Release Date: 02/21/2017
QUESTION: The owner of a property I’d like to list has asked me a question about the Exclusive Right to Sell Listing Agreement (form 101) that I need some guidance on. In the “Firm’s Compensation” paragraph, it says in so many words that the commission is deemed earned if a ready, willing and able buyer makes a full-price offer or if the property goes under contract during the term of the listing agreement. The owner says my fee shouldn’t be earned until there’s a closing. He says it wouldn’t be right for him to have to pay a commission if a buyer backed out of a contract, and he thinks the listing agreement needs to be changed. I don’t think he’d owe me a commission if a buyer backed out, but don’t know how to explain it to him. Can you help?
ANSWER: You are correct that the seller would not owe a commission if the buyer backs out of a contract, provided that it wasn’t due to a material breach of the contract by the seller. Let’s take a quick look at the organization of paragraph 7 of the listing agreement to see why this is so. Paragraph 7(a) sets forth the amount of the commission. Paragraph 7(b) establishes when the commission is deemed “earned.” Paragraph 7(c) establishes when an “earned” commission becomes “due and payable.” There are several events that trigger the “due and payable” provision. The most common event is when closing on the property takes place, but an earned commission may also become due and payable if the seller refuses to sign a full-price offer or breaches a sales contract or the listing agreement. However, note that the buyer’s failure to complete a transaction (e.g., buyer’s breach of a contract, the non-fulfillment of a contract condition, buyer’s exercise or a unilateral right to terminate) is NOT an event that causes the commission to become due and payable under paragraph 7(c). Thus, it can be seen that although a commission may be “earned” under paragraph 7(b) if the property goes under contract, it may never become “due and payable” under paragraph 7(c) if the buyer backs out of the contract through no fault of the seller.
Hopefully, this explanation will give your prospective client some assurance that the listing agreement does not need to be changed in order to protect him, but if he has any questions about his rights and responsibilities under the listing agreement, he should be advised to seek guidance from his own lawyer.
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