The safety clause

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This article demonstrates the use of a safety clause in a listing to earn a fee after the listing has expired for the time and effort spent with prospective buyers during the listing period.

A fee earned after the listing expires 

A broker is retained to represent a seller under an employment agreement, commonly called a listing. The listing, whether open or exclusive, contains a safety clause entitling the broker to the agreed fee, if: 

  • a person has contact with the broker (or his agent) regarding the property during the listing period, called solicitations
  • the broker treats the person as a prospective buyer by providing the person with information about the property, legally called negotiations
  • negotiations with the person terminate without resulting in a sale; 
  • on expiration of the listing period, the broker registers the person with the seller as a prospective buyer; and 
  • the person and the seller, with or without involving the broker, later commence negotiations within a specified time period following the expiration of the listing, called the safety period, and ultimately complete a sale of the property. 

For example, during the listing period, a broker’s listing agent has contact with prospective buyers. All of the buyers are handed a listing package fully disclosing the property’s condition. 

The listing agent’s discussions with each buyer and the property information given to each buyer, as well as to any buyer’s agent, is noted on an Activity Report Sheet in the agent’s listing file. [See first tuesday Form 520] 

Also, each prospective buyer’s name, address or phone number are added to the list of prospective buyers for the property on a registration form also maintained in the listing file. [See Form 122 accompanying this article] 

After “follow-up” conversations with the prospective buyers, the listing agent does not have any further contact with any of them. 

The listing period expires and the property remains unsold. After the listing expires, the listing agent sends the seller the list of prospective buyers he has entered on the registration form and closes his file on the property. The list includes all those buyers who, during the listing period, were in contact with, and received information about the property from, the broker, his agents or through the buyer’s broker. [See Form 122] 

Within the safety period after the listing agreement expires, a buyer registered by the agent on the list of prospective buyers enters into negotiations with the seller to purchase the property. Negotiations ultimately result in a completed sale. Neither the broker nor his listing agent are involved in the renewed negotiations in any way. 

On the listing agent’s discovery of the completed sale, the broker makes a written demand on the seller for his fee as earned under the safety clause in the expired listing. 

The seller refuses to pay the broker a fee, claiming the broker has no right to a fee since neither the broker nor his agent was the procuring cause of the sale, i.e., the broker did not obtain and submit the offer. 

The broker claims he does not need to be the procuring cause to be entitled to a fee since a prospective buyer who was provided information about the property during the listing period acquired the property as a result of negotiations commenced during the safety period

Is the broker entitled to a fee from the seller? 

Yes! The seller owes the broker a fee under the safety clause in the listing agreement’s fee provision. A prospective buyer, who reviewed information about the property with the broker’s agent during the listing period, was registered with the seller. After the listing expired, the registered buyer acquired the property as a result of negotiations commenced during the safety period, either directly with the seller or through another broker. Payment of a fee in the listing agreement’s fee provision was not limited solely to procuring a buyer. [Leonard v. Fallas (1959) 51 C2d 649] 

Contrary to the claims of the seller, a broker will never be the procuring cause of a sale when the brokerage fee is earned under the safety clause. The safety clause is always triggered by negotiations which have a “fresh start” after the listing expires. 

Negotiations initiated during the listing period, which continue, with or without the broker, beyond the expiration date on the listing and result in a purchase agreement being entered into with the seller, are the essence of procuring cause. 

The safety net for due diligence 

A safety clause in the fee provision of a listing agreement extends for an additional period after the listing expires the right of a broker to earn a fee for the time and money the broker and his listing agent invest during the listing period in their effort to market the listed property and locate a buyer. The clause preserves the broker’s and listing agent’s expectations of earnings for exposing the property to prospective buyers during the listing period should the prospective buyer become disinterested, break off negotiations, and then later reappear after the listing expires to buy the property. 

Thus, the broker is assured a fee under the safety clause if: 

  • information about the property is provided to prospective buyers during the listing period by his listing agent; 
  • the seller is notified of the identification of the prospective buyers as soon as possible after termination of the listing; and 
  • a prospective buyer from the list acquires the property as a result of negotiations commenced during the safety period. 

