Is a commission due for a ready, willing and able buyer?

Is a commission due for a ready, willing and able buyer?

By Bryan Mashian  

Buyer submits an all cash offer at the full listing price of $17 million. Seller indicates that the terms of the buyer’s offer are acceptable and counters only to increase the price to $19.5 million. The parties’ deal does not go past this stage. Buyer’s broker then sues seller for his 2% commission since the broker had produced a “ready, willing and able” buyer at the full listing price. The court held that seller could counter the price and did not owe a commission to the buyer’s broker.

California law is solidly settled that a real estate broker earns a commission when the broker procures a ready, willing, and able purchaser who offers to buy the property on the terms set by seller in the listing agreement. Seller’s acceptance of the offer is not needed for the broker to earn a commission as long as the broker can prove that the purchaser was ready, willing and able.

A below the listing price offer does not obligate seller to pay a commission, but only if seller accepts that offer. Because typically offers are submitted at below the listing price, listing agreements generally provide that the commission is earned when the broker procures an offer that is otherwise acceptable to seller, such as below the listing price, but nevertheless accepted by seller.

Also, when an offer is conditional, such as on buyer obtaining a loan, approving physical inspections, etc., then the broker has not procured a willing purchaser (regardless of the offering price), until the conditions have been removed.

The closing of the deal is not required for the broker to earn a commission based on procuring a ready, willing and able buyer. If the offer was matching, or if a nonmatching (but unconditional) offer was accepted, the broker has earned the commission, whether or not the sale closes. In other words, if a commission already has been earned by procuring a matching offer or an accepted lower offer, then the broker cannot lose the right to the commission based on what happens later, such as failure of the deal to close due to breach or other reasons.

The listing agreement in the case mentioned above was the standard form published by the AIR Commercial Real Estate Association. The listing agreement provided that the cooperating broker earned a commission on the seller’s receipt of a $17 million cash offer “or such other price and terms acceptable to seller.”

The Court of Appeal saw a parade of horribles that could follow if the court held that seller did owe the buyer’s broker a commission. For example, seller could be obligated to pay multiple  commissions on every full-price offer without regard to the offers’ terms. Seller would not be able to accept a higher offer once a full listing price offer had been made. A commission would be due even if the buyer subsequently breached the contract. Or, the cooperating broker would be disinclined to seek a lower purchase price for the buyer because that might jeopardize the commission.

An unusual aspect of this case is that listing broker did not pursue the commission, but only the buyer’s broker. A cooperating broker’s right to commission is dependent on the listing agreement, which means that if seller does not accept an offer, the cooperating broker is really at  the mercy of seller and the listing broker. The Court of Appeal did not even mention these requirements, and instead focused only on the language of the listing agreement.

The court relied on the fact that listing agreement specifically stated that the commission would be earned when a buyer is procured “on any other price and terms agreeable to seller.” So, seller could specify a price and terms, even outside of the four corners of the document. The court ruled that to obtain a commission under the listing agreement, the cooperating broker needed to satisfy more terms than simply provide a buyer who offers the full list price of $17 million. Thus, the court concluded that “the $17 million price was merely an invitation to submit offers.” Also, the listing agreement stated that any commission was to be paid at close of escrow. The court held that these terms defeated the cooperating broker’s commission claim.