Why this matters: Learn to protect your broker’s right to collect a fee when a seller-client removes their property from the market or cancels the representation agreement.
A client’s alternatives and a fee earned
An agent does not have a conflict of interest when they negotiate with a client to set broker fees they earn for services they agree to provide.
Simply put, fees are negotiated and agreed upon to set expectations before the representation begins, as in all professions. Fundamentally, fees earned by achieving the client’s objectives are the lifeblood providing an agent a livelihood.
To these ends, representation agreements — as contracts with provisions — are entered into by a broker and their client. The terms of employment authorize or limit the conduct of the broker and client who team up to bring about the client’s real estate objectives.
Specifically, for this article, you are informed about the fee earned by unauthorized client interference with your due diligence efforts to meet the client’s declared goals for the representation.
Consider an owner of real estate you solicit who enters into an exclusive seller representation agreement you negotiated as your broker’s agent. The exclusive representation agreement, formerly called a listing, employs a real estate broker as the seller’s advisor with authority to act on behalf of the seller to market the real estate and locate a viable buyer.
Fee provisions in a seller representation agreement state the broker is due a fee when earned, payable by the seller-client.
Client interference with representation is addressed in two fee provision clauses protecting the broker’s due diligence efforts to achieve the client’s original objective of the employment:
- a withdrawal-from-sale clause; and
- a termination-of-agency
The withdrawal-from-sale clause states the broker has earned a fee when, prior to the expiration or justified cancellation of an exclusive representation agreement, the seller-client:
- withdraws the property from the market;
- transfers fee ownership of the property to others;
- conveys a leasehold interest in the property without the broker’s consent; or
- makes the property unmarketable. [See RPI Form 102 §3.1(b)]
On the other hand, the separate termination-of-agency clause states the broker earns a fee when the seller-client, without justification, cancels the representation agreement prior to its expiration. [See RPI Form 102 §3.1(c)]
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Withdrawal from sale
Consider a seller broker employed under an exclusive representation agreement. The broker’s agent gathers all available property information for disclosure through forms and reports. A marketing package containing the items of property information is completed which is delivered to buyers who become interested in the property.
The availability of the property for sale is published in various multiple listing services (MLSs) and posted on websites visited by real estate buyers. A “For Sale” sign is placed on the property displaying a QR link to the broker’s URL webpage with promotional information about the property, but not the marketing package.
Before the representation period expires, the seller-client withdraws the property from sale. The agent is instructed to remove the “For Sale” sign and lockbox and cease marketing the property.
The agent confirms the seller’s withdrawal in a written memorandum and immediately complies with the client’s request. The agent’s broker then makes a demand on the client for payment of an earned fee, which the client rejects.
The broker claims the withdrawal-from-sale clause in an exclusive seller representation agreement entitles them to a full asking price fee, earned when the seller elected to remove the property from the market during the representation period.
The seller claims the broker is not entitled to a fee since a fee based on withdrawal of the property from the market when the property did not sell is an unfair and unenforceable penalty.
Is the broker entitled to a fee earned by the terms of the withdrawal-from-sale clause?
Yes! A seller becomes obligated to pay the broker the fee earned as agreed in the exclusive seller representation agreement, when:
- the broker, through their agent, continuously exercised diligence in the marketing of the property; and
- the seller exercised their right under the withdrawal-from-sale clause to voluntarily remove the property from the marketplace during the representation period.
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Review the difference between the employment agreement and the representation agreement.
A fee earned is compensation for an opportunity lost
In the previous example, the seller-client claimed the withdrawal-from-market fee provision constituted a monetary penalty, called a forfeiture or a windfall. However, the broker fee the seller agreed to pay on a withdrawal of the property from sale during the representation period compensates the broker for their lost opportunity and expectation to earn a fee.
The seller-client has alternatives to exercise under the two provisions. Instead of leaving the property on the market for the entire representation period (and paying a fee earned on a sale), the client, without legal justification, voluntarily exercises an alternative performance option, which:
- removes the property from the market and pays a fee as earned; or
- cancels the representation to terminate the agency and pays a fee as earned.
A withdrawal of the property from the market also always results in a termination of the broker’s agency relationship with the seller. In contrast, a termination of the agency by the seller is not always due solely to a withdrawal of the property from sale. The seller may decide to cancel the agency and market the property themselves or employ a different broker.
Termination of agency by the seller
A seller enters into an exclusive representation agreement employing a broker to sell a property within, say, a three-month period. The fee provision in the representation agreement includes a termination-of-agency clause.
