SECURING AND PROTECTING YOUR BROKER COMMISSIONS
In California, whether or not a real estate broker is entitled to a commission when their client buys, sells or leases a property can be a complicated subject. As a commercial real estate broker there can be nothing quite as disappointing, even as disastrous, as not being paid a commission when a transaction the broker is working on closes. In order for a commercial real estate broker to ensure the best chance of getting paid his/her commission when a deal closes is to make sure the following are complied with:
Maintain a Valid Real Estate License:
The first step to receive a commission on a real estate transaction, is for the real estate broker to maintain an active and valid license issued by the California Department of Real Estate. In California, as a matter of public policy, an unlicensed real estate agent cannot receive a commission on the sale. However, the unlicensed person may be entitled to some compensation for activities that do not require a real estate license. There are also some exceptions to the general rule, for example, a “finder” of real estate may be entitled to a commission even if they are unlicensed, provided that the finder is not performing services that require a license. There are also additional rules that apply when an out-of-state broker sells a California property or when a California broker sells an out-of-state property. To summarize, without a valid license a commercial broker is not entitled to a commission.
Promise to Pay Commission Must be in Writing:
Generally, a real estate broker is only entitled to receive a commission when there is a written agreement between the broker and the principal. Civil Code Section 1624, regarding the Statute of Frauds, states that an agreement with a broker to buy or sell real estate is invalid, unless it is in writing. The form of the written document can vary, but at a minimum, in order to be enforceable, the document must: (1) be between the broker and principal, (2) manifest an objective mutual intent to be bound, (3) contain the terms of consideration that the principal will accept, (4) identify the property, and (5) contain a promise by the principal to pay the broker a commission. The amount of the commission is not set by law but is a matter of negotiation between the broker and the principal. Lastly, the document must be signed by the principal. There are some exceptions to the general rule but as a matter of good business practices brokers should always have a detailed contract signed by the principal regarding the payment of the broker’s commission.
Commission Must be Earned:
A broker’s right to commission is not earned until the broker has performed whatever conditions he/she agreed to in the agreement with the principal. For example, the broker finding a buyer that desires to purchase the property on the terms offered by the seller could trigger the right to a commission. Depending on the particular terms of the agreement, the broker’s commission could be earned at different times. For example, the broker’s commission may not be earned until the principal signs a contract with a buyer or seller, or the parties could agree that the commission is not paid until the sale transaction closes. Also, in certain cases, a broker could earn a commission if it procures a buyer or seller that is “ready, willing, and able” to complete the transaction on terms that are acceptable to the buyer or seller, even though no formal contract to sell has been entered into. Sometimes there are situations where a broker secures a buyer but before the transaction closes, one party cancels the contract. In these situations, the broker may or may not be entitled to a commission based on the terms of the broker and principal agreement. It is good business practice to include provisions in the broker/principal agreement that spell out the right to a commission in the event one party cancels the contract.
Brokers should pay special attention to the commission provisions in their agreement with the principal to ensure that it accurately reflects that the broker is entitled to a commission, the rate of the commission, the events that trigger the payment of the commission and the method of when/how the commission payment will be made.
Ultimately, there will always be factors outside of a broker’s control, however, by understanding your rights and responsibilities as a commercial real estate broker, you can better ensure that your commission will be secured and protected.
The information above is by no means exhaustive, and does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only and do not create an attorney-client relationship. The experienced and knowledgeable attorneys at Blake Law Firm are available to help you navigate your legal matters.