LET’S TALK ABOUT (YOUR) MONEY!

LET’S TALK ABOUT (YOUR) MONEY!
(Selections from New Jersey Real Estate Brokerage Law)

(a) The Right to Get Paid

“When a broker is engaged by an owner of property to find a purchaser for it, the broker earns his commission when (a) he produces a purchaser ready, willing and able to buy on the terms fixed by the owner, (b) the purchaser enters into a binding contract with the owner to do so, and (c) the purchaser completes the transaction by closing the title in accordance with the provisions on the contract.”

This standard for a broker to earn a commission was set forth by the New Jersey Supreme Court in the seminal case of Ellsworth Dobbs, Inc. v. Johnson. Prior to Ellsworth Dobbs, “when a broker who had been duly authorized by the owner to find a buyer for his property produced a willing and able purchaser who entered into a contract to buy on terms agreeable to the owner, the broker had fulfilled his undertaking and his right to commission from the owner was complete.” However, the Ellsworth Dobbs Court determined that “[a] new and more realistic approach to the problem in necessary,” as “[t]he present New Jersey rule…permits a broker to satisfy his obligation to the owner simply by tendering a human being who is physically and mentally capable of agreeing to buy the property on mutually satisfactory terms, so long as the owner enters into a contract with such person.”

The Supreme Court reasoned that, “[i]n a practical world, the true test of a willing buyer is not met when he signs an agreement to purchase; it is demonstrated at the time of closing title, and if he unjustifiably refuses or is unable financially to perform then, the broker has not produced a willing buyer.” It therefore concluded that “fairness requires that the arrangement between broker and owner be interpreted to mean that the owner hires the broker with the expectation of becoming liable for a commission only in the event a sale of the property is consummated, unless the title does not pass because of the owner’s improper or frustrating conduct.”

Thus, in the wake of Ellsworth Dobbs, a broker does not earn a commission simply by procuring a willing buyer. Rather, the broker’s right to a commission ordinarily is contingent upon the closing of title. The Court further explained that, “[i]f the contract is not consummated because of lack of financial ability of the buyer to perform or because of any other default of his, there is no right to commission against the seller. On the other hand, if the failure of completion of the contract results from the wrongful act or interference of the seller, the broker’s claim is valid and must be paid. In short, in the absence of default by the seller, the broker’s right to commission against the seller comes into existence only when his buyer performs in accordance with the contract of sale.”

In Cushman & Wakefield of New Jersey v. Alexander Summer Co., the Appellate Division explained that a broker may reasonably expect to have earned his or her commission where the broker “brought the parties together, negotiated the principal terms of the transactions, and harbored the reasonable expectation that he would be compensated for his efforts.”

A “broker is entitled to a commission upon procuring a customer willing and able to enter into a contract to purchase or lease the property on terms agreeable to the landowner. This is so even when the final negotiations are conducted by the seller and the seller accepts terms different from the terms expressed in the listing agreement.” (emphasis added) Thus, in Louis Ross Associates v. Interstate Holding Corp. the Appellate Division held that the “real estate broker is entitled to a commission for the extended term of a lease where the terms of the extension are different from the terms of the option to extend provided in the lease.” Similarly, in Joseph Hilton & Associates v. Evans, the Appellate Division held that a “real estate broker is entitled to a commission on the sale of real estate where the buyer and seller signed an agreement and consummated the sale for a lesser selling price than that authorized by the seller in his written memorandum to the broker.”

(b) What if the seller wants to terminate the listing agreement?

In every listing agreement, as in every other contract, the law implies a covenant of good faith and fair dealing. However, “the implied covenant of good faith performance and fail dealing does not prevent a party from terminating a contract in accordance with its express provisions, irrespective of the motive.” As such, a listing agreement will ultimately be governed by its express language, with the implied covenant of good faith serving as a default provision that provides a remedy for grossly unfair or bad faith performance as to issues not more specifically addressed in the agreement.

