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Risks of circumventing the safety clause

by / Friday, 01 August 2014 / Published in Articles

Risks of circumventing the safety clause

By: Bryan Mashian

Even though real estate brokerage listing agreements typically include a “safety” clause which obligates the owner to pay the broker a commission if the property is sold or leased within a specified period after the listing period expires, the parties may nevertheless be tempted to go around the broker. The parties may be enticed to pursue this surreptitious scheme, lured by not having to pay a brokerage commission. The financial incentive for this maneuver becomes especially strong when an offer is presented towards the end of the listing term. But “saving” the brokerage commission by skirting the safety clause poses risks.

Sometimes the prospective buyer or tenant directly contacts the owner and proposes that the parties intentionally delay negotiations until after the listing contract has expired. But in this scenario, the broker can sue the seller for breach of contract and the covenant of good faith and fair dealing, which is implied by law into all contracts. Under a listing agreement, the seller impliedly promises not to do anything that will prevent the broker from realizing the benefit of the broker’s bargain. A seller cannot avoid the obligation to pay a commission by intentionally, arbitrarily or in bad faith thwarting or delaying execution of a purchase agreement until the listing agreement term expires.

The broker can additionally sue the buyer under the tort theory that the buyer induced the seller to breach the listing agreement. As a third alternative, the broker can also sue both parties for civil conspiracy – agreeing between them to delay execution of an agreement until after the listing period has expired with the intent of defeating the broker’s commission.

Sometimes a person registered by the broker under the safety clause may attempt to use a straw buyer to dodge the safety clause. Often, it is difficult for the broker to prove the concealed connection between the straw buyer and the registered person. But in one case, the straw buyer’s familial relationship with the initial prospect, and the short time between the showing and the opening of escrow made the broker’s case stronger.

In this case, the broker showed a motel to a prospect. Unbeknownst to the broker, 4 days later the prospect’s in-laws opened escrow with seller to purchase the motel for the list price, less the amount of commission due to the broker. The escrow closed 8 days later – while the listing agreement was still in effect. The broker sued for conspiracy, naming the seller, the initial prospect and his in-laws. The court held the broker had stated a cause of action for conspiracy and rejected the argument that the broker had not produced a ready, willing and able buyer. The court noted that the initial prospect and his in-laws could not rely on their own wrongdoings for immunity.

Sometimes, the seller may refuse to respond to or outright reject an offer secretly intending to bypass the broker and later directly negotiating a deal with the same party after the listing agreement expires. In one case, the seller’s broker did not have a signed listing agreement. The buyer’s offer provided for a commission to be split between the broker for seller and buyer. The seller made a counteroffer but did not change the commission terms. The seller’s counteroffer expired unaccepted by the buyer. Later, the principals proceeded separately to negotiate directly and subsequently signed a purchase agreement that contained the same terms as were embodied in the original offer and counteroffer negotiated by the brokers, except for deleting the commission to seller’s broker and reducing the purchase price by the amount of that commission.

Despite the absence of a listing agreement signed by seller, the court found the seller-executed (but unaccepted) counteroffer sufficient to embody a “pre-existing agreement” to pay a commission. Therefore, the subsequent circumvention of the agreement by cutting out the seller’s broker and consummating the same sale without paying the commission was a breach of the covenant of good faith and fair dealing and unfairly deprived the broker of a right to a commission.

The objective of the safety clause is to protect the broker from losing a commission by the parties’ furtive conduct. The parties should carefully consider the risks of evading the safety clause as the benefits may ultimately be elusive.

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