes the likely, even the only buyer, needs to lease the property, perhaps with an option to purchase the property at a later date. Are you protected for a commission on the lease?  Are you protected for the sale that occurs months or years later, either pursuant to exercise of the option, or perhaps “or otherwise” if the parties renegotiate the option price or terms at a later date?

The sad truth is that each of my concerns stems from at least one actual claim.  My concerns on your behalf are far from theoretical.  In short, the time (even the money) you spend getting that old listing agreement a tune-up is likely time and money well spent.  Lessons learned from experience are valuable, but the tuition might be too high. To learn more about this topic, register for Mr. Hochman’s upcoming CE class: “Getting Paid in a Changing Market” C.A.R. 200 S Michigan Ave #400 Chicago, IL 60604 January 20, 2016 1:00 – 4:00 PM, Networking Reception 4:00 – 5:30 PM $45 for C.A.R. Members | $55 for Non-Members Approved for 3 hours elective CE