BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
SCENARIO NO. 1: I am a salesperson. I have a listing for which I located a ready, willing, and able buyer. A purchase and sale agreement was signed, but the seller has now canceled the contract. The buyer does not want to sue the seller for specific performance. However, I feel I am entitled to my commission as I earned it. What are the issues involved in asserting a claim for my commission?
RESPONSE: There are a number of issues involved in asserting a claim for a commission. First, you must obtain an assignment or permission from your broker to pursue a commission claim. Listings belong to the broker. Therefore, it is the broker’s decision to pursue a commission. Assuming the broker agrees to assign the commission right to you, before you assert legal action, you need to consider the legal risks of asserting such a claim.
One of the risks is that the seller could file a cross-complaint against you and the broker for negligent handling of the listing. We have seen situations where sellers create alleged negligence on the part of the listing agent to avoid paying a commission. For example, a seller may assert that the property was not properly marketed. In other cases, the seller claims they sales price was too low as a result of the agent’s handling or mishandling. If the sellers assert a claim that they sold the property for less than fair market value as the result of the listing agent’s actions, the listing agent and broker could face a cross-complaint.
If a cross-complaint is filed, your errors and omissions insurance carrier may become involved, which will complicate the issue. The insurer will not provide insurance coverage for the commission collection action. Therefore, a situation is created where there is a mixture of fees which are paid by the insurer and the client.
Another issue involves attorney’s fees. Who, between you and your broker, will pay for the attorney’s fees affiliated with the commission recovery action? Once that is determined, it needs to be determined as to what happens to the attorney’s fees if you lose the lawsuit. For example, if an agent files a lawsuit seeking a commission, but the agent is not successful, a court or jury could find in favor of a seller and award the seller attorney’s fees. Who is going to pay the attorney’s fees? The buyer or the agent or the broker?
It is recommended that the following steps be taken when considering bringing a claim for a commission:
- The agent needs to consult with the broker regarding whether the broker is willing to pursue the claim;
- A written agreement should be reached between the broker and agent regarding the handling of the claim, including who pays attorneys’ fees and costs, how a potential cross-complaint will be handled and who pays fees, if the agent and broker lose the case;
- An attorney should be retained to provide an evaluation of the claim before formal action is taken;
- If the attorney opines that the action to recover the commission is advisable, the attorney will start with a demand letter and request mediation from the seller;
- If the case cannot be resolved informally, then a mediation should proceed; and
- If the case does not resolve at mediation, careful consideration should be given with counsel’s advice, before filing a lawsuit.
PRACTICE TIPS:
- There are times when a broker should sue to collect a commission that they have earned pursuant to the terms of the listing agreement, or buyer representation agreement. However, before any action is taken, you should discuss it thoroughly with your broker, weighing all of the pros and cons before proceeding.
- Matters within the jurisdictional limits of Small Claims Court ($10,000 or less) can be brought without the expense of hiring an attorney, because attorneys are not allowed to appear in those hearings.
- If a commission or referral claim is against another broker who also is a member of an Association of REALTORS®, and thus is a member of NAR and a subscriber to the Code of Ethics, then the dispute must be arbitrated through the AOR, and not in court.
- All commission or fee recovery matters must be brought by, or in the name and approval of, the broker who is entitled to receive the commission or fee.
- Before filing a lawsuit for a commission, a careful analysis of the claim should be obtained from counsel.
This Weekly Practice Tip is an attorney client privileged document and is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.