Real Estate Commissions Disputes

Realtors expect to be paid for their work when they deliver to a vendor who is similarly ready to conclude a deal, a purchaser who is willing, ready and able to purchase.  In the normal course, the transaction is completed, and the realtor gets paid for his or her services.  The more difficult situation arises when the deal falls apart.

Under standard real estate listing agreements[1], [2] between a realtor and a vendor, the realtor becomes entitled to payment “when the sale is completed” (or similar wording). Typical listing agreements also contemplate the payment of commission for sales completed after the expiry of the listing agreement for a defined period of time or to a purchaser introduced by the broker.

Courts have made it clear that the sale must be completed before a commission is earned, and the execution of a purchase agreement is not enough, on its own, to earn a commission (unless the vendor refuses to close) [3], [4]. Unless the listing agreement states otherwise, a realtor has not earned a commission if the transaction does not close due to failure of the purchaser’s conditions or outright refusal of the purchaser to close.

An exception is found in some commercial listing agreements[2], which may entitle the realtor to a reduced amount of commission (typically a share of the deposit) if the purchaser backs out of the purchase agreement and forfeits its deposit.  This reflects the considerable effort that goes into matching a buyer to a seller for commercial property.  A listing agreement may also entitle the realtor to a commission if the vendor refuses an unconditional offer that satisfies the conditions set out in the listing agreement.

Ultimately, the realtor’s entitlement to a commission in the event of a sale that is not completed will depend on the wording of the listing agreement.  A listing agreement can be drafted so as to entitle the realtor to a commission upon execution of a purchase agreement, upon satisfaction/waiver of conditions, or upon the happening of any other event.  A listing agreement is typically drafted by the realtor, and great care must be taken in the wording.  Any ambiguity in the meaning of the listing agreement will be interpreted in favour of the vendor [5].

If a transaction does not close, the realtor has no claim for payment of a commission regardless of how unfair the situation may appear unless there are clear contractual terms providing for payment of commission in the event of a failed sale.  There is no recourse to any equitable principles of fairness [6] – the listing agreement prevails.

Disputes often arise when a purchase agreement is entered into after the end of the listing agreement. Many standard form agreements entitle the realtor to a commission for any sale that is completed after a “Hold-Over Period”.  In typical listing agreements, the entitlement to payment during the Hold-Over Period requires only that a sale is completed, but does not require that the introduction or sale was facilitated by the realtor. Typically, the only exception is a sale during the term of a new listing agreement, in which case the commission goes to the new realtor.

Some listing agreements entitle the realtor to a commission only if the sale was brought about by the actions of the realtor (the “effective cause” doctrine).  Under many standard listing agreements, the wording is very clear that the realtor does not have to be the effective cause of the sale during the Hold-Over Period[7], [8] As each agreement is defined by its terms, a listing agreement could even be drafted so that commission is payable upon execution of a purchase agreement, regardless of whether the sale is actually completed.

The entitlement to a commission in most cases flows from a written listing agreement.  However, in appropriate circumstances a realtor may be entitled to a commission for a deal that is made without a written listing agreement on the basis of “quantum meruit”.  This remedy is available when it can be shown that there was an oral agreement and the realtor materially contributed to the sale[9].  It is also available when there is wrongdoing by the vendor, such as when the vendor and purchaser wait until the listing and hold-over periods are over with the intention of depriving the realtor of a commission.

Unfortunately for realtors, having a clear right to a commission does not guarantee that the realtor will get paid.  One way for a realtor to improve its prospects of getting paid the commission owed to it is to file a caveat on the land title. However, a realtor must be very careful to define the right to file a caveat within the terms of the listing agreement; otherwise, a commission owing is nothing more than a simple debt[10], [11].  A caveatable interest is created only when the listing agreement clearly states that an interest in the land is granted by the vendor as security for payment of the commission.  Anything less is not sufficient to support a caveat, and improperly filing a caveat that blocks a sale could result in a claim for damages against the realtor.

In conclusion, it is essential for the vendor and the realtor to understand their obligations, rights and remedies under a listing agreement. Not all listing agreements are the same, and each agreement will be interpreted according to its own terms. Careful wording is essential, and ill-considered changes to a standard form of agreement – such as handwritten changes to a carefully drafted document  – can have consequences that were never intended.