It’s a bitter lesson. A real estate agent spends money advertising and showing property. But when the deal closes, no commission is paid.
To prove the right to a commission, the agent must prove only two things:
- that the agent was the “procuring cause of the sale”
- that an employment relationship existed between the seller and the agent.
The case Deer Run Properties v Keys to the Lake illustrates that the second point can be elusive.
The listing agreement between the owner of the real estate to be sold and the broker creates the employment relationship between the seller and the agent that completes the obligation to pay a commission.
“Agency” is the role of one person acting on behalf of another. The legal rules for agency have evolved through common law (the process of appellate courts issuing opinions on the facts before them). For real estate brokerage, through the growth of multiple-listing services and statutes and regulations enforced by state real estate commissions that have redefined agency relationships, the law of agency for real estate agents has taken on a life of its own. The court in Deer Run Properties v. Keys to the Lake ignored the complexities of real estate agency and used a basic principle of contract law to decide the case: a person who is not a party to a contract cannot sue to enforce it.
Under the modern regime, real estate agents (who are either brokers or persons whose licenses are held by brokers) commonly attempt to sell their own listings or the listings of other brokers through multiple-listing services. Only a broker may enter into a listing agreement with an owner of real estate, although the broker’s agent may sign the listing agreement on behalf of the broker. At the closing, the commission is owed to the listing broker only, who divides the commission with the selling broker, who then pays a share of the commission to the agent who actually got the contracts signed.
Keys to the Lake was a broker, but did not list the Deer Run condominium units that were offered. The listing was with another broker. Keys to the Lake presented some of the Deer Run condo units to a buyer. The buyer apparently went directly to the owner of the units and signed a contract to purchase the units. Keys to the Lake then filed a notice that Keys to the Lake was entitled to a lien on the sale proceeds on the units shown to that buyer for the commission.
Deer Run filed a suit, asking the court to order the removal of the lien and claiming that it had no relationship with Keys to the Lake that could obligate Deer Run to pay a commission to Keys to the Lake. Keys to the Lake counterclaimed for its commission.
Deer Run filed a motion for summary judgment, alleging that Keys to the Lake was not the procuring cause of the sale and had no agreement for a commission with Deer Run. The court agreed with Deer Run, and Keys to the Lake appealed.
In the Southern District of the Missouri Court of Appeals, most summary judgments granted by trial courts are reversed on appeal. But this one stood, even though Keys to the Lake argued that there was a genuine factual dispute about whether Keys to the Lake was the procuring cause of the sale. But the appellate court, like the trial court, did not accept the argument that Deer Run’s agreement with the listing broker to put the property in the multiple listing service was a contract for the payment of commission to Keys to the Lake.
Keys to the Lake was not the agent of Deer Run. Under the terminology of the Missouri Real Estate Commission regulations, Keys to the Lake was the agent of the listing broker and a “sub-agent” of Deer Run with respect to the listed property. The listing broker was an agent of Deer Run and had a direct relationship that would have allowed the listing broker to sue Deer Run for a commission, if the broker was the procuring cause of the sale or the sale took place during the term of an exclusive-right-to-sell contract.
The listing agreement between Deer Run and the listing broker (who received no commission and chose not to participate in the lawsuit) was an exclusive-agency contract, meaning that Deer Run had the right to sell directly to buyers without being obligated to pay a commission, but would enter into to no listing agreements with other brokers. We can speculate that the listing broker declined to sue Deer Run because the listing broker wanted to preserve its relationship with the seller or that the listing broker wasn’t sure that Keys to the Lake had a strong case that it was the procuring cause of the sale.
Ozarks Law & Economy 
Your article brings to the fore an important issue, which is sometimes taken for granted or overlooked by real estate professionals and real estate investors alike. That is the issue of ensuring that they execute a properly documented and soundly drafted property listing agreement or real estate sales agreement. It highlights the need for realtors, property owners and buyers to ensure that the terms of their real estate sales or listing arrangements are properly documented in a written agreement that has been discussed with and reviewed by a real estate attorney. Confirming the terms of the listing or sales agreement is a critical step in ensuring a successful real estate transaction, free from controversy. Failure to document these arrangements may lead to ambiguities in the terms of the arrangement or conflicting expectations of the parties and may ultimately lead to a breakdown in an otherwise promising relationship.
