Chapter 3

Real Estate Brokerage

THE LISTING CONTRACT

A real estate listing is an employment contract between a real estate broker and a property owner in which the broker is hired to obtain a buyer or tenant for a certain parcel of real estate in return for which the owner agrees to pay the broker a fee or commission. In most states, including Massachusetts, listings are not required to be in writing. However, in some states oral listing contracts are unenforceable in court.

TYPES OF LISTINGS 

The major types of listings for sales are : 

OPEN LISTING. An open listing is one in which the owner may hire one or more brokers with the understanding that the broker who is the procuring cause of the sale will be entitled to the commission. The owner has the right to sell directly to a customer without any obligation to a broker.

EXCLUSIVE LISTING. An exclusive listing is one in which the owner agrees to appoint only one broker for a specified period of time to sell the property. To be enforceable the exclusive must be in writing and contain a definite termination date.

The two types of exclusive listings are :

Terminating an Exclusive Listing. An owner has the right to terminate an exclusive listing agreement by taking the property off the market or by discharging the broker. In either case, if the property is sold, the owner may be liable to the broker for a commission. For example, an owner lists his house with a broker and signs a sixty-day exclusive right to sell. The broker shows the property to several prospects. Before the exclusive runs out, the owner tells the broker to stop showing the house as the property is being taken off the market. After the sixty-day time period expires, the owner sells the property to a buyer originally procured by the broker. The seller is liable for a commission to the exclusive broker.

MULTIPLE LISTING. One broker who has an agreement to share the listing with other brokers who are members of a listing service takes a multiple listing. When the property is sold, the seller pays one  commission, which is shared on an agreed basis by the listing and selling brokers. Multiple listings are usually exclusive right to sell agreements.

NET LISTING. In a net listing the commission is based upon the difference between the sale price and an agreed net amount to the owner. For example, If the owner wants to net $100,000, and the property is sold for $125,000, the broker's commission would be $25,000. Massachusetts and many states prohibit net listings.

TERMINATION OF LISTINGS

Listing agreements may be terminated for any of the following reasons:

EARNING A COMMISSION

Essentially, a real estate broker's job is to bring two parties together for the purpose of selling or  renting real estate. The person who hires the broker pays the real estate commission. Although property owners usually hire brokers, it is not unusual for a prospective buyer or tenant to engage the broker and to agree to pay the commission. A broker is not paid for the amount of time spent to make the sale or rental. A commission is earned when the broker completes the task called for in the listing.

REQUIREMENTS FOR EARNING A COMMISSION

Except in Massachusetts and a few other states, a broker is entitled to a commission from a seller for the sale of real estate when the following conditions have been met:

*In Massachusetts, a broker is entitled to a commission only if the purchaser completes the transaction by taking title. Note: Profits from contracted real estate sales can be legally made only when based upon commission. The Massachusetts requirements are more fully discussed later in  this chapter.

THE HIRING. It is essential, in order for the broker to earn a commission, to establish that there was a hiring or listing agreement. The fact that a seller may benefit from a broker's services does not make the seller liable for a commission unless the broker had been hired. For example, a broker, noticing a "for sale" sign in front of a home, which he had not listed, sends a customer over to see the owner. The customer and the owner enter into a purchase and sale agreement and title is deeded to the buyer. The broker had never spoken to the seller and was not involved in the transaction. The broker would lose a suit for a commission because there had never been a hiring by the owner even though the broker's customer bought the property.

PERFORMANCE BY THE BROKER. 

The general rule except in Massachusetts is that a commission is earned when the broker produces a ready, willing and able buyer, or the seller accepts the broker's customer. (In Massachusetts, title must pass in order for the broker to be entitled to a commission.) A ready, willing and able buyer is described as a person who is prepared to sign a purchase agreement on the owner's terms, and without any reservations as to being able to complete the transaction, except for contingencies mutually agreed to. For example, a broker is hired to sell a home for $160,000 with the understanding that the owner will take back a purchase money mortgage for $120,000. The broker finds a customer who agrees to the price, but insists on paying all cash. The customer is not ready, willing and able on the seller's terms. However, if the buyer and seller enter into a purchase and sale agreement, there is a presumption that the buyer is ready, willing and able.

PROCURING CAUSE. 