Theoretically, an agent’s knowledge of prospective buyers is information the seller is entitled to on expiration of the listing should the seller request the information, with or without a safety clause. 

The terms of the safety clause 

A safety clause is usually included in the fee provision of a listing agreement. Both the open and exclusive types of seller’s and buyer’s listing agreements typically contain safety clause provisions. [See first tuesday Forms 102 §3.1(d) and 103 §5.1(c)] 

The safety clause imposes an obligation on the seller to pay a fee on a sale which resulted from negotiations with registered prospective buyers commenced by anyone within the safety period. 

Like an exclusive listing agreement, the safety clause also contains an expiration date, establishing a time period during which the clause is in effect. Typically, safety clauses are drafted to cover a sufficient and reasonable period of time needed to protect the agent’s time and effort spent with prospective buyers on behalf of the seller. The safety clause period commences on termination of the listing period. 

The listing is terminated, commencing both the safety clause period and the period for putting the seller on notice of prospective buyers, upon: 

  • the seller’s withdrawal of the property from the market during the listing period; 
  • the seller’s termination of the agency before expiration of the listing period; or 
  • expiration of the listing agreement by its own terms. 

The seller’s premature termination of the broker’s agency relationship does not also terminate the listing period in an exclusive listing agreement which fails to contain a termination- of-agency fee provision. [Century 21 Butler Realty, Inc. v. Vasquez (1995) 41 CA4th 888] 

Whether or not the listing contains a termination-of-agency clause, premature termination should be treated as an act which commences the safety clause period. Thus, on premature termination of the agency, withdrawal or expiration of the listing period, the agent should send the seller his list of prospective buyers to perfect his right to earn a fee under the safety clause should a prospective buyer later commence negotiations and buy the property. 

Perfecting the safety clause 

A broker has the burden of perfecting his right to a fee under the safety clause. 

Several crucial activities must be performed by the listing agent to establish his broker’s right to a fee under the safety clause, including: 

  • providing information about the listed property to any prospective buyers he or cooperating brokers have contact with; 
  • documenting dealings with prospective buyers by maintaining an Activity Report Sheet in a listing file [See first tuesday Form 520]; and 
  • registering the prospective buyers with the seller on termination of the listing by providing the seller with a List of Prospective Buyers in a timely manner (e.g., within 21 days). [See Form 122] 

Most listing agreements contain broker cooperation provisions which authorize brokers to work with and share fees with other brokers who represent buyers interested in the listed property. [See first tuesday Form 102 §4.2] 

Thus, when registering prospective buyers with the seller, the broker whose listing contains a broker cooperation provision should be sure to include any buyers with whom buyer’s brokers dealt. If a sale covered by the safety clause occurs, both brokers will be protected and will share the fee. 

The disclosure of the prospective buyers by registration with the seller is required to “arm” the safety clause. Thus, by registration, the broker perfects his right to earn a fee under the clause. If a prospective buyer registered by the broker or his agent enters into negotiations during the safety period, and as a result acquires the listed property, the broker has earned a fee. 

Negotiations which result in a sale do not need to be concluded during the safety clause period to qualify the broker for a fee. Escrow also does not need to be closed prior to the expiration of the safety period. Once negotiations are commenced during the safety clause period, which leads to a sale of the listed property to a registered prospective buyer, the broker has earned his fee. An acceptance of a purchase offer or the close of a sales escrow relates back to the date negotiations commenced, a date which, if it falls within the safety clause period, entitles the broker to a fee. [Leonard, supra

Contact with prospective buyers 

The degree of involvement a broker or his agents must have with a buyer during the listing period in order to qualify the buyer as a prospective buyer is set by the terms of the safety clause. 

For example, a fee provision may state the broker or his agents are required to personally introduce the property to a buyer to qualify the buyer as a prospective buyer, not merely conduct negotiations over the phone. [Korstad v. Hoffman (1963) 221 CA2d Supp. 805] 

For all listings, a buyer is not a prospective purchaser under the safety clause if the buyer’s only relationship with the broker is the buyer’s observation of a “For Sale” sign on the property or of a published advertisement regarding the property placed by the broker or his agent. [Simank Realty, Inc. v. DeMarco (1970) 6 CA3d 610] 

At the very least, a broker or his listing agent is required to provide the buyer with information regarding the property to qualify as having commenced negotiations. The agent does not need to produce a written offer from a buyer for the buyer to be a prospective purchaser. 