Too often the parties fail to consult a real estate attorney before signing an agreement, only to find out that the agreement does not adequately stipulate their mutual understandings of the arrangement or does not sufficiently protect their interest. A conflict may later arise, well into the transaction, when either party has acted in reliance of their expectations under the agreement, and to their detriment. Resolving this conflict can often be costly at this stage and very time consuming at this stage. Real estate professionals and investors are therefore well advised to take appropriate steps to ensure they act under proper legal guidance before entering a real estate transaction or executing any real estate agreements. Real estate transactions often involve significant sums, with high stakes for all involved. You wouldn’t leave large sums of money in the hands of another or lying on the table unattended without first guaranteeing its security, would you? If you’re smart, you’d want to know that when you get back, every penny would be accounted for or at the very least you could recover any amounts that went missing. Yet that’s exactly what you do when you enter a real estate contract without a properly drafted or vetted contract or without first obtaining the advice of your real estate attorney. In these tough economic times, you simply can’t afford to leave your money unattended or exposed.
I have often been surprised that a business client will call me about a $200 traffic ticket, but will sign a $500,000 or $1 million real estate contract without my help. I only find out about the contract when a problem rears its ugly head. I have to conclude that I, like many other real estate attorneys, haven’t generally done a good job of letting my clients and the public know how an experienced real estate attorney can be helpful.
Probably part of the reason that attorneys are often left out of the process has to do with the manner in which real estate, especially residential real estate, is sold, Realtors do a great job of letting the public know that Realtors are experts and many are very skillful and knowledgeable. But the job of real estate agents to sell, and the job of real estate attorneys is to make sure the deal fits their clients’ desires and abilities over the years; real estate agents, with their long contracts and many forms of addenda to address any contingency or condition, give the impression of being comprehensive, and buyers and sellers, feeling that the transaction is well-documented, are reluctant to hire an attorney to read all that boilerplate. Attorneys can be most helpful if they are involved before letters of intent and contracts are signed.
But an experienced local real estate attorney is already familiar with the boilerplate and can focus of amending or supplementing the contract to make the deal work for the attorney’s client or give the client the information the client needs to make a decision to walk away from the deal. Naturally, real estate agents have a strong desire to keep attorneys out of the transaction, until they have a problem keeping the deal together.
Dear Harry,
I’m the proud owner of a condo in Washington DC. I’ve listed my property for sale two times before with no luck. On the first go around, I incurred $27,000 in expenses while keeping the property vacant as my realtor (Bob) attempted to sell my property. I wised up the second go around, keeping expenses to a minimum, but I continued to use Bob, which was a mistake.
The property is now off the market as it is rented yet again. The other day I receive a phone call from a listing agent (Tim) , who happens to work for the same broker as Bob. Tim just sold an identical unit to mine, had multiple offers, and wants to know if I’m interested in selling to a broken hearted buyer who lost out in a bidding war on the identical property. The problem is I rented out my place a month ago.
The very next day I receive a phone call from my old agent Bob who obviously got wind of this deal from Tim. The buyer is willing to purchase my property even though it’s rented, at a reduced price. I’ve incurred so many expenses from past attempts to sell that in order to get out “whole”, I require a matching price to the identical property, but the buyer won’t budge. If Bob and the buyer’s agent take a reduced commission of 4% rather than 5% I’ll be able to close without bringing a penny to the table, but I know my Bob won’t go for it.
Here’s where it gets good. Bob sent me the contract from the buyer, but I no longer have a listing agreement with Bob! His screw ups in the past have cost me a small fortune. Yet I still want to do the “right thing” and offer 4% commission even though I know my Bob will scoff at this and likely screw up the deal yet again.
Am I under any obligation to pay Bob any commission or even retain his services? Same question regarding Tim? If I simply take the contract to a closing attorney, can I be sued by Bob, Tim, or the broker they work for?
Thanks for your advice,
Ezra
Ezra,
I don’t give advice about particular legal situations on this blog. I provide legal advice to my clients in exchange for payment.
To get legal advice about real estate, you need to consult with a lawyer in the community where your property is located.