Conditions Precedent in Brokerage Agreements

In the absence of language to the contrary, a real estate broker in New York becomes entitled to a commission when the broker produces a purchaser who is ready, willing, and able to consummate the sale. That is, if the seller changes its mind, or proves unable to deliver title, the seller remains liable for the broker's commission. Dispute about whether broker has procured a ready, willing, and able buyer has generated considerable litigation, but those disputes are not the subject of this article. Instead, this article focuses on the import of “language to the contrary” — language that purports to alter the common law obligation of the seller to the broker.

The Dagar Case

Consider the problem that recently confronted the Second Department in Dagar Group, Ltd v. South Hills Mall, LLC (NY Law Journal, 11/30/04, p. 29, col. 2). The landlord entered into a brokerage agreement with a termination date of Dec. 31, 2000. The agreement required the broker to provide the landlord with a list of prospective tenants it had solicited within 30 days of the termination date, and the broker would become entitled to a commission if a lease for space in landlord's shopping mall was “signed and delivered” within 1 year of the landlord's receipt of the list. The broker sent the lists to the landlord by letters dated Jan. 19 and Jan. 26 of 2001. One of the firms on the list ultimately executed a lease on March 1, 2002 – more than 13 months after the landlord received the list from the broker. The landlord refused to pay the commission, and the broker sued.

The Appellate Division started its analysis by recognizing that a broker and his principal may, by contract, condition the broker's commission on the occurrence of events beyond procurement of a ready, willing, and able buyer. In Dagar Group, the parties had conditioned the commission on delivery of a lease within a one-year period, and that event had nor occurred. But the court held that seller was not entitled to summary judgment because triable issues of fact remained as to whether seller was responsible for failure of the condition by delaying execution of the lease.

The court's opinion raises an important question: How should courts construe brokerage agreements that impose a condition — other than procurement of a buyer – on the broker's right to a commission? Often, a brokerage agreement will require “closing of title”; in Dagar, by contrast, the condition was delivery of a lease within a specified period. The most straightforward way to construe these conditions is to hold that if the condition does not occur, for whatever reason, the broker is not entitled to the commission. This approach honors the words chosen by the parties, who have, after all elected to modify the standard brokerage agreement. If the parties had intended for the broker to receive a commission, in some circumstances, even if the condition were not satisfied, the parties could have included language specifying those circumstances.

The Court of Appeals' Approach

The Court of Appeals has not, however, adopted that approach. In Colvin v. Post Mortgage and Land Co., 225 NY 510, the seller and broker agreed that the broker would receive a commission form “each installment of the purchase price as and when the same is received.” After the purchaser made a small initial payment, a dispute arose between the purchaser and seller about clouds on title, and no further payments were made. When the broker brought an action for commissions, the Court of Appeals held that the seller was not entitled to summary judgment. The court held that if “the sale fails through the seller's fault” the broker should not lose its commission. Id. at 517. The court acknowledged that the parties could agree explicitly that the broker would be entitled to no commission if the sale falls through because of the seller's fault, but indicated that “[c]ommonly … such is not the meaning of the parties and an agreement should not be so construed unless such a result is clearly intended.” Id. at 516.

Since Colvin was decided in 1919, the court has developed several principles to refine what it means for a sale to fail through the seller's fault. First, seller's failure to bring an action for specific performance against a defaulting buyer does not constitute “seller's fault” entitling the broker to a commission on the failed sale. Thus, in Amies v. Wesnofske, 255 NY 156, seller agreed to pay the broker's commission “half on the contract and half on the closing of the deal. The purchaser defaulted at closing, and seller ultimately released them from their contract obligation, retaining the down payment. When the broker brought an action to recover the second half of its commission, the Court of Appeals rejected the claim, concluding that no recovery could be had because seller's “passive acquiescence in a declared default … was not an act of prevention or hindrance.”

