Broker Entitled To Commission Despite Carve-Out Provision
Written by: Alan Nochumson
In both the residential and commercial context, a property owner typically retains the service of a real estate broker to list and market a property for sale. Prior to retaining a real estate broker, the property owner enters into a written agreement defining the scope and term of their relationship. Typically, the real estate broker provides a form broker agreement for the property owner to sign. Most property owners, even in the commercial context, are not represented by legal counsel when signing the broker agreement and the property owner’s failure to properly negotiate the terms and conditions of the broker agreement could sometimes lead to unintended consequences.
In Binswanger of Pennsylvania v. TSG Real Estate LLC, 2015 Phila. Ct. Com. Pl. LEXIS 2000 (September 1, 2015), Philadelphia Court of Common Pleas Judge Patricia McInerney determined whether a real estate broker was entitled to a commission from a property owner when the property was sold to a corporate entity that had expressed interest in purchasing the property before the real estate broker was even retained to list and market the property for sale.
On Sept. 20, 2013, TSG Real Estate LLC informed Binswanger of Pennsylvania Inc. that it wished to retain the services of Binswanger as its real estate broker to sell the property it owned in North Wales, the opinion said. At the time, TSG was being represented by another real estate broker but its agreement to list and market the property for sale with that real estate broker was scheduled to expire upon its own terms and conditions, the opinion said.
Only a couple of days before expressing its interest in retaining the services of Binswanger, TSG received an offer from TWA Holdings Inc. to purchase the property, the opinion said. While TSG did not accept the offer, TSG indicated to Binswanger that any broker agreement between them had to limit the right of Binswanger to collect a commission should TWA purchase the property, the opinion said.
On Sept. 27, 2013, TSG and Binswanger formally entered into a written broker agreement in which Binswanger was retained by TSG to list and market the property for sale, the opinion said.
Under the broker agreement, Binswanger was entitled to receive a commission of 5 percent of the gross sales price for the property. Binswanger, however, agreed to split the commission with any real estate broker that procured a buyer for the property.
The broker agreement included a provision carving out a period of time wherein a commission would not be due and owing to Binswanger if TWA and other identified interested buyers purchased the property from TSG. Specifically, the broker agreement stated that a commission would not be earned by Binswanger for “sales, exchanges, or other transfers” to TWA or any of these other interested buyers if “such sale, exchange or transfer [wa]s completed on or before Jan. 5, 2014.”
Under the broker agreement, Binswanger’s term of employment was for one year and TSG had the right to terminate the broker agreement after six months with 30 days’ prior written notice.
On Jan. 3, 2014, two days before the expiration of the carve-out period set forth in the broker agreement, TSG entered into a written agreement of sale for the property with TWA for the sum of $3.4 million.
Under the agreement of sale, the parties’ agreed settlement would occur by April 10, 2014. The agreement of sale contained a mortgage financing contingency provision under which TWA could terminate the agreement of sale if it did not obtain certain mortgage financing within 60 days from the execution of the agreement of sale.
Despite entering into the agreement of sale, TSG was specifically allowed by TWA to continue marketing the property for sale to third parties during the due diligence period of 60 days contained within the agreement of sale.
After the agreement of sale was entered into with TWA, Binswanger requested TSG to pay the alleged commission due under the broker agreement since the “sale, exchange or transfer” would not be completed by Jan. 5, 2014, the date of the alleged carve-out period set forth in the broker agreement.
In response, TSG claimed Binswanger was not entitled to a commission because the execution of the agreement of sale by the parties completed the “sale, exchange, or transfer” of the property prior to the expiration of the carve-out period, and, on Jan. 16, 2014, TSG also declared that the broker agreement would be terminated effective March 26, 2014, through its alleged right under the broker agreement to terminate it early.
The property was sold to TWA on April 10, 2014.
In the meantime, litigation ensued between Binswanger and TSG in the Philadelphia Court of Common Pleas before McInerney. During the litigation, Binswanger sought a judgment in the amount of $170,000 against TSG for the alleged commission due to Binswanger by TSG under the broker agreement.
Binswanger subsequently filed a summary judgment motion in the pending litigation.
After considering the summary judgment motion, McInerney granted and denied the motion in part, finding that Binswanger was entitled to a commission under the broker agreement, but that Binswanger had to split the commission with the other real estate brokers involved with the sale of the property, as per the terms and conditions of the broker agreement.
The parties subsequently filed an appeal of McInerney’s ruling to the Superior Court of Pennsylvania.
