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HOW TO LOSE A REAL ESTATE COMMISSION IN ONE EASY STEP

The ending is everything. Plan all the way to it, taking into account all the possible consequences, obstacles, and twists of fortune that might reverse your hard work and give the glory to others. By planning to the end you will not be overwhelmed by circumstances and you will know when to stop. Gently guide fortune and help determine the future by thinking far ahead.

Robert Greene, The 48 Laws of Power

Real estate agents have many challenges. There are obvious ones:  building client and referral bases and dealing with difficult people.  However, less obvious dangers lurk for agents who fail to plan:  losing a commission by failing to comply with real estate commission statutes.  There is little worse for an agent than to be denied a commission after investing substantial time and money to help a client close a transaction.  Do not let that agent be you.

Continuing education courses are one way to navigate the law, "pass go," and collect a commission.  But there is an equal, if not better, source of education:  the school of hard knocks.  Let's look at the recent Daum Commercial Real Estate Services (Daum) case in which the Arizona Court of Appeals ruled that Daum was not entitled to a commission that it sued upon.

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A 20 MILLION DOLLAR DEAL -- WHAT COULD GO WRONG?

In 2012, Daum represented a buyer and seller in a near $20,000,000 commercial real estate sale in Phoenix.  The seller became upset with the amount of money the buyer was bringing to the transaction and demanded that Daum reduce its commission from 2% to 1.5%.

Daum's agent discussed the commission issue with the buyer and then emailed the buyer:

I'm preparing my broker for the meeting with [Seller] today.

I told my broker that if [Seller] reduces our fee to 1.5 %, that

you guys will make up the difference of .5 % at the close of

escrow, per my discussions with [your business partner] this

weekend. Can you confirm this, for my broker, before our

meeting with [Seller] (11am), please?

The buyer responded:

Confirmed. We make up fee of 0.5% when we

sell the property.

The property sold in 2014 for $21,600,000.  However, the buyer (now seller) refused to pay the .5% ($95,000) commission to Daum.  Daum sued the buyer for the commission. I represented the buyer.  After lengthy litigation, the Arizona Court of Appeals ruled in my client's favor -- denying Daum the commission it sued upon.

DAUM FAILED TO PLAN ALL THE WAY TO THE END

Can you guess what Daum did wrong?  The answer lies in the Arizona statute governing real estate commissions.  As a broker who provided brokerage services to the buyer for compensation, Daum was required to ensure that the email agreement complied with Arizona law.  To be enforceable, the agreement needed to meet each of the following requirements:

(1) be written in clear and unambiguous language,

(2) fully set forth all material terms, including the terms of broker compensation,

(3) have a definite duration or expiration date, showing dates of inception and expiration, and

(4) be signed by all parties to the agreement. 

The email agreement was unenforceable because it did not have a definite duration or expiration date.  Daum was denied its commission.  Here is the Arizona Court of Appeals' Decision (which reversed the trial court).

In ruling against Daum, the Arizona Court of Appeals emphasized that "Arizona places strict requirements on real estate professionals who seek to recover commissions" and "real estate brokers are presumed to know the law." 

Daum tried to label the email agreement so as to avoid the application of the real estate commission statute.  The Court of Appeals was not persuaded.  It stated:

“Compensation” is defined as “any fee, commission, salary, money or other valuable consideration for services rendered or to be rendered as well as the promise of consideration whether contingent or not.” A.R.S. § 32-2101(16). It is undisputed that Daum performed services throughout the transaction for both parties. Until the Agreement was entered, the compensation for such services was to be paid from Seller’s side of the ledger; after the Agreement, part of the compensation for services switched to Kathleen’s side. Whether Daum had already entered into a real estate employment agreement with Seller is irrelevant—nothing in the statutory provisions limits a broker from entering into only one agreement. Stated differently, simply because Daum signed a listing agreement with Seller did not excuse Daum from complying with the statutory requirements governing agreements for compensation of services. As the broker that provided brokerage services to Kathleen for compensation, Daum was required to ensure that the Agreement complied with A.R.S. § 32-2151.02(A).

Thus, any time you are being paid compensation for possible brokerage services, think:  have I complied with each statutory requirement? 


SPEED KILLS

Real estate deals often come together quickly in a swirl of rapidly changing circumstances.  No matter the speed of events, be sure to plan all the way to the end.  This means ensuring -- at every point in a transaction -- compliance with the rules that enable agents and brokers to obtain commissions. 

Example:  In Young v. Rose, a residential real estate agent failed to sign a Buyer–Broker agreement when receiving the client-signed agreement via email.  Instead, the realtor wrote back “Thank you.”  The client went on to buy an expensive home using another realtor during the term of the agreement.  The original realtor sued, only to face a defense that she had not signed the agreement as required to obtain a commission. 

The realtor argued that her "thank you" email, with an electronic business card consisting of her name, business address, email address, telephone numbers, website address, and photograph, was adequate as an electronic signature.  The Arizona Court of Appeals left "for another day the task of determining when an email communication qualifies as an electronic signature."  You, as a realtor, should not leave the issue to chance:  sign your agreements in ink. 

Understand, ignorance of the law is no excuse.  If an agent or broker fails to meet any requirement of Arizona's strict real estate commission statutes, the agent and broker will be denied a commission.  Do not place yourself in Daum’s predicament of having an agreement that is unenforceable.

Art Bourque is an AV rated commercial and employment lawyer who has been practicing law in Phoenix, Arizona for 27 years.  Art provides real estate and employment law training in order to help businesses operate efficiently and avoid mistakes; he is also an experienced litigator.  Art can be found at www.bourquelaw.com, art@bourquelaw.com, 602.559.9550, linkedin, or trail running with his dog, Eli.

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