Daily Development for Tuesday, January 9, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

BROKERS; LISTING AGREEMENTS: Absent a specific provision to the contrary, an owner who has signed a listing agreement may withdraw its property from the market before a buyer is produced and is liable only for contract or quantum meruit damages, not for loss of the full sales commission.

Island Realty v. DeckerBibbo, 748 A.2d 620 (App. Div. 2000); cert. denied 758 A.2d 646 (N.J.2000)

A homeowner signed a six month exclusive listing agreement. About three months later, the homeowner communicated her decision to the real estate broker to remove the house from the market.

A few days later, the real estate broker sent an unsigned agreement of sale for the full listing price to the homeowner. This was followed a few days later by an agreement signed by the buyer. The homeowner did not consummate the sale and she rejected the real estate broker's demands for a commission for having produced a buyer.

The lower court noted that "the listing agreement does not address the issue of termination in the event that the seller, as is purported [sic] occurred here, has a change of heart." Nonetheless, for purposes of the motion before the lower court, the judge assumed that the listing agreement was in effect. She rejected the real estate broker's claim because, although the offer was for the full price, the initial deposit and the additional deposit had not been tendered with the agreement or otherwise paid. The court found that the listing agreement contemplated that the seller had the right to reject a contract, even for full price, that did not meet her standards. Consequently, the lower court found there was not a ready, willing, and able buyer making a bona fide offer, and therefore the right to receive a commission never accrued.

The Appellate Division agreed. But it went further, holding that, "an owner of who has signed a listing agreement retains the right to withdraw the property from the market before a buyer is produced; subject, of course, to every contracting party's obligations to deal fairly and in good faith." "Where the property has been withdrawn from the market before the broker's efforts have produced a buyer who stands ready to consummate the transaction, the owner is responsible to the broker only for such damages as may be established for breach of contract or on a quantum meruit basis for special services rendered in connection with reasonable efforts to sell the property, undertaken before it was withdrawn from the market."

As to the damage measure, the court noted that ordinary expenses are not recoverable; they are the cost of doing business. According to the court, these principles are in keeping with the general rule that, in the absence of bad faith or special circumstances, the owner is not liable for the full commission unless a sale actually occurs. Inasmuch as the real estate broker never asserted that it had incurred damages from the homeowner's alleged breach of contract, apart from the loss of the full sales commission, it was proper for the lower court to dismiss the real estate broker's suit against the homeowner.

Comment 1: Note that New Jersey is one of a small number of jurisdictions that interprets listing agreements to require closing as a condition of the commission, rather than simple production of a "ready, willing and able buyer." But where the seller refuses to carry out the agreement once there has been a "meeting of the minds," the court acknowledged here that the seller would be liable for the commission, since it obstructed the carrying out of the contract.

That didn't happen here because, in the judgment of the court, the seller had a right to refuse the contract based upon the lack of a paid earnest money deposit, and in any event the seller had an absolute right to withdraw from the listing agreement, which she had done.

Comment 2: Although the editor would not go so far as to say that every seller has the right to dictate all the terms of the listing agreement, the editor would agree that the seller has the right to demand that the buyer's earnest money be tendered as a condition of the seller's agreement to sell. In residential sales, this is a very common custom.

Comment 3: On the court's second ground for its decision, however, the editor cannot agree. A listing agreement is a contract like any other. The seller agrees to hold the property available for sale at the listing price for the term of the agreement. The broker, in exchange for such agreement, may invest substantial time in attempting to sell the property, particularly in the cultivation of leads that may not bear fruit until relatively late in the listing period. There is no way for the broker to demonstrate that the time spent in this endeavor might have produced a commission if it had been expended on another deal, so any "lost profits" when this seller walks are speculative and uncollectible. But that doesn't mean that they don't exist. The broker has every right to require that the seller stand by the promise to hold the property available for sale.

Comment 4: In the editor's experience, it is not a bit unusual for the broker, in order to maintain good will, to permit a seller to terminate a listing and take the property off the market without penalty, particularly if this occurs early in the listing agreement. It is quite possible that the broker didn't agree to that arrangement here because of some ill feeling that already had developed between the parties. But why should we assume that the broker was the cause of this ill feeling? Obviously, the broker felt seriously about this commission, and we can assume that it went through trial and appellate process because it was of the view that it did indeed work this listing and deserved better treatment. The editor agrees.

Comment 5: The court's "escape hatch" is to identify that the seller has a duty of good faith and fair dealing, and therefore cannot dump the broker under circumstances that the court concludes violates this duty. But this is one more example of a court substituting its own judgment for the contracted intent of the parties. As those who read these comments know, the editor is of the view that such ad hoc decision making in a transactional setting is antimarket and just a bad idea.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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