Generally speaking, a real estate broker is entitled to a commission when he or she procures a buyer ready, willing and able to purchase the subject property on terms acceptable to the seller. Although the rule sounds simple, disputes over failure to pay brokerage commissions are surprisingly common. Under New York law, a commission agreements with a licensed agent or broker does not need be in writing and a contract may be implied from the conduct of the parties depends upon the circumstances involved. Notwithstanding the foregoing, a contract cannot be implied in fact where there is an express contract covering the subject matter involved and the safest way to ensure that all parties understand their rights and obligations is to sign a written commission agreement at the beginning of the relationship.
A broker is the “procuring cause” of a transaction if he or she can show that they initiated an unbroken chain of events that resulted in the deal between the buyer and the seller. No one factor can be used to determine “procuring cause” rather each factor should be weighed in conjunction with the other factors relevant to the case. The execution of a purchase agreement by both parties is evidence that a commission has been earned by a broker that is the “procuring cause” of such agreement.
Regardless of when the commission is earned, it is customarily paid at closing when money actually changes hands between the parties to the transaction. Although there is a distinction between when earned and when paid, once a commission is earned it does not become unearned if the deal falls through. A seller may feel uncomfortable with the idea of having to pay a commission when no sales proceeds exist to supply it. A seller may look to include language in a written agreement along the lines of “The commission is payable only as, if and when title passes.” This will eliminate the risk to the seller of owing a commission if the buyer breaches the contract of sale, as well as the risk of owing a double commission if two complying offers are presented by two cooperating brokers. Brokers need to be alert to the potential loss of a commission even when they have found a qualified buyer, and if possible to combat it with specific language in a written agreement such as “The commission is payable only as, if and when title passes except for wilful default on the part of the seller.”
In all contracts, written or oral, there is an implied covenant of good faith and fair dealing which requires each party to the contract to use their best efforts in performing their obligations and to not intentionally do anything to thwart the other party from performing. If the seller expects to impose unusual terms or conditions in the contract of sale (which might raise a question of whether the seller is acting in good faith), the broker and seller are well-advised to expressly agree, in the brokerage agreement, that those terms will be part of the contract of sale.
Although a written agreement is not required by law, a clearly drafted agreement, executed prior to initiating services can help avoid disputes down the line.