Daily Development for Thursday, November 11, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

BROKERS; COMMISSION; STATUTE OF FRAUDS; QUANTUM MERUIT: Broker can recover a commission under a theory of quantum meruit where client negotiates a long-term lease with a prospective buyer, even though the broker's listing agreement addressed only a sale of the property in question.

Petrosky v. Peterson, 2004 WL 2239518 (Del. 2004).

Broker indicated to Owners that he had a prospective buyer of Owners’ property, and the Owners agreed to enter into a 90-day exclusive listing agreement with Broker. The agreement provided that the broker would be paid a commission of five percent of the sales price. Thereafter, a prospective buyer made an offer to purchase the property. The Owners rejected the initial offer, deciding instead to make a counter-offer. After the counter-offer was rejected, the parties decided to negotiate a long-term lease for the property rather than a sale. According to the lease, Broker was to act as escrow agent through which rent payments would be made. Broker and the Owners, however, could not agree on the terms of a commission to be paid to Broker for helping to secure the long-term lease for the Owners.

The trial court found that the lease only provided for a commission in the event of a sale. Thus, the trial court held that, because a Delaware Real Estate Commission regulation requires all listing agreements to be in writing, the broker could not recover under a claim that the parties orally modified the agreement, or under quantum meruit.

The Supreme Court of Delaware granted certiorari to consider whether a real estate broker should be compensated for services performed in obtaining a long-term lease when the broker's listing agreement addresses only a sale of the property in question. The Supreme Court noted that Delaware Real Estate Commission Rule 7.1.1 provides that "listing agreements for the rental, sale, lease or exchange of real property, whether exclusive, co-exclusive or open shall be in writing and shall be signed by the seller or Owner." The Court acknowledged its previous holding in Eastern Commercial Realty Corp. v. Fusco, 654 A.2d 833 (Del. 1995), that an oral listing agreement was unenforceable because it violated Rule 7.1.1 and the public policy underlying the rule. The Court reiterated the public policy concerns that oral listing agreements can be an unsafe practice and the requirement that listing agreements be in writing helps to foster fair dealings between parties, standardize real estate practice, prevent fraud and avoid litigation.

Here, however, the Court distinguished Fusco because in that case the broker did not seek recovery under quantum meruit, a quasi-contract claim that allows a party to recover the reasonable value of his or her services if: (1) the party performed the services with the expectation that the recipient would pay for them and (2) the recipient should have known that the party expected to be paid.

The Court went on to address other decisions that had considered whether a quantum meruit claim may be maintained in the absence of a written listing agreement. In Amato & Stella Assocs., Inc. v. Florida North Investments, Ltd., 678 F. Supp. 445 (D.Del. 1988), for example, a federal court held that there could be no recovery under quantum meruit, reasoning that allowing the plaintiff broker to recover for services rendered, despite non-compliance with the written listing agreement regulation, would significantly undercut the purpose and intent of the regulation.

The Supreme Court nevertheless concluded that a broker could recover under quantum meruit notwithstanding that there was no written listing agreement for the transaction that was ultimately consummated – a long term lease. The Court reasoned that Broker did not ignore the written listing agreement requirement because he did in fact obtain a properly executed written listing agreement, albeit for a sale rather than a long-term lease. Further, the Court reasoned that the broker here in fact procured the prospective "buyer" during the term of the agreement. Also, although the nature of the transaction shifted, the lease still acknowledged that a commission was due to the broker. Finally, the Court noted that the evidence adduced at trial indicated that Broker performed services in procuring the tenant and negotiating the terms of the lease. Thus, under these circumstances, the court held that it would not undercut the policy embodied in Rule 7.1.1 to allow recovery for the reaso nable value of services rendered, and accordingly remanded to the trial court to establish what reasonable commission Broker was due.

Comment 1: Although the decision is very helpful to brokers because it departs from prior authority and does award a quantum meruit recovery, the close reading of the facts here suggests that the court is unlikely to apply the theory generally in cases of unwritten listing agreements, as might be the case in other jurisdictions.
Comment 2: Note that it is not uncommon for the parties to negotiate a “time payment” arrangement for a brokerage commission when a long term lease is involved, since the Owner is not going to get the reward of the broker’s effort except over time, and in fact the reward isn’t even certain except over time. In fact, the Owners offered to compensate the broker with a 5% commission - $35,000 - spread over five years. The $35,000 was the amount that the broker would have received had the sellers sold the property. The broker agreed to the $35,000 amount, which the court comments is considerably lower than the “standard” commission for a lease of the type the parties finally entered into, but the Owners refused. Now it appears that they’ll pay a lump sum considerably larger than that, although it’s still possible that the trial court, on remand, will view a time payment arrangement as consistent with local practice and “equitable.”

Comment 3: The editor is somewhat puzzled why the quantum meruit arrangement is even necessary. If the Owners entered into a long term lease during the period of the listing agreement, didn’t they frustrate the broker’s opportunity to realize a commission on the sale of the property? Most exclusive listing agreements provide that a commission is payable under these circumstances. Even without such language, some courts would view the lease as a violation of a clearly implied term in the listing agreement that the seller not interfere with the broker’s efforts to procure a sale of the property during the listing term. Others might say that the client can terminate the agency any time and that the broker’s only compensation, unless it can show that it had a buyer ready to buy, would be compensation for expenses and efforts in trying to sell.

Comment 4: Be sure to compare: T.G. Slater & Sons, Inc. v. The Donald P. And Patricia A. Brennan L.L.C., 2004 WL 2190099 (4th Cir. 9/30/04) (Virginia court offers multiple alternatives for broker to escape problem that there is no listing agreement and no stated commission in case involving multimillion dollar property sale.)

Readers are encouraged to respond to or criticize this posting.

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