Consider a broker who is retained by a seller under an exclusive right-to-sell listing agreement which contains a safety clause requiring prospective buyers to have negotiated with the broker or his listing agent. [See first tuesday Form 102 §3.1(d)] 

During the listing period, the agent has contact with and provides property information to several individuals. The list of prospective buyers is prepared and delivered to the seller. The listing agent includes the names of people who were not contacted or were not provided with any information about the listed property. 

During the safety clause period, a person who was registered, but had no contact with the broker or the listing agent, negotiates to purchase the property directly from the seller (or through another broker). The negotiations result in a sale. 

The broker makes a demand on the seller for a fee since a person registered as a prospective buyer acquired the property through negotiations which commenced during the safety period. 

The seller refuses to pay a fee, claiming the broker’s listing agent never treated the person as a prospective buyer since the listing agent never exposed the person to the property in any way. 

Has the broker earned a fee under the safety clause? 

No! For the broker to earn a fee under this safety clause, the broker, his listing agent or another agent employed by the broker must have entered into negotiations with the likely buyer. For the listing agent’s contact with the buyer to be equated with negotiations, the listing agent or another agent of the broker must have handed the buyer information regarding the property, such as its income and expenses, title conditions, property conditions or operating conditions. At no time during the listing period did the listing agent review any aspect of the property with the buyer or the buyer’s agent. [Hobson v. Hunt (1922) 59 CA 679] 

Price paid 

Now consider a listing agent who markets a property for a seller under a listing which contains a safety clause requiring negotiations with the buyer as one condition for receiving a fee. The listing agent provides detailed information on the property to a likely buyer, including water availability and an estimate of assessments on the property. The agent has several follow-up conversations with the prospective buyer about the property. 

The buyer becomes disinterested in the property due to his interest in another property. On expiration of the listing period, the listing agent registers the buyer with the seller by delivering the agent’s list of prospective buyers as required by the safety clause. 

During the safety clause period, the buyer is contacted by the seller regarding the property. Negotiations result in the prospective buyer’s purchase of the property for less than the listed price. 

The listing agent’s broker learns of the sale and makes a demand on the seller for a fee. 

The seller refuses to pay a fee, claiming the broker is not entitled to a fee since the price paid for the property was less than the full listing price. 

The broker claims he has earned a fee since the sale was to a registered buyer who negotiated to purchase the property during the safety clause period and acquired it. 

Here, the broker is entitled to the agreed fee under the safety clause since the buyer: 

  • reviewed the property with the listing agent during the listing period; 
  • was registered with the seller on expiration of the listing; 
  • negotiated with the seller (or an agent of the seller) during the time period covered by the safety clause; and 
  • ultimately purchased the property due to the negotiations. 

Based on the price paid for the property, the broker earns the percentage of the price paid (or the fixed fee) stated in the listing agreement. [Delbon v. Brazil (1955) 134 CA2d 461] 

Dual liability on relisting 

A properly worded and perfected safety clause remains enforceable even when a seller relists the property for sale with another broker after the original listing expires. [See first tuesday Form 102 §3.1(d)] 

Thus, a broker or his agent who enters into a listing must first inquire into the existence of an unexpired safety clause in a prior listing the seller may have had with another broker. 

The seller is exposed to multiple fees when the property is sold by a new broker to a prospective buyer registered with the seller under the safety clause in an expired listing. 

If a safety clause is still in effect, the new listing agent should obtain a copy of the list of prospective buyers registered with the seller. Since solicitations or negotiations by the new listing agent with these buyers would expose the seller to liability under the prior broker’s safety clause, the broker should negotiate a fee-sharing agreement with the prior broker and document the arrangement as part of the listing process. [See first tuesday Form 105] 

A fee-sharing agreement, also improperly called a cooperating broker agreement, allows for both the prior broker and the present broker to share fees, usually 50-50. The fee-sharing agreement broadens the pool of prospective buyers for the new listing agent and clarifies the opportunity of both brokers to earn a fee — for the duration of the safety period. 

