By Glen C. Hansen

In RealPro, Inc. v. Smith Residual Company, LLC(2012) 203 Cal.App.4th 1215, the Court of Appeal for the Fourth Appellate District upheld a trial court judgment sustaining a seller’s and their agent’s demurrer to a cooperating broker’s complaint to recover a real estate commission, where the cooperating broker presented a written offer of a buyer that was “ready, willing, and able to purchase the Property … on all material terms” contained in the listing, including an all cash purchase at the full listing price of $17 million, but where the seller did not accept the offer and a sale was never completed.

On or about September 21, 2005, Sellers retained the services of MGR Services, a real estate broker, to act as their exclusive agent for the sale of 46.8 acres of vacant land that was owned by the Sellers. Sellers entered into a “Standard Owner-Agency Agreement for Sale or Lease of Real Property” (the Listing Agreement) with the listing broker. The Listing Agreement was for a term from September 21, 2005, to April 1, 2006. It set forth the following sale price and terms: “$17,000,000.00 cash or for such other price and terms acceptable to [Sellers], and other additional standard terms reasonably similar to those contained in the ‘STANDARD OFFER, AGREEMENT AND ESCROW INSTRUCTIONS FOR THE PURCHASE OF REAL ESTATE,’ published by the AIR Commercial Real Estate Association (‘AIR’) or for such other price and terms agreeable to [Sellers].” The Listing Agreement authorized MGR to list the property in the appropriate local commercial multiple listing services, including AIR, and “‘at [MGR’s] election, cooperate with other real estate brokers (collectively “Cooperative Broker”). A Cooperative Broker may, as a third party beneficiary hereof, enforce the terms of this [Listing] Agreement against the [Sellers] or [MGR].’”

On or about November 22, 2005, RealPro, Inc., another real estate broker, delivered to MGR a written offer to purchase the property for all cash at the full listing price of $17 million (“Offer”). The buyer was “ready, willing, and able to purchase the Property … on all material terms contained in the Loopnet listing as represented by MGR to be in the Listing Agreement … .”

On December 22, 2005, RealPro received an acknowledgement from MGR that it had received the Offer and indicated that the listing price was being increased to $19.5 million (“Counteroffer”). Except for the increased price, Sellers indicated that the terms of the buyer’s offer to purchase were acceptable. Both MGR and Sellers confirmed in writing the brokerage fee of 4 percent split 50/50 between RealPro and MGR. The counteroffer was never accepted and no contract was entered into. Nevertheless, on March 16, 2006, RealPro demanded its 2 percent brokerage fee as a third party beneficiary of the Listing Agreement.

When Sellers refused to pay the brokerage fee to RealPro, the latter filed a complaint that alleged breach of contract and breach of the implied covenant of good faith and fair dealing. Sellers demurred to the complaint on several grounds, including that conditions precedent (i.e., the listing price is “‘$17,000,000 cash or for such other price and terms acceptable to the owner’” and that escrow must close prior to payment of any commission) were not met. The trial court sustaining the demurrer, without leave to amend, and granted defendants judgment, on the ground that RealPro had failed to allege facts giving rise to the existence of an enforceable written contract for the payment of a real estate commission. RealPro appealed. The Court of Appeal affirmed the judgment.

The Court of Appeal held that the trial court correctly interpreted the language in the Listing Agreement and found that merely presenting an all cash offer for $17 million did not obligate Sellers to pay a commission because the offer never materialized into a sale. According to the Listing Agreement, 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].” The Court of Appeal explained that “[t]he confusion centers on the use of the word ‘or” in the Listing Agreement.” RealPro interpreted the word “or” as separating $17 million from “such other price and terms acceptable to [Sellers].” However, the court interpreted it to include “such other price.” Thus, the court reasoned that the listing was for $17 million or such other price, plus terms acceptable to Sellers; and thus RealPro’s presentation of the $17 million cash offer “was merely an offer to purchase the Property for $17 million plus terms acceptable to Sellers.” The court further stated that Sellers are allowed “to specify a price and terms, even outside of the four corners of the document, that must be met by a purchaser.” The court found it relevant that the Listing Agreement did not include language “that allows for payment of any commissions simply upon the receipt of a full price offer.”

The Court of Appeal further acknowledged a parade of horribles if RealPro’s position was correct:

As Sellers point out, doing so would have the following results: “1) A seller would not have the option to accept a higher offer on acceptable terms without still owing a commission to a broker who presented a concurrent unacceptable offer; [¶] 2) A seller would be responsible to pay multiple commissions on all submitted full price offers, irrespective of the offers’ terms; [¶] 3) A seller would be responsible to pay a broker’s commission if the purchaser breached before the sale was consummated simply because the broker had procured a buyer willing to purchase the property for the listing price; [¶] 4) Prospective buyer’s brokers would have no incentive to obtain purchase prices below the listing price because it would jeopardize the broker’s right to a commission.”

The Court of Appeal stated that it refused to accept that these results represent the expectations of someone wanting to sell real property.

Thus, the RealPro court essentially holds that a commission is not earned until a sale is actually completed. That may not be the rule that real estate brokers have operated under, even if it may be the result that sellers expect. The bottom line from the Court of Appeal’s decision in RealPro is that Listing Agreements must be drafted to include specific language that addresses whether or not broker commissions are owed without a purchase contract being signed or without an escrow being closed.

The California Supreme Court is presently considering whether to grant review of the Court of Appeal’s decision in RealPro. (See RealPro, Inc. v. Smith Residual Company, LLC (May 23, 2012) 2012 Cal. LEXIS 4995.)

Glen C. Hansen is senior counsel at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.