Daily Development for
Wednesday, May 29, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BROKERS; DUTY TO DISCLOSE; SHARED COMMISSIONS: A broker's failure to disclose to its principal, the seller, that the broker was paying part of its commission to the buyer was a breach of broker's fiduciary duty for which the broker forfeits its entire commission. Goldberg Realty Group v. Weinstein, 669 A.2d 187 (Me. 1966).

The listing agreement reflected an existing right of first refusal in a present tenant and provided for a reduction in commission should the property be sold to the tenant. The broker produced a buyer who entered into a contract to purchase the property to be financed, in minor part, by a second mortgage from the buyer to the seller. After the contract was executed, the tenant attempted to exercise his right of first refusal, resulting in litigation between seller, tenant, and buyer. At a meeting between tenant, buyer and broker, the broker negotiated a settlement under which the buyer would assign its contract rights to the tenant and the broker would pay the buyer one-half of its commission. The seller refused to sell to the tenant under the terms of the contract unless the buyer guaranteed the second mortgage note, a note now to be issued by tenant's corporation not by buyer. During further litigation over the seller's refusal to close, the seller first learned of the broker's agreement with the buyer.

The court held that the broker's failure to disclose to the seller its agreement to pay part of its commission to the buyer was a breach of the broker's fiduciary duty. This fiduciary duty requires that the broker make "full and frank disclosure" to its principal of all material facts. The undisclosed payment was material to the sale of the property even though seller might have proceeded with the sale had he known of it. It was material because it affected the business risk that the seller accepted by agreeing to a mortgage for part of the purchase price. The seller's agreement had been predicated upon the buyer, not the tenant, being the purchaser-mortgagor. The change in parties affected the business risk and, therefore, was material. The court indicated that the rule denying the broker commission is "more prophylactic than remedial; it is applied, not to compensate the principal for an injury, but rather to discipline the fiduciary in the conduct of the office entrusted to him."

Comment: The broker clearly "blew it" here. The general rule is "when in doubt, disclose." Perhaps the broker had difficulty understanding how the seller was injured by the non-disclosure, but it should be up to the client, and not the broker, to make the judgment on an issue concerning the broker's sharing a commission with one of the parties to the deal. Further, broker's ethical rules prohibit brokers from sharing commissions with anyone other than another broker.

Comment 2: Even where we acknowledge that the broker made an error here, we should recognize that the penalty imposed is rather severe, notwithstanding the fact that it is a well established custom. Let us consider what might happen if a lawyer made a similar non-disclosure. Would we expect the lawyer to forfeit all compensation for all legal services rendered? The lawyer would cry long and loud that the client had benefitted from those services. The broker in this case could make the same argument.

Many commercial brokers will work a listing for a year or more before they make the deal. The forfeiture of commission remedy for relatively breaches that cause little or no injury certainly bears re-examination. Where, of course, the injury is significant, but not quantifiable, because it results in increased risk, the rule may be justified. The editor isn't sure that the non-disclosure here significantly increased the risk. The seller knew who the buyer/borrower was, and information about that party's motivations isn't central to the seller's evaluation of risk.

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