A good piece of advice for anyone buying real estate is buyer beware. But recent court rulings show that sellers, too, should beware; clauses in the listing agreement can mean the realtor can claim a commission – even if a sale doesn’t close.
A high-profile case in British Columbia this spring saw homeowners Mike and Sheila Armstrong ordered to pay $52,500 in commissions even though a buyer who agreed to pay $1.35-million for two Lake Errock cabins backed out of the deal. While many might think that a salesperson needs to sell something in order to gain a commission, Justice Sheila Tucker of B.C.’s Superior Court noted the listing agreement contract the couple signed didn’t specify that outcome: “The Commission Clause does not refer to a closing or completion … The Commission Clause read on its own discloses that commission is tied to the existence of an enforceable contract.”
Real estate lawyers have reported an uptick in legal actions related to real estate deals that fell apart owing in part to rapid shifts in interest rates.
“It is often the case that terms form part of an agreement of purchase and sale that are not favourable to buyers and sellers,” said Daniel Waldman, a real estate litigator with Dickinson Wright LLP. He says claims by buyers or sellers that they didn’t understand such an important clause won’t cut it in front of a judge. “Courts will often still stand by the rule that the party is stuck with the agreement they signed. There are some exceptions, such as when the party is not sophisticated, where English is not their first language, or where they can show that they were taken advantage of or unduly pressured to sign something.”
In her ruling, Justice Tucker cited a stark warning found in the 2001 case of 978011 Ontario Ltd. v. Cornell Engineering Co. from Ontario Court of Appel judge Karen Weiler: “Absent a special relationship, the common law in Canada has yet to recognize that in the negotiation of a contract, there is a duty to have regard to the other person’s interests, namely, to act in good faith.”
That their own agent has no duty of good faith to them might be a shock to sellers.
“Buying or selling a house is a high-stress time and clients will often be looking to the agent for many different kinds of advice,” said James RG Cook, litigator with Gardiner Roberts LLP. “People don’t view it as a cold, hard, contractual relationship. From the agent’s perspective the contract is there to protect them.”
In Ontario, Canada’s largest real estate market, the vast majority of listing agents sign sellers up with a contract provided by the Ontario Real Estate Association. According to Brian Madigan, a lawyer and broker with Re/Max Realty West who is often called upon as an expert witness in real estate contract disputes, the standard form doesn’t even say a sale has to be accepted or successfully completed for a commission to be owed. It merely reads: “for any valid offer to purchase the Property from any source whatsoever obtained during the Listing Period and on the terms and conditions set out in this Agreement OR such other terms and conditions as the Seller may accept.”
And in case that’s not clear enough it goes on: “The Seller further agrees to pay such commission as calculated … even if the transaction contemplated by an agreement to purchase agreed to or accepted by the Seller or anyone on the Seller’s behalf is not completed, if such non-completion is owing or attributable to the Seller’s default or neglect.”
As Mr. Madigan points out, seller neglect or default is not necessary for a commission to be owed, and buyer default isn’t even mentioned.
“OREA does not offer guidance to its members on matters pertaining to commissions,” said OREA spokesperson Jean-Adrien Delicano. Nevertheless, OREA’s forms are used thousands of times a year and they default to strong protections for agents.
“All of our Forms and Clauses go through an annual review process that keeps them current with emerging market trends, changes in legislation, and regulation,” wrote Ms. Delicano in a statement.
The counterpoint from working agents is the contract isn’t that important because it is career suicide to demand commissions on deals that didn’t happen.
“The way I operate, we’re only getting paid on successful completion,” said Andre Kutyan, broker with Harvey Kalles Real Estate Ltd. “It would be bad business for me to go around suing clients: word’s going to get around pretty fast.” Still, he acknowledges not everyone thinks as he does. “As the market might change, with more hungry agents and sellers … you might see more of this thing coming up.”
The solution, according to Mr. Madigan, is simple: don’t sign the standard listing agreement contract without changing it. “One of the things you could do to it is add in a line like ‘commission is payable only if transaction closes,’ or words to that effect,” he said. While that may mean engaging a lawyer to assist you, Mr. Waldman urges sellers to consider it. “If you’re buying and selling real estate, you will be hiring a lawyer in any event, so it’s a good idea to use them to the fullest extent possible. It can save a headache down the line,” he said.
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