In order to be entitled to a commission, it must be evident that the broker was the efficient, predominating or procuring cause of the sale. The amount of time or effort to produce the desired results has no bearing on the right to commission. The broker's efforts are measured by quality rather than quantity in determining success. The broker becomes the procuring cause by setting in motion a chain of events from which the sale or transaction is ultimately consummated. This could be the results of a newspaper ad, signs on the property, introduction of the parties or by communicating a prospect's name to the owner. It is not necessary for the broker to be present at the closing. For example, a broker shows a property to a prospective buyer who asks for a few days to think it over. A week later the buyer and seller meet, without the broker's knowledge, and close a deal for the sale. The broker is the procuring cause of the sale. In another example, a broker as held to be the procuring cause when the customer learned about the house by seeing the broker's sign on the front lawn. An exclusive right to sell listing eliminates the requirement of procuring cause, since the broker is entitled to a commission regardless of who is responsible for the sale.

TIME FOR PERFORMANCE

The courts have never set a definite time limit for performance by a broker after negotiations have begun. However, to be the procuring cause of the sale, the broker's services must, in point of time, be  in close proximity to the consummation of the sale or, at least, of the negotiations.

TWO OR MORE BROKERS IN THE SAME TRANSACTION

In open listing situations, disputes may arise between two or more brokers as to who is the procuring cause. For example, an owner lists property with two brokers both of whom deal with the same prospective buyer without the other's knowledge. If the property is sold to this customer, both brokers may have a legitimate claim for commission. Unless the situation can be resolved, the seller may be liable for two commissions.

BROKER'S LICENSE REQUIRED TO SUE FOR COMMISSION

In Massachusetts, a person may not sue for a real estate commission unless he or she was duly licensed at the time the services were performed. For example, a broker whose license has been revoked would not be barred from suing for a commission for a sale, which occurred, while the broker was licensed.

COMMISSION RATES

The rate or amount of commission is determined by agreement between the broker and seller or the person who does the hiring. it is a violation of the Sherman Antitrust Act for brokers or professional  organizations to agree to or to set commission rates. The commission rate should be agreed to in the  listing. In the absence of any express agreement, a court of law may take notice of the "usual" rate of commission being charged by brokers in similar transactions through the testimony of expert witnesses.

SHERMAN ANTITRUST ACT

The real estate industry is subject to antitrust laws, which prohibit monopolies, and contracts, which are in restraint of trade. The most common violations in the real estate industry occur in price-fixing (setting real estate commissions and management fees), allocations of customers or markets and unreasonably excluding brokers from local professional organizations and multiple-listing arrangements. Penalties for violations of the antitrust laws can include a maximum fine of $100,000 and three years in prison for individuals. For corporations the fine can be up to $1,000,000.

 MASSACHUSETTS LAW REGARDING WHEN A BROKER EARNS A COMMISSION - TRISTRAM'S CASE 

In a few states, including Massachusetts, the legal requirements for earning a real estate broker's commission have been changed by judicial ruling. In the case of Tristram's Landing Inc. v. Wait, 327 NE2d 727 (1975) the Massachusetts Supreme Judicial Court ruled that a real estate broker is not entitled to a commission for the sale of real estate unless the sale or transaction is consummated and title is conveyed to the buyer. The facts of the Tristram case are as follows: The plaintiff, Van der Wolk, a real estate broker, doing business under the name of Tristram's Landing, Inc, was engaged by the defendant, Linda Loring Wait, to find a customer for the sale of her property on Nantucket. Van der Wolk found a prospective buyer who made an offer of $105,000, which was accepted by Wait. The buyer gave Wait an earnest money deposit of $10,500, and the parties signed a purchase and sale agreement for $105,000. Subsequently, the buyer refused to go through with the purchase and forfeited the deposit as liquidated damages. The broker presented Wait a bill for commission in the amount of $5,250, five percent of the agreed sale price. The defendant refused to pay the commission on the grounds that the sale had never been consummated. The broker sued and was awarded the full amount of commission by the trial court. On appeal, the Massachusetts Supreme Judicial Court reversed the lower court's decision and found in favor of the defendant. The S.J.C. ruled that in order for a broker to earn a real estate commission, the following conditions must be met:

In Tristram v. Wait the court held that if the contract is not consummated because of lack of financial ability of the buyer to perform or because of any other default of the buyer there is no right to commission against the seller. However, 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. The court further held that an agreement made by an uninformed seller to pay a commission even though the buyer defaulted is unenforceable.

