“Broker Beware” — Get Commission Agreements In Writing

By Kevin Brodehl, February 28, 2017

All California real estate brokers should be well aware of the statute of frauds governing their work found in Civil Code section 1624(a)(4).

Here is what the statute says:

(a) The following contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party’s agent:

…

(4) An agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser or seller of real estate or a lessee or lessor of real estate where the lease is for a longer period than one year, for compensation or a commission.

In a recent California Court of Appeal opinion — Westside Estate Agency, Inc. v. Randall — the court emphasized that “Broker beware” was the “less renowned cousin” of the concept “Buyer beware,” and that all brokers are expected to know, and comply with, the statute of frauds in order to earn their commissions.

Facts: $46 million sale; $925,000 commission opportunity; but broker had no written contract

In 2014, James and Eleanor Randall told their friend Stephen Shapiro that they wanted to buy a home in Los Angeles. Shapiro was a real estate broker and the principal of Westside Estate Agency, Inc. Shapiro agreed to represent the Randalls, but their agreement was never reduced to writing.

Shapiro identified a potential property in the Bel Air neighborhood listed at $65 million. The listing for the property included an offer by the seller’s broker to pay a cooperating broker’s fee of 2% to the buyer’s broker.

The Randalls asked Shapiro to allow them to apply any broker’s fee he would receive to the purchase price. Shapiro refused.

Nonetheless, Shapiro made a $42 million offer on the property on behalf of the Randalls. Several counters followed. The Randalls reached out to their attorney for advice, and afterward, instructed Shapiro to “cancel the offer.”

Three months later, the Randalls made a $47 million offer on the property with their attorney acting as their broker. Escrow closed one month later for a final purchase price of $46.25 million. The Randalls’ attorney applied the $925,000 cooperating broker’s fee against the purchase price.

The lawsuit: implied contract?

Shapiro’s agency, Westside, sued the Randalls for breach of an “implied contract” seeking a commission of $925,000.

The trial court sustained the Randalls’ demurrer, finding the claim fell “squarely within” the statute of limitations, and dismissed the case.

Westside appealed.

The court of appeal’s opinion

The court of appeal held that under the facts alleged by Westside, the statute of frauds would govern the claim unless Westside could demonstrate that one of the recognized “narrow” exceptions applied. Those exceptions include:

(1) to prevent “unconscionable injury or unjust enrichment” caused by the principal’s “actual fraud” (i.e., where the principal has told the agent that their agreement for a commission was in writing when it was not, or where the principal has told the agent to cancel an otherwise valid written contract for exchange of the property while concurrently making an oral promise to the agent to still pay the commission, but then reneges on that promise)
(2) if the broker’s principal and the other party to the sale have executed a written and binding agreement for the purchase of real estate, the agreement specifies that the broker will receive a commission, and the broker’s principal cancels the agreement
(3) where an unwritten agreement is later ratified in writing by the broker’s principal.

The court of appeal rejected Westside’s efforts to fit the claim into any of those exceptions. The court noted that Westside did not allege any actual fraud by the Randalls, and that the Randalls and the sellers never reached a binding contract for the property during Shapiro’s representation of the Randalls.

As such, the court of appeal concluded that Westside’s claim was barred by the statute of frauds.

Lesson

The lesson of the Westside case is simple: If you are a real estate broker in California, be sure to get your commission agreement in writing.

One Response to ““Broker Beware” — Get Commission Agreements In Writing”

Eric May 30, 2017

With friends like that, who needs an enemy. …

Comments are closed.

Facts: $46 million sale; $925,000 commission opportunity; but broker had no written contract

The lawsuit: implied contract?

The court of appeal’s opinion

Lesson

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One Response to ““Broker Beware” — Get Commission Agreements In Writing”