During the appellate proceedings, McInerney issued a memorandum opinion explaining her rationale for ruling on summary judgment in favor of Binswanger and against TSG in the amount of about $56,666.
McInerney first addressed whether the execution of the agreement of sale was a “completed sale, exchange or transaction” within the meaning of the broker agreement, allowing Binswanger to collect a commission from the sale of the property to TWA.
While Binswanger argued it was entitled to a commission on the sale of the property because the “sale, exchange or transfer” was completed at the time of settlement of the real estate transaction that occurred outside of the carve-out period, TSG argued the executed agreement of sale constituted a completed “sale, exchange or transfer” of the property and no commission was due to Binswanger since the agreement of sale was executed prior to the expiration of the carve-out period.
McInerney initially discussed what happens to title to real estate in Pennsylvania when a seller and buyer enters into an agreement of sale. Citing to Payne v. Clark, 187 A.2d 769 (Pa. 1963), McInerney pointed out that it is well established in Pennsylvania that “from the moment an agreement of sale for real estate is executed and delivered, it vests in the purchaser equitable title to the real estate,” with “the seller [being] considered a trustee of the real estate for the purchaser and the latter becomes a trustee of the balance of the purchase money for the seller,” and “the seller’s title which he retains until final conveyance is but a security title and the risk of loss or advantage is borne by the buyer.”
Nevertheless, citing to Dubin Paper v. Insurance Co. of North America, 63 A.2d 85 (Pa. 1949), McInerney warned that “this notion of transferring equitable title at the execution of the agreement of sale applies only to the parties to the contract, i.e., the agreement of sale, and cannot be extended so as to affect the interests of others.” Moreover, citing to rulings previously handed down by the state Supreme Court, McInerney concluded that “equitable title is transferred only when the contract for the sale of land is free from conditions which are beyond the control of the parties.”
Applying this line of reasoning to the factual circumstances set forth in Binswanger, McInerney flatly rejected TSG’s argument that, because equitable title passes at the signing of the agreement of sale, the “sale, exchange or transaction” for purposes of the broker agreement was complete at the time the agreement of sale was executed by the parties.
McInerney first held the reasoning employed by TSG was misplaced because the agreement of sale contained a mortgage financing contingency. Since applying and procuring a mortgage loan was beyond the control of TSG and the interested purchaser, McInerney reasoned that “equitable title did not transfer at the time the agreement of sale was executed and therefore the sale, exchange or transaction for the property was not complete prior to the termination of the carve-out period as required by the broker agreement.”
In a footnote, McInerney also emphasized the agreement of sale contained a due diligence period of 60 days that would not conclude until after the broker agreement’s carve-out period expired.
Since the executed agreement of sale was a conditional agreement and was not a completed “sale, exchange or transfer” at the time of its execution, and since the sale, exchange or transaction was completed after the expiration of the carve-out period, McInerney held that Binswanger was due a commission for the sale of the property to TWA.
McInerney then dealt with what effect TSG’s attempted termination of Binswanger had on its entitlement to a commission under the broker agreement.
In the litigation, TSG argued that no commission was due to Binswanger because title to the property passed after the broker agreement had already terminated. Unpersuaded by this argument, McInerney cited to the broker agreement, which specifically provided for a term of one year from the execution of the broker agreement and gave TSG the right to terminate the broker agreement after only six months with 30 days’ prior written notice to Binswanger.
Since the term of the broker agreement began Sept. 27, 2013, McInerney pointed out Binswanger’s services under the broker agreement could not be terminated prior to March 28, 2014, and TSG could only then terminate Binswanger’s services under the broker agreement with advance notice of 30 days. According to McInerney, the attempts by TSG to terminate Binswanger’s services under the broker agreement on Jan. 16, 2014, and Feb. 14, 2014, were, thus, ineffective and invalid and a commission was accordingly due and owing to Binswanger.
Although McInerney believed that Binswanger was entitled to a commission under the terms and conditions of the broker agreement, she noted that Binswanger was not entitled to the full commission of $170,000, as TWA was not procured by Binswanger and, as such, Binswanger would be required to split the commission with the other two brokers involved with the real estate transaction. For that reason, McInerney found that Binswanger was entitled to collect one-third of the commission, $56,666, and entered summary judgment in favor of Binswanger and against TSG in that amount.
Reprinted with permission from the November 17, 2015 edition of The Legal Intelligencer © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.