UPDATE: New case law on real estate brokerage agreements

It is common for buyers and sellers of real property to assume that brokerage commissions will only be payable on the consummation of a sale of real property. As a recent California Court of Appeal case shows, that is not always the case.

In RC Royal Development and Realty Corporation v. Standard Pacific Corporation, No. B206894 (Cal. Ct. App. Sep. 29, 2009), the California Court of Appeal for the Second Appellate District held that a broker, RC Royal Development and Realty Corporation (the "Broker") earned its commission at the time the buyer of real property, Standard Pacific Corporation (the "Buyer"), entered into a purchase agreement and that the close of escrow was not a condition precedent to the Broker's right to the commission.

The court's decision turned on the specific language in the agency agreement between the Broker and Buyer ("Brokerage Agreement") and provides an important lesson for similarly situated parties. If the intent is that a commission will be payable only on the actual consummation of a property sale, a buyer or seller must be careful to expressly provide language reflecting that intent in its brokerage agreement. Also, in order to avoid a claim under the implied covenant of good faith and fair dealing (which the RC Royal court, in an unpublished portion of the opinion, also addressed), a buyer or seller should also have the brokerage agreement expressly provide that the decision to consummate a purchase or sale of the underlying property is in the seller/buyer's sole discretion and that the broker will not be entitled to a commission unless the sale is actually consummated, regardless of the reason(s) for not closing the sale. Without that language, a buyer or seller's legitimate decision to forego a purchase or sale may, nevertheless, leave it susceptible to a broker's claim for its commission.

Under the Brokerage Agreement in RC Royal, the Buyer agreed to pay the Broker a commission equaling 1.5% of the gross sales price of a property located in downtown Los Angeles (the "Property"). The Brokerage Agreement defined "purchase" to mean "any and all acquisitions of any direct or indirect beneficial interest in the Property, including, without limitation, any lease, option, finance, exchange, stock purchase, joint venture or other transaction through which [the Buyer] would acquire a direct or indirect beneficial interest in the Property."

The Buyer subsequently entered into a "Real Estate Agreement" (the "Purchase Agreement") with the owner of the Property (the "Seller"). The Purchase Agreement conditioned the Buyer's obligation to purchase the Property on, among other things, the issuance of a temporary certificate of occupancy for proposed condominium units at the Property. As a result of delays in permitting, inspection and construction and a contemporaneous downturn in the downtown Los Angeles condominium market that made the project economically infeasible, the temporary certificate of occupancy was never issued, the purchase and sale escrow did not close, and the Buyer did not acquire the Property.

The Broker brought an action against the Buyer for payment of its commission. The Buyer moved for summary adjudication of the breach of contract cause of action on the ground that the Buyer did not breach any obligation it owed to the Broker and, alternatively, that the Brokerage Agreement provided that a commission would be earned only when the Buyer's purchase of the Property actually closed. The trial court agreed, ruling in relevant part that the Buyer would have obtained an interest in the Property sufficient to trigger the Buyer's obligation to pay the Broker its commission only when all contingencies and conditions to the sale of the Property had been removed and, further, that the close of escrow was a condition precedent to the Buyer's obligation to pay the Broker its commission.

In reversing the trial court's ruling, the appellate court held that the Buyer's obligation to pay the Broker's commission became fixed at the time Buyer entered into the Purchase Agreement, not at the time escrow closed. The appellate court concluded that the Buyer had in fact acquired a beneficial interest in the Property at the time it entered into the Purchase Agreement. As the appellate court explained, "in the context of real estate transactions, a purchaser acquires ... a conditional, equitable title to the property in fee simple, on the execution of an agreement for the purchase and sale."

Under the appellate court's reasoning, because equitable title is a "beneficial interest," once the Buyer entered into the Purchase Agreement the Broker earned its commission. The appellate court also rejected the Buyer's argument that the terms of the Brokerage Agreement conditioned the payment of the Broker's commission on the close of escrow. In short, as the court put it, "[the Broker] earned its commission when [the Buyer] entered into the buy-sell contract subject to the [Brokerage] Agreement, irrespective of whether the sale was consummated."

This posting is intended to summarize recent developments in the law for informational purposes only. It is not intended, and does not constitute, legal advice. We make no warranties of its completeness or accuracy. Because questions regarding the application and interpretation of these and other laws require qualified legal analysis, we ask that you direct any such questions to us following an appropriate, formal retention.