What constitutes a wrongful act or interferences by the seller was not specifically defined by the court. It is clear from Tristram v. Wait, however, that the seller's refusal to accept a ready, willing and able customer presented by the broker is not considered a wrongful act entitling the broker to a commission. In summary, in Massachusetts, a broker earns a commission only if, as and when the seller is paid and the deed is delivered. The only exception would be in the case where the seller wrongfully prevents the sale from being completed. Since this decision, there have been no cases in which "wrongful act or interference" has been defined in suits for commission for the sale of a personal residence. In a suit for commission for the sale of commercial property, where the sale fell through because of the seller's inability to correct a defect in title, the court held this to be a wrongful act interference by the seller and awarded the broker a commission. However, this decision has not been applied in the case of the sale of a residence.

PRINCIPAL AND AGENCY

 AGENCY. Agency is the legal relationship created when one person, known as the principal, expressly authorizes another person, known as the agent, to act for the principal either in a general or special (limited) way. The principal is liable to third persons for the actions of the agent performed within the agent's scope of authority. This is known as the doctrine of "respondeat superior" It is not necessary that the principal actually authorized the act; it is sufficient if the agent has apparent (ostensible) or implied authority to act on behalf of the principal. As an example of implied authority, a broker's failure to disclose to the buyer a defect in the house would make an innocent seller liable to the buyer, since the broker's knowledge is imputed to the seller, who is treated as knowing about the defect.

Ostensible or apparent authority is that which a principal, intentionally or by conduct, causes or allows a third person, acting in good faith, to believe the agent to possess. For example, an agent who has a listing on a vacant house discovers a major leak in the plumbing, which could cause serious damage unless corrected. The owner has specifically instructed the broker not to make any repairs without obtaining the owner's approval. Unable to reach the owner, the broker hires a plumber to make emergency repairs. The owner refuses to pay the plumber's bill, claiming that the broker had acted without authority, whereupon the plumber sues the owner to collect payment. The court found in favor of the plumber, who, it said, acted in good faith in reliance on the apparent or ostensible authority held by the broker.

GENERAL AGENCY AND SPECIAL AGENCY.

An agency relationship may be either (1) general or (2) special.

General Agency. An agent is given broad authority to act on behalf of the principal on a  continuing basis, such as a property manager. A salesperson is the general agent of his or her employing broker.

Special Agency. A special agent is one who is employed to carry out a specific task, such as that required of a real estate broker in a listing contract. The broker's task is to find a ready, willing and able buyer, not to sign a purchase agreement or deed on behalf of the owner.

RELATIONSHIP BETWEEN BROKERS AND THEIR CLIENTS.

While in most real estate transactions the broker represents the seller (seller's agents), there are occasions when the broker may represent the buyer (buyer's agent). In either case the law imposes a fiduciary duty upon the broker to work diligently, energetically and thoroughly in his or her principal's behalf. Note: A broker acquires a client by having them sign an agency contract. An agent who breaches this fiduciary obligation may be subject to a civil action for damage incurred by the principal and to disciplinary action by the state licensing authority. Salespersons and cooperating brokers are treated as subagents, and owe the same degree of loyalty to the principal as the agent does.

DUTIES IMPOSED UPON FIDUCIARIES.

A fiduciary relationship imposes the following duties on brokers and salespersons:

Care. The agent must exercise due care in representing his or her principal. The agent is liable to the principal for any losses due to carelessness. The agent must be careful not to misrepresent any material facts to the principal or to third parties.

Obedience. An agent must obey the principal's instructions even though the agent may disagree. However, it is recognized that the agent has the right to exceed the principal's expressed authority in emergency situations when it is clearly within the principal's best interests. 

Accounting. Agents must be able to account for all funds entrusted to them for the benefit of their principal. State licensing laws require brokers to make complete and accurate accounting of escrow funds and to keep accurate records, which may be examined by the licensing authority. 

Loyalty. Agents owe absolute loyalty to their principals above the interest of all others, including their own. A broker must disclose any material fact to the seller, which would be to the seller's benefit. For example, a broker lists a residence in a neighborhood, which the broker knows is going to be rezoned. The new zoning ordinance would increase the value of the property over the seller's asking price. The broker has a duty to disclose such information. Of course, the broker is not required to commit an illegal act on behalf of the principal even if instructed to do so. Brokers are personally responsible for their illegal acts whether authorized or not.

BROKER'S OBLIGATION TO THIRD PARTIES.

