When Is A Real Estate Broker Entitled To A Fee?

In our many years of practice, there are some issues which tend to show themselves at regular intervals.  One such issue that we are regularly asked to clarify is at what point in a transaction is a real estate broker entitled to a fee.

In Massachusetts, a real estate listing broker is usually hired by the seller to list the property for a percentage of the purchase price.  The broker and seller typically sign an exclusive listing agreement, which is a contract setting forth the parameters of the representation, including the percentage commission and length of time which the agent will have to sell the property.  As an extension, the listing agent then offers a percentage of the contracted commission to any buyer’s broker (sometimes referred to as the selling broker) who brings a buyer that ultimately purchases the property.  The brokers then typically receive their payment of commission at the time of the purchase closing.

There are circumstances, however, where a broker lists a property for a seller and shows it to potential buyers according to the terms of the listing agreement, but the property does not ultimately sell during the listing period.  In such a case, the seller may wonder whether he is obligated to pay the broker for the services provided during the listing period.

The current law was set forth by the Massachusetts Supreme Judicial Court in Tristam’s Landing, Inc. v. Wait, 367 Mass. 622, 629-630 (1975).  In Tristam’s Landing, the court announced the “default” rule as to when a real estate broker’s commission becomes due.  In that seminal case, the Court held that, absent a valid contract to the contrary, a real estate broker will be entitled to his or her commission from the seller only if a) the broker produces a buyer who is ready, willing and able to  buy on terms fixed by the seller; b) the buyer enters into a binding contract with the seller to do so; and c) the sale is consummated in accordance with the contract or, if not consummated, the failure of consummation is due to wrongful act or interference by the seller and not to any default by the buyer (emphasis added).  The Court went on to hold that this “default” rule may be easily circumvented by language to the contrary in agreements between sellers and brokers.

What does the court’s ruling in Tristam’s Landing mean for everyday sellers of property?  If your agreement provides nothing more than the “default” rule, you will only be required to pay your broker if he or she brings a ready, willing, and able buyer to the transaction, and 1) the transaction ultimately closes or 2) the transaction does not close, but this failure to close is due to something other than the seller’s wrongful act or interference.  Under this default rule, if the seller is not required to pay his or her broker if the buyer walks away for any reasons related to financing or inspection, as long as the seller did not interfere with the process.

If, however, your listing agreement sets fort something other than the default rule, you will be bound by its terms.  For example, if the listing agreement states that the seller must pay the listing agent an hourly rate for showing the property, or a fixed rate for listing the property on the Multiple Listing Service (MLS), then the seller will be required to pay the rate regardless of whether a buyer is found or the sale is consummated.

Simply put, you should always be sure to read and understand your listing agreement, which will set forth exactly when the broker is entitled to be paid.  If you have any doubts, bring the agreement to an experienced real estate attorney, who will advise you of your rights and obligations before you sign it and obligate yourself contractually.

Sol J. Cohen is a partner at Cohen & Sales, LLC, a Waltham based law firm with a combined 30 years of experience in Real Estate Conveyancing and general litigation.  For more information contact Cohen & Sales, LLC at (617) 621-1151 or info@cohenandsales.com.