California Real Estate Broker Commissions – When They Can Be Earned, and A Court’s Interpretation

A California Real Estate Broker has a right to payment of a commission only when there is a signed written agreement that provides for a commission. The commission is not earned until the broker completes the performance, and satisfies the conditions, spelled out in the agreement. But, as a recent decisions show, contract language regarding commissions is subject to interpretation, and concerned sellers , brokers, and agents may want to cunsult with an experienced Sacramento and Yolo County real estate lawyer.

In RealPro Inc. v. Smith the sellers entered a listing agreement with MGR, a broker. The agreement proved that a commission was earned when “a buyer is procured who is ready, willing, and able to buy the Property at the price and on the terms stated herein, or on any other price and terms agreeable to sellers.” It also authorized payment of commissions at close of escrow.

The listing price was $17 million. RealPro, another broker, presented a written offer to MGR for the full listing price. The listing broker then told MGR that the seller was increasing the listing price to $19,500,000. Except for the price, all other terms of the offer were acceptable. RealPro then demanded its share of the commission from MGR as a third party beneficiary of the listing agreement. MGR refused to pay, and RealPro sued.

RealPro’s argument was that, as it presented an offer that matched the terms of the listing agreement, it was entitled to its split of the commission. The court said no, there was no enforceable contract entitling RealPro to a commission.

The key was the phrase “or on any other price and terms agreeable to sellers” in the commission language. The court interpreted it to mean that the listing was for $17 million or such other price, plus terms acceptable to sellers. As a result, an offer to buy for $17 million did not obligate the sellers; it was merely an offer t buy for $17 million plus terms acceptable to the sellers. Also, the listing agreement only allowed payment of commission on close of escrow.

Though I think this was the right result, the court arrived at it through a forced reading of the commission language. This is the right result because of the consequences of finding that RealPro was entitled to commission. It would mean that, if concurrent offers at the listing price were made, the seller would have to pay multiple commissions. And if the buyer breached before the sale, the seller would still have to pay the commission. These are not results that reflect the mutual intent of the parties at the time they entered the listing agreement.

This is a forced reading of the language because the court inserts its own comma after “$17 million or such other price…” My interpretation is that it means $17 million and stated terms, or any price plus terms acceptable to buyer. This reading still allows the correct result. This decision just goes to show that the longer you stare at a group of words, usually the more you become of what they mean. Another set of eyes can come up with something different, and a judge is just another set of eyes.