On expiration of a listing, the seller may avoid the dual liability situation altogether by relisting with the same broker, rather than listing with another broker, a relisting advantage held by the original broker. The relisting should be by way of a modification of the expiration (and any other terms) of the listing. Modification eliminates the need to register prospective buyers until the extension of the listing expires. [See first tuesday Form 120] 

For the seller, re-listing with the same broker avoids any overlap of the prior broker’s safety clause period and the new broker’s listing period. Re-listing with the same broker also preserves the efforts spent by the original listing agent educating the seller while marketing the property. 

Safety clause vs. procuring cause 

Sellers often confuse the workings of the safety clause with the open-listing or full-listing-offer theories of procuring cause. A broker is the procuring cause of a buyer and entitled to a fee when the broker holds an open listing and he or his agent is either: 

  • the direct cause of a sale to a buyer; or 
  • the cause of a series of events which result in a sale to the buyer. 

Consider a broker who enters into an employment agreement with a lender to locate a person who will syndicate the purchase of trust deed loans warehoused by the lender, a process called securitization

The agreement contains a fee provision calling for payment of a fee only if the broker or his agent initiates a transaction which is successfully completed. The agreement also contains a ten- year safety clause. 

On expiration of the listing, the broker’s agent hands the lender a list of several securities firms who create or represent trust deed investment pools which purchase trust deed notes in the secondary money market. None of the investment firms listed as prospective trust deed buyers enter into negotiations with the agent, much less complete a transaction with the lender which was initiated by the agent. 

Later, an investment firm registered by the agent buys trust deeds from the lender. 

The agent’s broker discovers the transaction and demands a fee from the lender. The broker claims he is entitled to a fee since his agent introduced the lender to the firm which eventually purchased the loans within the ten-year safety period. 

The lender claims the broker is not entitled to a fee since the broker was hired to initiate and complete a successful transaction, and he did not do so by merely registering the names of investment firms. 

Is the broker entitled to a fee? 

No! The broker is not entitled to a fee for merely registering the names of firms which his agent knew bought trust deed notes. The fee provision required the broker or his agent to be the procuring cause of the sale, not just naming, soliciting or negotiating with prospects. Payment of a fee is contingent on the broker’s initiation of a transaction which is successfully completed. [Hedging Concepts, Inc. v. First Alliance Mortgage Company (1996) 41 CA4th 1410] 

A fee agreement calling for a broker to be paid only if he is the procuring cause of the sale automatically voids any safety clause contained in the fee provision of a listing agreement. Thus, recovery under a safety clause and a procuring cause clause are mutually exclusive — one or the other, but not both in the same document. [Delbon, supra

Now consider a seller who employs a broker under a listing agreement which entitles the broker to a fee if he locates a buyer who eventually acquires the property. 

During the listing, the broker or his listing agent has contact with a buyer resulting in the delivery of information on the listed property. The buyer has difficulty arranging purchase- assist financing. After several discussions, the listing agent no longer follows up on the buyer and they engage in no further negotiations. 

On expiration of the listing, the property remains unsold. Three months later, the seller contacts the buyer to see if he is still interested in purchasing the property. Negotiations are resumed when the buyer ultimately arranges financing and is able to acquire the property. The listing agent discovers the sale and alerts his broker. 

The broker then makes a demand on the seller for a fee, claiming he was the procuring cause of the sale since he presented the property to a buyer who remained interested in the property and eventually purchased it when financing became available. 

The seller claims the broker is not entitled to a fee since the buyer acquired the property through negotiations commenced by the seller after the listing expired. 

However, the broker is entitled to a fee. He was the procuring cause of the sale since the broker’s contact with the buyer set into motion an uninterrupted chain or series of events, separated only by time, which eventually resulted in a sale. [E. A. Strout Western Realty Agency, Inc. v. Lewis (1967) 255 CA2d 254] 

Editor’s note — A safety clause in the listing agreement and registration of the prospective buyer would have avoided this dispute. 

 

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