The termination-of-agency clause entitles the broker to a fee as earned when the seller terminates the broker’s employment — without good cause as justification — before the representation period expires. [See RPI Form 102 §3.1(c)]
The seller broker, on entering into the representation agreement, promptly commences a diligent marketing effort to locate a buyer and sell the property. However, during the representation period and before a buyer is located, the seller-client discharges the broker.
The broker makes a demand on the seller for payment of a fee based on the asking price in the representation agreement, which the seller rejects. The broker claims the termination-of-agency clause in the fee provision of the representation agreement calls for payment of a full asking price fee as earned when the seller elects to discharge the broker.
The seller claims the broker is only entitled to recovery of a reasonable amount of money as reimbursement for the broker’s time, effort and costs spent marketing the property since a seller has the right to terminate a broker’s agency at any time.
Is the broker entitled to collect a full asking price fee from the seller as earned when the seller at any time exercises their legal right to terminate the agency before expiration of the representation agreement?
Yes! The seller-client elected to exercise their option to terminate — cancel — the broker’s agency under their exclusive representation agreement. On exercise of their option to cancel, the seller broker simultaneously earns a fee under the termination-of-agency clause. The seller may not both terminate the agency (without justification) during the representation period and avoid payment of a fee.
Here, the seller chose between:
- continuing to work with the broker under the representation and paying a fee when a buyer is located before expiration of the representation period; and
- terminating the broker’s agency and paying the broker their earned fee, whether or not the seller removes the property from the market.
Related article:
Purchase agreement cancellation – termination of right to buy or sell
A breach without alternatives
Occasionally, both the withdrawal-from-sale and the termination-of-agency clauses fail to be included in an exclusive seller representation agreement. Without these provisions for earning a fee, a withdrawal or termination results in a breach of the representation agreement since no options exist to be exercised. Here, the broker is unable to collect a full broker fee since no amount of fee was set as earned on the occurrence of either event.
Without these alternative performance fee provisions, the seller-client unjustifiably terminating their broker’s agency limits the broker’s recovery to losses for a breach of an exclusive seller representation agreement. [See RPI Form 102 §3.1(b) and 3.1(c)]
On a seller-client’s breach, the recovery of losses entitles the broker to:
- their out-of-pocket costs — money — expended to service the representation; and
- the value of the time and effort expended by the broker in the employment, called a quantum meruit [Hedging Concepts, Inc. v. First Alliance Mortgage Company (1996) 41 CA4th 1410]
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Documenting the cancellation
When a seller-client, by word or by conduct, clearly indicates they are no longer willing to work with the broker to market their property, the broker needs to prepare a Release and Cancellation of Employment Agreement form for the seller to review and sign. [See RPI Form 121]
This release form is used by a broker employed under an exclusive seller representation agreement to negotiate a termination of the agency by mutual consent when the client has become a significant interference with marketing. The form documents the agreed-to termination of the employment, cancels the representation agreement and ends any future claims arising due to the employment.
Editor’s note — The release and cancellation agreement creates a new contract between the broker and the seller, effectively replacing the representation agreement.
The release and cancellation agreement as initially prepared by the broker calls for immediate payment of the full asking price fee earned under the representation agreement fee provisions. In exchange, the broker and seller mutually agree to cancel the representation agreement.
Eventually, the release terms negotiated may call for payment later, such as when the property is sold, exchanged, optioned, mortgaged or leased. A compromise might be payment of a partial fee.
A release and cancellation agreement is also used when a buyer-client wants to cancel an exclusive buyer representation agreement. On cancellation, the broker loses the employment opportunity to earn a fee under the exclusive buyer representation agreement.
As a compromise with the buyer-client, the release agreement might provide for payment of the broker fee when the buyer later purchases property like the generally described real estate the broker was retained to locate.
Simply put, when a client accomplishes on their own what they exclusively retained the broker to do, during a set period after cancellation — say, one year — the broker is entitled to a fee.
Editor’s note — The broker may not require the client to relist with them when the client decides to buy or sell within the cancellation period. Pairing the cancellation with future employment is an unenforceable tying arrangement. [Calif. Business and Professions Code §16727]
The broker might negotiate an appropriate hourly rate plus out-of-pocket expenses as the settlement.
Occasionally, a goodwill gesture to waive all fees due for a mutual cancellation may be a fair alternative when the broker believes the client is most likely to use their services or refer others in the future.
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