Chapter 11
Commissions
INTRODUCTION
Brokers usually receive compensation because of the completion of a transaction, rather than by a salary. This form of compensation is a commission. Only licensed brokers may collect a commission for brokerage activities. The right of an affiliated licensee to a commission derives from the rights of the contractual arrangement between the affiliated licensee and their broker. Generally, brokers may recover a commission based upon the following legal theories: contract, procuring cause and quantum merit.
CONTRACT
Most commonly, a broker becomes entitled to a commission when he or she performs under a contract, usually a listing agreement, a brokerage engagement agreement, or a contract for the sale of realty. In recent years, brokers have also been operating under contracts to buyers to act as buyers’ agents. Other chapters of this book more fully discuss these contracts.
PROCURING CAUSE
Under most circumstances, a broker earns a commission when, during the agency, the broker finds a buyer or a tenant who is ready, able, and willing to buy or lease or who offers to buy or lease on the terms stipulated by, or acceptable to, the seller or the landlord. (O.C.G.A. § 10‑6‑32). “Able” means financially able to purchase or lease. This statute also applies to buyers and tenants. Even before the recent growth in buyers’ brokerage, the Georgia Court of Appeals held that a buyer may contract with a broker to find suitable real property. The broker earns a commission by locating a seller ready, willing, and able to sell on the terms specified by the buyer. Similarly, a broker engaged by a tenant earns a commission by finding a landlord who is ready, willing, and able to lease the property on the terms specified by the tenant. One recurring problem in leases is whether the broker earns a commission on lease renewals, extensions, options, or renegotiations. Carefully drafting the clause providing for commissions on renewals, extensions, options, and renegotiations can prevent many problems. Unless the parties otherwise agree, the right to a commission does not require the sale to close or the tenant to take possession, only that the broker procure a person who is able to buy or lease and offers to buy or lease on terms agreeable to the parties. Nevertheless, the parties can agree by contract to make the right to a commission contingent upon another event, such as the consummation of the closing. Only one broker can be the procuring cause, and commissions are not split between brokers under a procuring cause theory.
LIMITATIONS ON PROCURING CAUSE
A written contract may require an agency relationship and may supersede rights to a commission for being the procuring cause. Unless the seller accepts the buyer’s proposed offer, the terms of the offer to purchase and the terms of the seller’s listing must match exactly. For example, where a listing agreement states the price but includes no discussion of terms for payment, it is assumed that an all-cash listing exists. The broker does not earn a commission by submitting an offer that is not payable entirely in cash. However, if the seller (or other party who engaged the broker) accepts an offer with different terms than those specified in the listing agreement, that party waives adherence to the original terms, and the broker would be entitled to a commission. In a case where the listing agreement states the price as $2,000 per acre “or upon any other terms acceptable to me” and the seller agreed to accept a lower price per acre, the broker earned the commission.
Whether the broker was the procuring cause of the sale is always a question of fact that a party can raise in a lawsuit for the commission. Even an exclusive listing contract does not relieve the broker of the burden of showing that his or her efforts were the procuring cause of the sale. When a broker took no part in the contract negotiations, he was not entitled to a commission. In another case, the broker furnished the names of prospective buyers to the seller, but did not present any offer. The broker did not earn his commission. The court stated:
| If such evidence makes a case of procuring cause, all that an agent would have to do would be to direct a prospective buyer to the property, quote him the price stipulated by the owner, notify the owner, and then sit back and wait for someone else to make the sale . . . |
One important source of confusion in the subject of procuring cause is the role of the broker after the parties sign the sales contract. There is little law on this subject. One case held that a broker’s services are complete when the buyer and seller sign a sales contract. This case did not involve land or real estate brokers. However, in a more recent case involving a real estate broker, a sale did not close after the contract signing, and a broker was penalized for failing to engineer the closing. The court stated:
| We are faced with a situation where each party at interest did nothing to consummate a contract . . . . Thereafter the [broker] did nothing further to carry out the transfer of the property other than to make a few phone calls . . . but was unable to reach them . . . . Nothing was done to insure that a closing date was set . . . . The [broker] was hired to negotiate successfully a sale between the seller and the purchaser. |
The message to the broker is clear. The broker risks the commission unless he or she actively participates in the activities of bringing buyer and seller (or landlord and tenant) together and helps in the negotiations. If the transaction is a sale, a wise broker will monitor the progress of the parties after they sign the contract and will engineer the consummation of sale.
The broker does not earn a commission when he or she has been unable to obtain an appropriate offer and negotiations have broken off, even if later either the owner or another broker closes the transaction with the same person. The right to a commission under a procuring cause theory expires upon the expiration of the agency relationship.
DUTIES OF GOOD FAITH
The duties of good faith that exist between the broker and the broker’s principal affect the right of a broker to recover a commission under a procuring cause theory. If the principal knowingly interferes with the activities of the broker, a broker may still earn a commission. A broker may also receive a commission when the failure to close the transaction is the fault of the principal. Similarly, a broker will lose the right to a commission if the broker withholds important information from the principal such as information about the financial ability of the buyer to close the transaction.
QUANTUM MERUIT
Ordinarily, when one renders a valuable service to another who accepts the service in the absence of an agreement, the law of quantum meruit implies a promise to pay the reasonable value of the service. (O.C.G.A. § 9‑2‑7). Under certain circumstances, a broker may recover a commission under a quantum meruit theory. No agency relationship is necessary to recover under a quantum meruit theory.
LIMITATIONS ON QUANTUM MERUIT
The existence of an actual contract does not prevent a recovery under quantum meruit. While a lawsuit on a contract is inconsistent with a quantum meruit claim, this means only that the broker must elect which remedy to take before the judgment. The person to be liable under a quantum meruit theory must be aware of the work being performed on his or her behalf and must accept the services. Only a licensed broker can recover under a quantum meruit theory for real estate brokerage services.
BUYER’S LIABILITY FOR COMMISSION
If a buyer engages a buyer’s broker or if a prospective tenant engages a broker as a tenant representative, the buyer or tenant may be liable to the broker if the broker performs according to the terms of the engagement agreement. The buyer or tenant will not incur liability for commission if they did not engage the broker, unless the sales contract or lease contains some provision for such liability. A buyer was held liable for the broker’s commission by refusing to close the sale after signing a contract that provided “if the sale is not closed because of Purchaser’s failure or refusal to perform any of Purchaser’s covenants herein, Purchaser shall forthwith pay broker the full commission.” Other cases find an implied liability for a “finder’s fee” due to a broker when that broker finds property for a prospective buyer.
(c) Copyright 2006 Georgia Real Estate Commission and Appraisers Board. All rights reserved.