Question/Answer Memo for Material on Brokerage (pages 2-21)

1. I have a question for you about Drake. The court focuses on the seller’s frustration of the contractual agreement as their reason to find in favor of the broker.  Most broker’s agreements provide for a listing period and they also state that the broker is entitled to a commission if the buyer sells the property within a certain period of time after the listing period.  I assume that this would have been a clause in the Drake case.  Would it have been easier for the court to use the listing period (if there was one) in their reasoning?

You’re correct that this kind of provision is typical in listing agreements.  There’s a similar provision in the form agreement in the book in paragraph 10(e) on page 5. The purpose of this kind of provision is to keep the Seller from getting a possible buyer during the listing period, dragging his/her feet so that the deal never closes until after the listing period expires, and then closing and claiming no commission is owed to the broker.  The broker doesn’t want to incur lots of cost and time “setting up” the deal only to have the Seller strategically avoid the commission by manipulating the timing of the closing.

You’re also correct that this kind of provision could (possibly) have protected Hosley in the Drake v. Hosley case, if it had been in Hosley’s listing agreement.  As a result, I doubt Hosley’s listing agreement did have such a provision in it. The listing agreement in Drake v. Hosley would have been quite atypical. Hosley and Drake signed the listing agreement on March 5, 1984, and by its terms it expired less than one month later (March 30, 1984).  That’s not very long.  What that suggests to me is that Hosley and Drake probably signed this listing agreement because Hosley had already identified these three buyers as interested.  That’s the only explanation for why the listing period would have been so short.  Otherwise, it would make no sense; as broker, 25 days is hardly long enough to list the property, advertise it, and identify potential buyers.

If a listing period was only going to be 25 days, that probably reflects that the parties were contracting with the idea that “OK, I’ll give you 25 days to get a deal done with these guys, otherwise I’m free to sell it on my own or through another broker.”  In that context, it wouldn’t be likely that you would see a broad carry-over provision like the one in paragraph 10(e) of the form agreement in the book.

This is the issue addressed by note 2 on page 17 following Drake. It is not clear whether this language would cause a court in a traditional "ready, willing, and able" state to conclude that the parties intended to contract for the Dobbs rule. Some courts (see Chamberlain v. Porter, p. 18) have held that this language incorporates the Dobbs result into the contract and thus seller would not be liable for a commission if the buyer failed to close. Others (see Fairbourn Commercial, Inc. v. Am. Housing Partners, p. 18) have held that similar language did not displace the traditional ready, willing, and able test, and that the seller was still liable for the commission. In that particular case, the court held that the seller was liable for the commission, but didn't actually have to pay it until the seller was able to re-sell the property.

2. Under the Dobbs rule, if Buyer breaches, the broker isn't entitled to a commission because the sale never actually closed. But the broker is still out the expenses incurred in finding that Buyer. Does the broker have any ability to recover those costs from the Buyer? Is there any method that would allow the broker to recover the cost that he or she incurred as a result of the Buyer's breach, perhaps something along the lines of promissory estoppel?

Generally speaking, the answer is no. Courts have not held that a buyer owes any duty to the seller’s agent, either in contract or in tort. No contract, no damages for breach of contract. Having said that, it is conceivable that you could have a particularly egregious set of facts where equitable estoppel might arise. It would be pretty exceptional, but suppose you had this situation. Seller and Buyer have a contract scheduled to close May 1. Broker runs into Buyer in Circuit City and they start talking. Broker says to Buyer “I’d like to be able to buy that HD TV set for the NCAA tournament, but I have to wait until this deal closes and I get the commission money in hand.” Buyer says to Broker, “You don’t have to worry about whether the deal will close. No question, this deal is getting done. Go ahead and buy that TV.” So Broker goes ahead and buys it. In a purely legal sense, Broker has no basis to rely upon this sort of guarantee of closing because they have no contract and this verbal exchange doesn't constitute one. Still, if presented with facts like that, a court could say Buyer was estopped from raising the absence of contractual relationship as a defense if Broker sued Buyer for damages for the lost commission, at least to the extent of the cost of the TV set. That would be a pretty bizarre set of facts, of course. In the more common and typical case, a broker representing the seller would have no ability to recover against a defaulting buyer.

This explains why the broker may often have a provision in the listing agreement like paragraph 13 in the listing agreement form (page 5 of the casebook). This is an agreement between the seller and the broker that if the buyer breaches and forfeits its earnest money deposit, the broker is entitled to half of that deposit from Buyer, up to the commission that the broker would have earned if the deal had closed. This way, the broker can recoup its expenses (and perhaps more), even though it doesn't have any legal basis for proceeding directly against the defaulting Buyer.

