Real estate brokers (and, in turn, brokers’ agents) are paid on a commission basis. Just as a shoe salesman’s income can be based off the number of shoes he sells, real estate brokers earn income based off the number of sales transactions in which they are involved. How does a broker establish a commission claim? How can she protect that claim?
WHAT IS A REAL ESTATE COMMISSION?
A commission is a fee for services. Typically, it is a percentage of sale price negotiated at the time of listing. Commissions are shared between the broker representing the seller and the broker representing the buyer.
HOW DOES A REAL ESTATE BROKER ESTABLISH A COMMISSION CLAIM?
The language of the listing agreement will address the commission agreed to between seller and listing agent. The listing agreement also sets forth the length of time the seller agrees to allow that agent to attempt to sell the property. Perhaps most importantly, the listing agreement states the conditions under which an agent has earned the agreed-upon commission. Typically, the listing agent representing a buyer who is willing and able to purchase the property is entitled to be paid the agreed-upon commission under any of three occurrences: (1) the closing of the sale; (2) the refusal of seller to close; or (3) seller’s refusal to sell at the price and terms specified in the listing agreement.
If the property does not sell and close within the time period identified in the listing agreement, the listing agent has not established a commission claim. But what happens if an agent shows a property to a prospective purchaser during the term of the listing agreement, but that party does not enter into a purchase agreement during the term of the listing agreement? Is all of the agent’s hard work wasted? Not if the agent has taken the proper steps to protect her commission claim.
THE PROCURING CAUSE DOCTRINE
A broker is entitled to a commission if her efforts are “the efficient cause, but not necessarily the sole cause of a series of unbroken, continuous events, which culminate in the accomplishment of the objective of the employment.” Williston on Contracts Section 62:19. A broker must do more than contribute to the result; he must be the means that actually produced the sale. This principle is known as the procuring cause doctrine. It has been applied in Minnesota courts for over a century. It is intended to protect the broker who finds a willing and able buyer from a seller’s efforts to avoid paying the commission by entering in a purchase agreement with that buyer after the listing agreement expires.
STATUTORY BASES FOR COMMISSION CLAIMS
Minnesota laws regarding real estate brokers and salespersons provide protections for listing agents, and specifically identify two key provisions to protect listing agents – the override clause and the protective list. The override clause entitles a listing agreement whose listing agreement has expired to claim a commission where that agent negotiated a sale with the buyer or showed a property to the buyer during the term of the listing agreement and that buyer ultimately purchases the property. The protective list, in turn, is a written list of names and addresses of prospective buyers with whom an agent has negotiated the sale of the property or to whom an agent has shown the subject property before the expiration of the listing agreement. In order to invoke the override clause, the protective list must be provided to the seller within 72 hours after the expiration of the listing agreement. These protections apply only if the override clause is included in the listing agreement and the protective list is provided in a timely manner. Minnesota courts construe that 72-hour period strictly.
Despite a broker’s best efforts to document her right to a commission, disputes arise. In many cases, those disputes are resolved via arbitration. In some cases, arbitration is the agreed-upon mode of dispute resolution. The Minnesota Commercial Association of Real Estate (MNCAR), for example, requires disputes between members to be handled by mediation or arbitration. The Minnesota Association of REALTORS® (MAR) may require commission disputes to be handled by arbitration. Finally, the parties to a purchase agreement may agree to resolve disputes arising in the transaction – including commission disputes – to be resolved via arbitration.
Resolution of commission disputes can be a complex process, the details and vagaries of which are beyond the scope of this article. Agents involved in a commission dispute should consult with legal counsel promptly in order to protect their rights.
David G. Hellmuth is a co-founder of Hellmuth & Johnson, a 60-lawyer law firm based in Edina. In his practice, Dave helps his real estate, developer and community association clients solve their legal problems. He also practices in business and corporate law, creditor remedies, banking law, litigation, and construction law. With more than 20 years of experience assisting individuals and businesses in the real estate industry, Dave combines strong insight and great breadth to bring value to his clients. Dave can be reached at [email protected] or at (952) 746-2107. Hellmuth & Johnson attorney Nancy T. Polomis also contributed to this article.
This article was republished with permission and originally appeared in the Vol. 5 No. 2 issue of Real Estate Agent Magazine.