Issues in payment of real estate commissions are common disputes at or nearing the closing. Here we provide an overview of the common issues that frequently arise in disputes over real estate broker commissions nationwide. Understanding these issues is crucial for both brokers and their client/sellers to navigate the complexities of commission agreements and disputes and understand the primary areas of conflict.
1. Triggers for a Broker’s Commission Being Owed
The two primary triggers for real estate broker commissions are a) a closing within an established framework of the listing agreement or b) the procurement of a “ready, willing, and able” buyer. A buyer meets this standard when they are prepared to purchase the property under the terms set by the seller, have the financial means to complete the purchase, and express a clear intent to proceed. Once a broker has introduced such a buyer, they typically earn their commission, even if the sale ultimately does not close due to reasons unrelated to the buyer.
However, several nuances complicate the straightforward application of this rule:
- Commission Agreements: The specific terms of the commission agreement between the broker and the seller can define or modify when a commission is earned. For example, some agreements stipulate that the commission is only owed upon the successful closing of a sale, while others may require payment upon the signing of a purchase agreement.
- Introduction of the Buyer: Disputes often arise over whether the broker was indeed the procuring cause of the sale. In some cases, sellers may argue that the buyer was found through another source, such as direct outreach or a buyer previously known to the seller, through another broker, or an open house or independent source not directly associated with the broker’s efforts.
2. Common Causes of Commission Disputes
While the triggers for a commission being owed are generally clear at the outset, several factors commonly lead to disputes between listing brokers and their client-sellers:
- Buyer From Another Source: One of the most frequent disputes occurs when a buyer is introduced by another source besides the broker who claims the commission. For example, if a buyer approaches the seller directly after having first encountered the property through the broker, the seller might dispute the broker’s claim to a commission. These disputes often hinge on whether the broker can prove they were the “procuring cause” of the sale, meaning their actions were the direct cause of the buyer’s decision to purchase.
- Breach of Agreement by Broker: Brokers are expected to fulfill certain obligations under their agreement with the seller. If a broker fails to meet these obligations—whether through negligence, failure to market the property effectively, or other breaches—the seller may dispute the commission. Sellers may argue that the broker’s breach directly impacted the sale process, thereby nullifying the obligation to pay the commission.
- Sale Fails Due to Seller’s Actions: In some cases, even when a broker finds a ready, willing, and able buyer, the sale may not proceed due to actions or inactions on the part of the seller. For instance, if the seller refuses to complete the sale or delays the process indefinitely, the broker may still claim their commission. Disputes arise when sellers argue that since the sale did not close, no commission is owed, regardless of the broker’s efforts.
3. Legal Considerations and Resolutions
Real estate commission disputes often require legal intervention due to the complex nature of the agreements, significant sums involved, and timing of the dispute (often ahead of a closing where a title company is poised to make a disbursement to the seller). Key considerations include:
- Contractual Terms: The specific language in the broker agreement will usually guide the resolution of disputes. Courts will examine whether the broker fulfilled their contractual duties and whether the conditions for earning a commission were met.
- Procuring Cause Doctrine: This legal principle is frequently cited in disputes, as it determines whether the broker’s actions were the direct cause of the sale. Proving procuring cause can involve analyzing the sequence of events that led to the sale, the broker’s involvement, and the buyer’s interactions with other parties.
- Mediation and Arbitration: Many commission agreements (including the standard form in Colorado) include clauses requiring alternative dispute resolution such as mediation or arbitration in the event of a dispute. These alternative dispute resolution methods can be less costly and faster than litigation, though they may still require careful negotiation and legal representation.
Conclusion
Real estate broker commission disputes are complex and often hinge on the specific terms of the broker agreement, the actions of the involved parties, and the sequence of events leading to a sale. Understanding these common issues can help brokers and clients alike avoid disputes or resolve them more effectively when they arise.
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