Broker Not Entitled To Commission In Oral Agreement
Written by: Alan Nochumson
In a real estate transaction involving the lease or sale of commercial property, a real estate broker will typically play a significant role in the transaction. The broker’s compensation for the completed transaction depends upon the type and terms of the agency agreement executed between the broker and the property owner.
One of the most common types of agency agreements is an exclusive listing contract, which generally provides that the broker will receive a commission if the transaction sought is completed within a specified time period. The purpose of such an agreement is to motivate the broker to complete the transaction quickly and for the highest price possible. If the transaction is not completed within the time stated in the contract, the parties can choose either to part ways or to extend the term of the contract for an additional period of time.
A recent decision by the Superior Court of Pennsylvania in Michael Salove Company v. Enrico Partners L.P. illustrates the importance of putting into writing the extension of the term of an exclusive listing contract.
Michael Salove Company (MSC), a real estate brokerage firm, and Enrico Partners L.P., a property owner, entered into an exclusive listing contract for the lease of vacant space owned by Enrico in the Main Line suburban area of Philadelphia, the opinion said. MSC had prepared a short form written agreement and after Enrico reduced the duration term of the contract and altered the compensation provisions, the parties executed the written agreement as modified, the opinion said.
When the term of the contract expired, MSC had not yet found a suitable tenant for the vacant space and was not engaged in negotiations with any prospective tenants. MSC alleged that it entered into an oral agreement with Enrico to extend the term of the listing contract prior to its expiration. MSC also claimed that the parties “decided that it wasn’t imperative to get … the extension in writing,” the opinion said.
According to the opinion, MSC was unable to recollect whether the parties ever discussed the duration of the extension of the term, and MSC admitted it did not send any e-mails or other correspondence to Enrico regarding the conversation. Although MSC claimed that the parties orally agreed to continue operating pursuant to the written exclusive listing contract, Enrico completely denied the existence of any agreement oral or otherwise to extend the duration of the term of the listing contract, the opinion said.
After the original term of the contract had already expired, a prospective tenant reached out to Enrico and expressed interest in leasing the vacant space. Enrico and the prospective tenant exchanged e-mails about the property and the prospective tenant visited the space and, when it did, it saw MSC’s sign in the window. Operating under the assumption that MSC was the brokerage firm managing the property, the prospective tenant called MSC and arranged for MSC to accompany the prospective tenant on a tour of the space. After the tour, MSC called the prospective tenant to set up a meeting at the property to discuss with Enrico the logistics of leasing the property.
MSC, Enrico and the prospective tenant met at the space and later exchanged numerous e-mails regarding financial information of the prospective tenant. However, when formal lease negotiations began, MSC did not participate. Soon thereafter, without MSC’s involvement, Enrico executed a lease agreement with the prospective tenant for the space.
Because MSC was not paid a brokerage commission as a result of the lease, MSC filed a broker’s lien claim against Enrico. MSC thereafter voluntarily agreed to dismiss its lien against the property and, in lieu thereof, proceeded with a claim against Enrico based upon breach of contract, unjust enrichment and quantum meruit.
After discovery, Enrico moved for summary judgment, arguing, in part, that “the claims for commissions were barred by the Real Estate Licensing and Registration Act, RELRA, 63 P.S. 455.101 et seq., because the nature of the services and the fee to be charged were not set forth in a written agreement signed by the consumer.”
The trial court granted summary judgment in favor of Enrico, finding “the claim for commissions pursuant to an oral modification extending the term of a written brokerage agreement to be barred under RELRA, and specifically, 63 P.S. 455.606a(b)(1).”
MSC appealed the grant of summary judgment to the Superior Court and only raised the following issue on appeal: “[w]hether 455.606a(b)(1) of the [RELRA] . . . precludes an oral agreement to extend the term of a commercial written real estate broker’s agreement, where such written agreement, by operation of law, permits oral modifications of the written agreement.”
The Superior Court ultimately found in favor of the property owner, Enrico, rejecting MSC’s contention that, prior to the expiration of the term of the exclusive listing agreement, the parties orally agreed to extend the written agreement indefinitely.
Specifically, MSC argued that because the written agreement did not require modifications to be made in writing, the parties were free to orally extend the duration of the agreement. Thus, MSC asserted that the orally extended agreement was in effect when the prospective tenant expressed interest in the space and at the time the lease was executed, and, as such, MSC was “entitled to a commission as the exclusive listing broker.” According to MSC, the “RELRA only requires that the material terms of the parties’ contract be in writing.”
In agreeing that the RELRA only requires that the material terms of the contract must be in writing, the Superior Court noted that the outcome on appeal hinged upon whether the duration of the term of the agreement was a material term of the agreement.
In resolving this ultimate issue, the Superior Court relied upon the statutory construction of the RELRA, which the legislature amended in 1998 and enacted in 1999 to provide that brokerage agreements must be in writing. In doing so, the Superior Court discussed various relevant sections of the RELRA, in addition to regulations promulgated pursuant thereto.
The Superior Court began its analysis by stating that 63 P.S. 455.606a(b) of the RELRA provides, in pertinent part, that: “[a] licensee may not perform a service for a consumer of real estate services for a fee, commission or other valuable consideration paid by or on behalf of the consumer unless the nature of the service and the fee to be charged are set forth in a written agreement between the broker and the consumer that is signed by the consumer.”
The Superior Court continued that the RELRA states a written brokerage contract must contain “[a] statement that the broker’s fee and the duration of the contract have been determined as a result of negotiations between the broker and the seller/landlord or buyer/ tenant.”
To complete its examination of the statutory construction of RELRA, the Superior Court explained that “[e]xclusive listing agreements, the type of agreement involved herein, which entitle the listing broker to a commission even if he does not procure the eventual buyer, are governed by 49 Pa. Code 35.332, which provides that exclusive listing contracts ‘shall contain, in addition to the requirements in 35.31 . . . the duration of the agreement.”
Though the Superior Court “decline[d] to hold that RELRA precludes any oral modification of a written exclusive listing agreement,” it did state that “an oral modification of a term of such an agreement, which is required [there]under . . . to be in writing, cannot support a claim for commissions or fees under RELRA.”
Since MSC admitted that the parties did not agree in writing or orally, for that matter on the duration of the term of the extended agreement, the Superior Court held that any such oral extension did not comply with the RELRA and MSC’s claim to a commission under RELRA is barred.
LESSON LEARNED
The court’s ruling in Michael Salove Company plainly demonstrates the importance of putting agreements related to real estate transactions into writing. Here, the brokerage firm, MSC, failed to memorialize an alleged oral extension of a prior written agreement and therefore was barred from a claim to a commission that it had worked toward for close to a year.
Reprinted with permission from the October 3, 2011 edition of The Legal Intelligencer © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