Second, if the condition precedent does not occur because of some act of the seller before purchaser and seller enter into the contract, the broker is not entitled to recover. Graff v. Billet, 64 NY2d 899, is illustrative. The brokerage agreement provided that the commission would be due when “title passes.” Although broker procured a purchaser willing to sign a sale contract, seller refused to sign the agreement because seller had subsequently received a better offer. The broker brought an action for its commission, contending that seller's willful default had prevented the passing of title. The court rejected the argument , concluding that without an executed sales contract, the “seller's mere refusal to enter into [a contract] with the broker's prospective buyer is not a “fault” or “default” of the seller in the absence of any specific commitment by the seller in the brokerage agreement to enter into the sales contract.” Id. at 901-02.

Other Cases

In other cases, however, the approach taken by the Court of Appeals requires resolution of questions of fact – whether the contract did not close because of the seller's “fault” – before the dispute over the broker's commission can be resolved. See, e.g., Levy v. Lacey, 22 NY2d 271 (questions of fact unresolved about whether seller was at fault when seller offered purchaser option between canceling contract and taking necessary proceedings to clear title); Stern v. Gepo Realty Corp., 289 NY 274 (questions of fact unresolved about whether title failed to close because of seller's neglect and refusal to discharge liens). The questions of fact to be resolved can be of two types: first, did the seller commit a wrongful act (the issue in the Levy case), and second, did the alleged wrongful act prevent the occurrence of the condition precedent (the issue in Stern v Gepo Realty).

Perhaps the approach taken by the Court of Appeals in this cases best effectuates the intentions of the parties to the brokerage agreement. An alternative view, however, is that parties subject commissions to conditions precedent in order to avoid difficult questions of fact about whether failure of the parties to close was the result of wrongdoing by the buyer or the seller. The message for brokers and sellers, however, is that in order to avoid disputes over wrongdoing, the brokerage agreement must make it explicit that the commission is conditioned on the condition precedent, even if failure of the condition to occur is caused in whole or in part by the seller's actions.

In the absence of language to the contrary, a real estate broker in New York becomes entitled to a commission when the broker produces a purchaser who is ready, willing, and able to consummate the sale. That is, if the seller changes its mind, or proves unable to deliver title, the seller remains liable for the broker's commission. Dispute about whether broker has procured a ready, willing, and able buyer has generated considerable litigation, but those disputes are not the subject of this article. Instead, this article focuses on the import of “language to the contrary” — language that purports to alter the common law obligation of the seller to the broker.

The Dagar Case

Consider the problem that recently confronted the Second Department in Dagar Group, Ltd v. South Hills Mall, LLC (NY Law Journal, 11/30/04, p. 29, col. 2). The landlord entered into a brokerage agreement with a termination date of Dec. 31, 2000. The agreement required the broker to provide the landlord with a list of prospective tenants it had solicited within 30 days of the termination date, and the broker would become entitled to a commission if a lease for space in landlord's shopping mall was “signed and delivered” within 1 year of the landlord's receipt of the list. The broker sent the lists to the landlord by letters dated Jan. 19 and Jan. 26 of 2001. One of the firms on the list ultimately executed a lease on March 1, 2002 – more than 13 months after the landlord received the list from the broker. The landlord refused to pay the commission, and the broker sued.

The Appellate Division started its analysis by recognizing that a broker and his principal may, by contract, condition the broker's commission on the occurrence of events beyond procurement of a ready, willing, and able buyer. In Dagar Group, the parties had conditioned the commission on delivery of a lease within a one-year period, and that event had nor occurred. But the court held that seller was not entitled to summary judgment because triable issues of fact remained as to whether seller was responsible for failure of the condition by delaying execution of the lease.

