When is a Commission Due? It Depends On What Your Definition of “OR” Is.

August 2012

by Nadav Ravid


When a seller of real estate hires a broker to find a buyer, the broker is usually considered to have earned his commission when he or she finds a “ready, willing, and able” buyer.  That generally means a buyer who is willing and capable of purchasing the property at the listed price, without any preconditions imposed by the buyer, such as a condition that the buyer obtains a loan.  It generally does not mean, however—and this may come as a surprise to some sellers—that the sale must actually be completed.  For example, if the buyer is ready, willing, and able to purchase the property at the seller’s listed price, but the seller chooses to reject the buyer’s offer, then although the seller is not obligated to sell the property to the buyer, the seller may still be required to pay the broker’s commission.  On the other hand, if the buyer is the one backing out of the transaction, then the seller would not be obligated to pay a commission, because in that case, the buyer would not be considered to be “ready, willing and able.”  We should also note that the seller is not obligated to sell the property to the buyer even if the buyer is willing to pay the listed price; it is established law that a listed price is not an offer to sell by the owner but rather an invitation for buyers to make offers to purchase.

While a seller may feel that a commission should never be due unless a sale actually closes, the law recognizes that in some cases, the broker has earned and is entitled to its commission irrespective of the sale’s completion.  This is because the broker is deemed to have done his or her job by finding a “ready, willing, and able” buyer, and should not suffer just because the seller had a change of heart.   The broker likely spent considerable time, expertise, money, and other resources to find a buyer at the seller’s price and has presumably done everything that he or she has been retained to do, thus entitling the broker to his or her commission.

Nonetheless, to avoid paying brokers a commission without a sale, experienced sellers typically require that their commission agreements state that a commission is earned only if a sale actually closes, regardless of whether the seller rejects an offer that meets all of the seller’s listed terms.  For the most part, brokers agree to such provisions, taking into account that it’s a risk worth taking.  After all, most sellers are quite happy when the broker finds a buyer willing to pay the seller’s price.

Not all sellers insert these provisions however.  Many sellers still sign “standard” broker commission agreements that do not contain these protections.  This appeared to be the case in RealPro, Inc. v. Smith Residual Company.  As discussed below, however, we believe the court rescued the seller and ruled that despite the missing seller protections, no commission was due.  The decision turned on the court’s interpretation of the word “or” in a standard commission agreement.

In RealPro, the Seller retained MGR to act as its agent for the sale of 46.8 acres of vacant land in Riverside, California.  The Sellers signed a commonly used “standard” listing agreement form, which  set forth the following sale price and terms: “$17,000,000 cash or such other price and terms acceptable to [Sellers], and other additional standard terms reasonably similar to those contained in the [AIR Purchase Agreement and Escrow Instructions] or f[o]r such other price and terms agreeable to [Sellers].”   The listing agreement also provided that MGR could cooperate with other brokers (“cooperative brokers”), who could enforce the terms of the listing agreement as third party beneficiaries.
RealPro, acting as a cooperative broker, submitted an all cash, full price offer for the property.  MGR rejected RealPro’s offer, and countered with $19,500,000 while indicating that all of the Buyer’s other terms were acceptable.  Ultimately, the parties could not agree on a final price and the sale never occurred.  Had the sale closed at the listed $17,000,000 purchase price, MGR and RealPro stood to split a 4% commission of $340,000 each.  RealPro sued the Seller for payment of its commission.

The Court ruled in favor of Seller, concluding that the listing agreement required “other terms acceptable to Seller” and that RealPro’s offer of $17 million satisfied merely one of those terms.  The court stated, “The confusion centers on the use of the word ‘or’ as separating $17 million from ‘such other price and terms acceptable to [Sellers].’  However, we interpret it to include ‘such other price.’  Thus, the listing was for $17 million or such other price, plus terms acceptable to Sellers.”  In other words, the court interpreted the language as requiring an offer of (a) $17 million cash or such other price; and (b) other terms acceptable to Seller.   But the court seems to ignore the fact that the Seller found all of the Buyer’s other terms to be acceptable.

Regardless, as RealPro argued, it seems more likely that the intent of the language used in the listing agreement was for the broker to locate a buyer at (a) $17 million cash, or (b) some other LOWER price.  Where the offer was for less than $17 million, then the listing agreement also required other terms acceptable to Seller.  Of course, the Seller could accept a higher offer, but if the offer was for less than $17 million, then, in that case, the price and terms would have to be acceptable to Seller.

Despite our reading of the language, we agree with several concerns the court raised about potential bad outcomes that could result if RealPro’s (and our) interpretation of the language held up.  The court stated, “…RealPro argued that the [trial] court was ‘ignoring plain English of what “or” means,’ and argued that if an agent brings in an offer of ‘$17 million cash’ then a commission is due.  The [trial] court replied, ‘Let’s say we were still in the very good market…and there was a listing agreement of $17 million or other terms, and there were bidding wars.  So you’re telling me that the listing agent, if they brought in a full price offer and then it bid up from there, everybody would be entitled to a commission?”  In response to the court’s hypothetical, RealPro argued that only the first broker to bring in a ready, willing, and able buyer for the full price and terms of the listing would be entitled to a commission.  But the court rejected this argument, and rightfully so—it doesn’t make sense that a seller should be forced to pay a commission on a lower offer just because it came in first.  The court also considered whether, if it accepted RealPro’s position, “[a] seller would be responsible to pay multiple commissions on all submitted full price offers, irrespective of the offers’ terms,” another legitimate concern.

To avoid ambiguity and these concerns, sellers and brokers should address these types of issues in their commission agreements.  Sellers will want to insert provisions that no commission is due unless the sale actually closes, while brokers will want to make it clear that a commission is earned so long as the broker delivers an offer for the listed price from a ready, willing and able buyer.  Both parties should also be sure to expressly specify all other material terms that may be important to the seller such as requiring a 30-day escrow, a 15-day due diligence period, or an all cash transaction.