by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
BROKERS; COMMISSION; PROCURING CAUSE: Broker can be procuring cause merely by informing buyers of property advertised for sale by owner, but "innocent seller" who is unaware that buyers are so referred and lowers price has a defense.. Bear Kaufman Realty v. Spec. Development, 645 N.E.2d 244 (Ill. App. 1994) Broker told developer that he had a "young investment banking couple" interested in developer's townhouse development. Developer told broker that he would pay a 5% commission if the "young investment banking couple" or any of broker's other clients purchased his units. Subsequently, apparently after breaking off their relationship with the broker, the couple visited the developer's "open house" for a townhouse and made a deal, representing that they were not working with a broker. Developer and the couple signed a contract for at least 5% below the asking price of the unit. On suit by broker for a commission, held: no commission payable.
Preliminarily, the court discussed Illinois precedent concerning "procuring cause" that is really quite generous for the broker. Operating under a vague oral agreement, the broker need do no more than point the buyers at the seller in order to obtain the commission. (Some of the dicier problems arise when the buyers, thus "pointed" end up striking a deal through a second broker - those facts were not present here.) But notwithstanding its generous conclusion that the broker was a procuring cause, the court denied the commission.
The court cited two reasons for its result: both are powerful ammunition for sellers:
First, the court held that there is an "innocent seller" defense. When the seller, after due inquiry, reasonably believes that there is no broker involved, and sells at a lowered price as a consequence, the seller owes no commission. Because the broker never revealed the identity of the "young investment banking couple," and the seller and the couple specifically discussed whether a broker was involved, the developer here was "innocent." In response to this rule, the broker argued that the seller could protect itself by getting an indemnity from every buyer. This is true, said the court, but pushes the seller too far. The broker can protect itself by giving the seller a list of names, and that is all the broker needs.
An interesting aspect of the rule is the requirement for the lowered price. Some of the cases the court cites for the principle, do not require, as the court here does, that the price actually be reduced. The seller here reduced the price by more than the amount of the commission, but it is not clear that this would be required. Note, however, that the court invoked this fact in response to the broker's alternative argument for quantum meruit. Had the price been reduced by less than the commission amount, perhaps a quantum meruit argument would still be available, at least in response to this first argument.
The second basis for the court's conclusion is more sweeping and perhaps more troubling for brokers. The court rules that in failing to give the seller, the principal, vital information in the form of the names of the prospective buyers, the broker breached its fiduciary relationship with the sellers. This alone, says the court, vitiates any contractual obligation the broker could claim (and presumably, and quantum meruit possibilities.
Comment: The Illinois court "gaveth and tooketh away." The generous ruling on procuring cause helps brokers. But the ruling on "innocent purchasers," and particularly the ruling on the fiduciary duty to reveal the identity of prospects, may be very harmful. Consider, for instance, the situation in which a broker strikes an open listing deal on one property with a developer who has a number of properties for sale. The broker might be concerned that the developer might not sell to the broker's prospect, but later might contact the prospect and sell the prospect other property not covered by the open listing. Concerned about this, the broker may be reluctant to reveal the name of the prospect, at least until a deal is imminent. Has the broker breached a fiduciary duty? Would such breach render the broker liable for damages? Would such breach void the broker's claim for commission if the property sold to some other prospect of the broker? Note that in the case at hand the developer knew that the broker had not revealed the propsect's name and apparently did not object too strenuously.
As another twist, would the developer in the above scenario somehow be guilty of a breach of good faith and fair dealing if the developer did contact the prospects regarding other property, assuming the broker did reveal the names? Couldn't the broker have protected his or her interests by contracting to protect the commission right with respect to this prospect regarding all of developer's properties? Isn't that enough?
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 five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260. Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.
Items reported in the Daily Development and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Items in the Daily Development are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.