In real estate transactions in which the seller hires the broker, the broker has certain moral and legal obligations to prospective buyers. The broker owes a duty to such persons to be fair and honest and to refrain from making any substantial misrepresentations intended to result in a sale. The broker also has a duty to disclose any vital facts about the property, which would affect the buyer's decision to go ahead with the deal. For example, a broker's failure to inform a prospective buyer that the house was not connected to city sewerage was held by a court to be an unfair and deceptive act, and the broker was ordered to compensate the buyer for damages. 

Many states, including Massachusetts, have passed consumer protection laws that place greater burdens upon brokers to disclose the presence of defects, which they know about, or of which they would be expected to know. The doctrine of "caveat emptor" (let the buyer beware) is less relied upon in consumer protection cases.

DUAL AGENCY - BROKER WORKING FOR BUYER AND SELLER IN THE SAME TRANSACTION

While it is often assumed that the broker represents both buyer and seller in the same real estate transaction, this is not correct. Law forbids a broker to act as a dual agent for the buyer and seller in the same transaction without the consent of all parties. Because of their opposing interests, sellers and buyers are expected to be deal with one another at "arm's length." Thus, it is legally and morally impossible for the broker to fairly represent both parties in the same transaction. To avoid misconceptions, some states, including Massachusetts, require licensees to request prospective sellers and buyers to sign a form acknowledging that the licensee is either a "seller's agent," or a "buyer's agents."

RELATIONSHIP BETWEEN BROKERS AND SALESPERSONS

A real estate salesperson must work under the direct supervision of a real estate broker. The salesperson is the general agents of the broker who is responsible for the salesperson's actions. Salespersons are prohibited from making any contracts or receiving commissions from anyone except their employing broker. Note: "Honesty and fair dealing" is the salesperson's responsibility. He/she must always disclose any information regarding the condition of a property, which could conceivably affect the prospective buyer's decision to buy. "Let the buyer beware" is never an acceptable philosophy. However, as subagents, salespersons have a fiduciary responsibility to the broker's principal and are personally accountable for any violations of this trust. Salespersons may be hired either as employees or as independent contractors.

COOPERATING BROKERS. 

If a broker agrees to share a listing with a cooperating broker, the cooperating broker becomes the agent of the listing broker and subagent of the seller. Although the cooperating broker's role is usually to present prospective buyers, the seller has no contractual relationship with the cooperating broker and is obligated to pay a commission only to the listing broker.

This form is for reference, but rarely (if ever) used. Kept here as an understanding of the interaction and its use in previous years around 1960-1980

INTER - BROKER AGREEMENT

MEMORANDUM OF AGREEMENT between the two undersigned realty brokers, by which the parties hereto undersigned agree to cooperate, in the work of selling the parcel(s) herein designated and  share the commission on said sale.

Hereinafter, the broker who has a listing of a parcel of realty for sale is designated as SELLING  BROKER, and the broker who has a prospective purchaser shall be designated as PROSPECT  BROKER. 

IT IS AGREED: That SELLING BROKER has a listing on a parcel known as No.___________________________ __________________________________________Street, ________________________________________________________ 

And PROSPECT BROKER agrees to refrain from interfering with, soliciting, or in any way contacting on his own the owner of said parcel; and SELLING BROKER agrees that the prospective purchaser, __________________________________________________________________________________________________________represented by PROSPECT BROKER is the listing and client of PROSPECT BROKER, and likewise to be respected.

PROSPECT BROKER agrees to bring his client to the office of SELLING BROKER whence they will  proceed to show the parcel, and if the sale is made to this prospect, the commission is to be shared. 

______________% to PROSPECT BROKER and _________________% to SELLING BROKER. __________________

If SELLING BROKER sells the parcel to, a buyer other than the client of PROSPECT BROKER, then  SELLING BROKER to retain the entire commission.

In no case shall either broker divulge the information about the other's client, nor shall either listing become the common property of both. Each broker shall remain the exclusive owner of his listings and the, only sharing shall occur when a deal is consummated as a result of the co-operation of both brokers.

Signed and sealed this __________________________________ day _______________________________ 20___________

PROSPECT BROKER_____________________________________________

SELLING BROKER_______________________________________________


KEY WORDS AND PHRASES

agency

agent

arm's length

relationship

dual agency

exclusive agency

exclusive right to sell

fiduciary relationship

general agent

multiple listing

net listing

open listing

principal

procuring cause

ready, willing and able buyer

scope of authority

special agent

FIGURE 3:1