For example, in Prudential Stewart Realty v. Sonnenfeldt, the listing agreement was made subject to a separate letter agreement, “which modified the commission rates at different selling prices, established an advertising budget and strategies, and provided a ‘[t]erm of listing’ of ‘[o]ne year with 6 months cancellation by either party.’” The owner terminated the agreement more than six months after it was executed, as permitted by the contract, and ultimately sold the property to a buyer with whom he had been having discussions before entering into the listing agreement, as well as during the term of the listing agreement, without the involvement of the broker. The Appellate Division held that the broker did not have a cause of action to recover a commission under the contract.

The Prudential court held that the agreement, as supplemented by the letter, “permitted precisely what happened in this case – termination of the agreement after a six-month period for purposes of a sale, without commission, to someone not procured to introduced to the property by the broker.” The court reasoned that the agreement gave the owner an unfettered right of termination: “If the defendant could terminate for any reason during the second six month period, he certainly could have terminated because he found the buyer independent of the broker.”

The court also rejected the broker’s claims that the implied covenant of good faith and fair dealing either required that the owner refer potential buyers to the broker or prohibited the owner from canceling the exclusive listing in order to deprive the broker of a commission. The court held that “the implied covenant of good faith and fair dealing does not override the right of the defendant to terminate the contract,” and, therefore, “[g]iven the terms of the negotiated agreement, the motives of the terminated party are irrelevant.” The court also noted that “[t]he exclusive listing agreement did not expressly require defendant to refer prospective buyers to plaintiff during the contract term,” and, absent such express language, particularly in light of the termination provision, the duty of good faith and fair dealing would not imply such an obligation. Ultimately, the court held the broker to the terms of the negotiated agreement, reasoning that, although the implied covenant of good faith and fair dealing protects a contracting party’s legitimate expectations, where, as here, sophisticated, experienced parties freely negotiate an express termination provision, the broker cannot claim “a justified reliance on any expectation that defendant would not exercise his right to cancel.”

(c) Can I get paid if the seller withdraws the property from the market

An owner who lists a property with a broker “retains the right to withdraw the property from the market before a buyer is produced; subject to every contracting party’s obligation to deal fairly and in good faith.” However, where a broker has undertaken special efforts to market that property before it is withdrawn from the market, the broker may pursue a quantum meruit claim to recover the value of the services rendered.

As the Appellate Division explained in Island Realty v. Bibbo, “[w]here the property has been withdrawn from the market before the broker’s efforts have produced a buyer who stands ready to consummate the transaction, the owner is responsible to the broker only for such damages as may be established for breach of contract or on a quantum meruit basis for special services rendered in connection with reasonable efforts to sell the property, undertaken before it was withdrawn from the market.” However, such recovery is limited to “special” services; “[o]rdinary services of a general nature rendered by the broker are not recoverable even on a quantum meruit basis”, as “they are the cost of doing business.

(d) What happens if the seller files bankruptcy?

Where the listing agreement and contract of sale have been signed before the seller files for bankruptcy, the filing of a bankruptcy petition has no effect on the broker’s equitable lien. As the Bankruptcy Court held in In re L.D. Patella Construction Corp., “where a listing agreement and contract of sale are signed before a bankruptcy petition is filed, the broker’s inchoate equitable lien under Cohen v. Estate of Sheridan is valid as against a bankruptcy trustee and ripens into a choate lien upon the funds created at closing.” The court also noted that, “[i]f no contract of sale has been signed when the bankruptcy petition is filed, the analysis must be modified. In such situations, the requirements of [Bankruptcy] Code § 327(a) and [Bankruptcy] Rule 2014(a) regarding retention of professionals must be met before a broker can be compensated under [Bankruptcy] Code § 330(a).” In other words, if you don’t get the proper approval you don’t get paid.

We hope this information will be instructive, allowing you to be sure you get the commissions you’ve worked so hard to earn.

-Dan Posternock

***The information included in this newsletter is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.