Daily Development for Tuesday, April 6, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BROKERS; AGENCY RELATIONSHIPS: Real estate broker was not "agent" of seller when seller disclaimed existence of such relationship following seller's agreement to sell to broker's party. Therefore broker had no obligation to disclose dual agency in advance.

Wardley Corp. v. Welsh, 962 P.2d 86 (Utah App. 1998).

Developer entered into an oral agreement with Broker that if Broker found buyers for certain lots, Developer would pay a commission. In the language of the court: "[Developer stated] that he needed to net $18,500 per acres from selling the parcel and that [Broker] could receive a commission for sending [Developer] a buyer. Broker introduced a buyer to Developer, and the buyer and Developer, outside of Broker's presence and without Broker's assistance, executed a sale agreement. This contract provided that Developer would pay to Broker a commission of $500 per acre.

Later, after the buyer acquired some of the property and Developer had paid some commission, the buyer and Developer had a dispute. Broker intervened in the negotiations, and at that time Developer sent Broker a letter telling Broker that "I would like to remind you that you do not repesent me in any way whatsoever, nor do you maintain any kind of any agency relationship with me, whatsoever." Developer and the buyer then executed a new agreement resolving their dispute. Presumably this new agreement did not provide for a commission for Broker. Developer paid no more commissions to Broker for the sale of the balance of the land, and Broker sued to recover its fees.

Developer claimed that the broker violated the real estate brokerage statutes by failing to disclose that Broker was Developer's agent to the buyer and by failing to disclose in the agreement to Developer that Broker was acting as agent for both the buyer and the seller, and therefore, the Broker was not entitled to recover any fees. Developer alleged further that Broker had unlawfully entered into a net listing agreement, in violation of state law. Broker responded that it was not only entitled to a commission but that it was entitled to attorney's fees under the attorney's fee provision of the first sale agreement which provided that any "party" who prevailed in a lawsuit concerning the agreement would be entitled to attorney's fees.

The trial court entered partial summary judgment for Broker, finding that letters written by Developer stating that no agency relationship existed between Developer and Broker precluded a finding that an agency relationship existed. The trial court found, after trial, that no net listing existed. But the court denied attorney's fees to Broker. Both sides appealed.

The Utah Court of Appeals affirmed on all points.

The court noted that an agency relationship can arise only at the will and by the act of the principal. For an agency relationship to exist, the principal must manifest its understanding that the agent will act on its behalf. In this case, Developer did not manifest such an understanding at the time of the original oral agreement or in the later written sale agreement. Further, Developer's express statements that no agency relationship existed required the conclusion that Developer in fact at no time authorized Broker to act as its agent.

At the time that Developer drafted the first purchase agreement (which provided for a commission to Broker), the court conceded that either the buyer or Broker might have been under the impression that Broker was serving as Developer's agent, but the court states that their beliefs were of no consequence if there is no evidence that Developer did not authorize Broker to function as its agent.

The court goes on to conclude that Broker functioned as a "mere finder" in this transaction, and was no one's agent. It affirms that Utah in fact recognizes the finder's function as a "nonagency" function. It indicates that "finders" in Utah must have a real estate license, but indicates that the disclosure requirements do not apply to them because there is no agency.

The court affirmed the trial court's holding that there was no "net listing" because it concurred with the trial court that there was no "listing" at all. It indicates that the Broker conceded on appeal that an agency relationship was necessary for there to be a "net listing," and since the court had concluded already that there was no agency, a fortiori there could be no net listing.

On the attorney's fee question, however, the court observed that the contract provided only that the attorney's fees were available only to a "prevailing party," and that Broker clearly was not a "party" to the sale agreement, as it was drafted and executed without Broker's knowledge. This was true even though Broker was a third party beneficiary of that contract, which was the only written statement of Developer's commission obligation.

Comment 1: It may well be that Broker was not the agent of Developer as between them. But to hold that Broker was no one's agent, and was required to make no disclosures to anyone, seems to be inconsistent with the facts of this case and with the purposes of the new disclosure laws.

The court says that because Broker was a mere "finder" it had no agency responsibilities. But the court indicates that, subsequent to the execution of the first written contract, Broker was heavily involved trying to negotiate a solution to the dispute between the buyer and Developer. That doesn't sound like a "mere finder" to the editor, and certainly a little clarity of relationship was called for here.

Comment 2: The court acknowledges that the buyer may well have believed that Broker was agent for Developer. Should the rule be that a broker is denied a commission only when the broker fails to make agency disclosures to the seller, or should the same penalty apply when the broker fails to disclose the nature of agency responsibilities to any party to the negotiation?

Comment 3: In any event, should the fact that a broker is operating simply as a "finder" result in a conclusory finding that no agency responsibilities exist? Doesn't this open up a loophole for brokers, especially commercial brokers, to dodge the responsibility to clarify the agency relationship by characterizing their duties as merely "finding?"

Comment 4: Another loophole seems to exist in the notion that there can be no breach of the prohibition against net contracts if a broker acts simply as a finder. Unless "finding" is very narrowly defined, so as to preclude any discussion of price or terms of the offering between the prospect and the broker, the evils that are perceived to exist in net contracts are very likely to exist here.

The editor is not certain that the original statement of the commission expectation clearly delineated a net contract, and the written statement does not appear to do so either. So this may not have been a net contract. But if it had been a net contract, should the broker be able to skirt the prohibition by declaring that it is serving simply as a "finder?" Comment 5: The broker understands that commercial brokers really hate the new disclosure laws in general, because they do not suit the somewhat formless way in which their relationships generally commence. The formality is much more helpful in the residential context, and the residential brokers have all the power in the NAR chapters that fomented the new crop of agency disclosure laws.

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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