3. Does a broker representing the Seller have any duty to the Seller to investigate a prospective buyer’s financial ability to close? What if the broker finds a buyer that the broker suspects or reasonably should suspect won’t be able to obtain financing? If the buyer signs a contract for sale of land, but then cannot get the financing, does the broker still get the commission?

This is a good question,with several different subquestions/subissues built into it. It is important to keep straight here whether we are talking about the broker's duty to investigate on behalf of its own client or the broker's duty to disclose information about the broker's client to the other party. There have been some cases in which a broker has been held liable for failure to disclose adverse financial information about the buyer. Note 9 on page 21 includes a citation to the notorious Lombardo case, in which the Arizona Supreme Court held a broker representing the buyer was liable for failure to disclose to the seller that the buyer was unlikely to qualify for financing.

By contrast, if I understand this question correctly, it focuses upon whether a broker representing the seller owes any duty to the seller with respect to the buyer's financial condition and the buyer's ability to close. This question is more properly evaluated by reference to the duty of care and/or loyalty that the broker owes to the seller as his/her client. This may be expressly stated in their agreement (e.g., ¶ 20 of the contract form on page 6 of the casebook), but even if it isn't, a court would say that the broker for the seller owes his/her client a duty of loyalty and reasonable care.

Certainly, if the broker representing the seller learns that a prospective buyer is insolvent or is unlikely to obtain financing, that broker would breach its duty of loyalty if he/she did not tell the seller and the seller as a result entered into a contract with the buyer in which the buyer unconditionally agreed to perform. In that circumstance, if the broker tried to collect a commission on a sale that fell through after the buyer didn't qualify for financing, and the seller can prove the broker knew or had reason to know that of the buyer's financial condition, a court would say that the broker breached its duty of loyalty. In that case, the broker could not enforce the listing contract and recover a commission (having materially breached the contract by breaching its duty of loyalty).

That's not the same thing, however, as saying that the broker would have a duty to investigate the buyer's financial condition. Brokers customarily do NOT have any such duty. Brokers don't customarily do credit checks on prospective buyers. Prospective buyers often would be reluctant to share financial information with a broker for the seller (for fear that the broker and seller might use that information to the prospective buyer's disadvantage in negotiating the price and terms). And some financial information about the buyer (e.g., whether the prospective buyer is current on existing loans and what the balance of those loans are) couldn't be discovered by the broker without the prospective buyer's consent anyway, under existing financial privacy laws. So unless the broker agrees with the seller, in the listing agreement or otherwise, to undertake a duty to investigate the buyer's financial condition, the seller's broker has no such duty of investigation.

Also, keep in mind that if the contract between the buyer and the seller provides that the buyer's obligation is contingent upon the buyer obtaining financing (a common contingency in many transactions), then even under the common law rule, the buyer is not "ready willing and able" unless the buyer actually obtains financing, because only then is the buyer unconditionally bound (i.e., the buyer isn't unconditionally obligated until the contingency is resolved).

4. I have a question about the issues discussed in note 2 on page 17. It's about the problem where the listing agreement says that the commission "will be paid from the proceeds available at closing.” One of the cited cases says that this language would not give the Seller the benefit of the Dobbs rule, but shouldn't the court construe that language in the Seller's favor?

That's not entirely clear. Some courts (see Chamberlain v. Porter, p. 17) have held that this language incorporates the Dobbs result into the contract and thus seller would not be liable for a commission if the buyer failed to close. Others (see Fairbourn Commercial, Inc. v. Am. Housing Partners, p. 17) have held that similar language did not displace the traditional ready, willing, and able test, and that the seller was still liable for the commission. [In the latter case, the court held that the seller was liable for the commission, but didn't actually have to pay it until the seller was able to re-sell the property.]

If I were representing the Seller in litigation vs. the broker in this situation, I would argue that the contract should be viewed as ambiguous and that it should be construed against the broker. But that argument is not a "lay-down." If the agreement was based upon a form contract provided by the broker — i.e., if the language "will be paid from the proceeds available at closing" is part of the broker's stock form contract language — then I think would be a good argument. But language like "will be paid from the proceeds available at closing" typically isn't included in a form drafted or recommended by realtor groups. Their form contracts tend to use the "ready, willing, and able" language like the form on page 3 of the casebook. It is more likely that language like "will be paid from the proceeds available at closing" would come from language insisted upon by the Seller. If so, a court might be less inclined to use the "ambiguous language is construed against the drafter" argument so as to construe that language against the broker.

If I had been representing the Seller at the beginning of the transaction, when Seller was entering into an agreement with the broker, I'd have told Seller to make this more explicit — that the broker would not earn a commission unless the buyer actually performed. [Of course, Sellers almost never get any legal advice before entering into a listing agreement. As a result, they inevitably sign a form that contains the "ready, willing, and able" language — and in states that haven't adopted the Dobbs rule, that language is most protective of the broker.]