The court's opinion raises an important question: How should courts construe brokerage agreements that impose a condition — other than procurement of a buyer – on the broker's right to a commission? Often, a brokerage agreement will require “closing of title”; in Dagar, by contrast, the condition was delivery of a lease within a specified period. The most straightforward way to construe these conditions is to hold that if the condition does not occur, for whatever reason, the broker is not entitled to the commission. This approach honors the words chosen by the parties, who have, after all elected to modify the standard brokerage agreement. If the parties had intended for the broker to receive a commission, in some circumstances, even if the condition were not satisfied, the parties could have included language specifying those circumstances.

The Court of Appeals' Approach

The Court of Appeals has not, however, adopted that approach. In Colvin v. Post Mortgage and Land Co. , 225 NY 510, the seller and broker agreed that the broker would receive a commission form “each installment of the purchase price as and when the same is received.” After the purchaser made a small initial payment, a dispute arose between the purchaser and seller about clouds on title, and no further payments were made. When the broker brought an action for commissions, the Court of Appeals held that the seller was not entitled to summary judgment. The court held that if “the sale fails through the seller's fault” the broker should not lose its commission. Id. at 517. The court acknowledged that the parties could agree explicitly that the broker would be entitled to no commission if the sale falls through because of the seller's fault, but indicated that “[c]ommonly … such is not the meaning of the parties and an agreement should not be so construed unless such a result is clearly intended.” Id. at 516.

Since Colvin was decided in 1919, the court has developed several principles to refine what it means for a sale to fail through the seller's fault. First, seller's failure to bring an action for specific performance against a defaulting buyer does not constitute “seller's fault” entitling the broker to a commission on the failed sale. Thus, in Amies v. Wesnofske , 255 NY 156, seller agreed to pay the broker's commission “half on the contract and half on the closing of the deal. The purchaser defaulted at closing, and seller ultimately released them from their contract obligation, retaining the down payment. When the broker brought an action to recover the second half of its commission, the Court of Appeals rejected the claim, concluding that no recovery could be had because seller's “passive acquiescence in a declared default … was not an act of prevention or hindrance.”

Second, if the condition precedent does not occur because of some act of the seller before purchaser and seller enter into the contract, the broker is not entitled to recover. Graff v. Billet , 64 NY2d 899, is illustrative. The brokerage agreement provided that the commission would be due when “title passes.” Although broker procured a purchaser willing to sign a sale contract, seller refused to sign the agreement because seller had subsequently received a better offer. The broker brought an action for its commission, contending that seller's willful default had prevented the passing of title. The court rejected the argument , concluding that without an executed sales contract, the “seller's mere refusal to enter into [a contract] with the broker's prospective buyer is not a “fault” or “default” of the seller in the absence of any specific commitment by the seller in the brokerage agreement to enter into the sales contract.” Id. at 901-02.

Other Cases

In other cases, however, the approach taken by the Court of Appeals requires resolution of questions of fact – whether the contract did not close because of the seller's “fault” – before the dispute over the broker's commission can be resolved. See, e.g., Levy v. Lacey , 22 NY2d 271 (questions of fact unresolved about whether seller was at fault when seller offered purchaser option between canceling contract and taking necessary proceedings to clear title); Stern v. Gepo Realty Corp. , 289 NY 274 (questions of fact unresolved about whether title failed to close because of seller's neglect and refusal to discharge liens). The questions of fact to be resolved can be of two types: first, did the seller commit a wrongful act (the issue in the Levy case), and second, did the alleged wrongful act prevent the occurrence of the condition precedent (the issue in Stern v Gepo Realty).

Perhaps the approach taken by the Court of Appeals in this cases best effectuates the intentions of the parties to the brokerage agreement. An alternative view, however, is that parties subject commissions to conditions precedent in order to avoid difficult questions of fact about whether failure of the parties to close was the result of wrongdoing by the buyer or the seller. The message for brokers and sellers, however, is that in order to avoid disputes over wrongdoing, the brokerage agreement must make it explicit that the commission is conditioned on the condition precedent, even if failure of the condition to occur is caused in whole or in part by the seller's actions.