This article examines the events which trigger the withdrawal-from-sale and termination-of-agency clauses in the fee provision of an exclusive listing and earn the broker a fee.
An alternative to staying the course
Sellers after entering into a listing agreement employing a broker and his listing agent to sell a property sometimes experience a change of circumstances. As a result, they want to be released of their employer obligations for having engaged the services of the broker.
Some seek to cancel the listing for personal reasons of health, employment, family needs or just a general dislike of the broker or listing agent. Others are driven to cancel by real estate market conditions such as the property’s value, price movement, volume of sales and quantity of buyers. Still others transition into marketing the property as a For Sale By Owner (FSBO) or listing with another broker, in the belief they will experience a more advantageous and immediate financial result.
An ironic twist to be considered by readers of this article is that it is brokers who should have a change of heart about their listings and set out to cancel those listings that are not likely to sell within 60 to 90 days. Today, changing circumstances for brokers are recession-driven and hugely impact his earnings and expense.
Also, consider the flip side of the cancellation-by-seller issues presented in this article. They are cancellation-by-broker issues. These issues focus on the seller who does not fully participate in the broker’s marketing effort, insists on an above market price, does not acknowledge prices are declining and would rather wait until prices go up than accept an offer at current values. Further, he unrealistically demands a high level of individualized marketing by the broker and listing agent when the likelihood of locating a buyer on terms acceptable to the seller is remote.
It’s the time of the business cycle to fire some clients, especially those who demonstrate they want their property more than they don’t want it. Then agents will be able to spread their due-diligence time over far fewer listings comprised of sellers who need to sell, understand the economic impact of a strong buyer’s market on their property’s market value and have the funds and willingness to order out all the investigations and reports needed to prepare a proper listing (marketing) package. These are sellers who are as eager to sell their property as are the brokers and listing agents. They are willing to cooperate to take whatever steps are necessary to impress prospective buyers who are in need of property — as a home or for investment.
The fee and the cancellation
An owner of real estate enters into an exclusive right-to-sell listing agreement, employing a broker to locate buyers and sell the property. The broker’s compensation for services he and his listing agent will provide is set forth in the listing agreement fee provision. The fee provision contains both a withdrawal-from-sale and a termination-of-agency clause. [See first tuesday Form 102 §3.1(b)-(c)]
The withdrawal-from-sale clause entitles the broker to be paid a full listing fee when, during the listing period, the property is:
- withdrawn from the market;
- transferred to others;
- further leased without the broker’s consent; or
- made unmarketable by the owner. [See first tuesday Form 102 §3.1(b)]
Further, the separate termination-of-agency clause in the fee provision entitles the broker to collect a full listing fee if the owner cancels the broker’s employment without justification during the listing period, whether or not the owner intends to continue marketing the property for sale.
Withdrawal from sale
To meet the obligations of employment imposed on the broker and his listing agent when entering into a listing agreement, the listing agent gathers available information about a seller’s property to create a listing package. The package is reproduced and copies are handed to those most likely to make a offer, called prospective buyers.
On completing the listing package, advertisements are placed in multiple listing services (MLS) and newspapers and a “For Sale” sign is erected on the property with a flyer box for distribution of information to interested parties willing to take one. The agent is diligent at all times in the performance of his marketing obligations.
Before the listing period expires, the seller withdraws the property from sale. The agent is instructed to remove his “For Sale” sign and lock box, and to cease marketing the property.
The agent immediately complies with the seller’s request, and confirms the seller’s withdrawal in writing. [See first tuesday Form 525]
The listing agent’s broker then makes a demand on the seller for payment of a full listing fee, claiming the withdrawal-from-sale clause in the listing agreement entitles him to a fee, earned and payable when the seller removed the property from the market prior to the expiration of the listing — the employment period.
The seller refuses to pay, claiming the provision calling for payment of the brokerage fee on the seller’s withdrawal of the property from the market is unenforceable as an unfair and unenforceable penalty since the property did not sell.
Is the broker entitled to a full listing fee under the withdrawal- from-sale clause?
Yes! The seller became obligated to pay the broker the fee agreed to in the listing when:
- the broker, through his listing agent, at all times exercised diligence in the marketing of the property; and
- the seller exercised his right under the withdrawal- from-sale clause to voluntarily remove the property from the marketplace during the employment, the listing period.
Further, the brokerage fee the seller agreed to pay on a withdrawal of the property from the sales market prior to the expiration of the listing period is not a penalty payment or forfeiture. The agreed amount due on withdrawal preserves the earnings the broker expected to receive by ultimately selling the property when the seller entered into the listing agreement and the broker and the listing agent commenced their due diligence efforts to locate a buyer. [Blank v. Borden (1974) 11 Cal3d 963]
On withdrawal, the fee due the broker compensates him for his lost opportunity. When the broker loses his authority to market the property and locate a buyer due to the interference, he has lost his ability to accomplish the objective of the employment, which is to sell the property and earn a fee.
Thus, instead of leaving the property on the market for the entire listing period (and paying a fee if it sells), the seller has exercised one of his alternative performance options which allow the seller to either:
- remove the property from the market, in which case a fee is earned and due; or
- terminate the agency by canceling the listing while leaving the property on the market, in which case a fee is also earned and due.
A withdrawal of the property from the market always results in a termination of the broker’s agency relationship with the seller due to the interference with the agent’s ability to perform. However, a termination of the agency by the seller is not always due solely to a withdrawal of the property from sale.
Termination of agency by seller
A seller of real estate enters into a listing agreement with a broker to sell a property within a three-month period. The listing includes a fee provision which contains a termination-of-agency clause entitling the broker to payment of a full fee should the seller terminate the broker’s employment, without good cause, prior to expiration of the listing period. [See first tuesday Form 102 §3.1(c)]
The broker’s listing agent promptly commences a diligent marketing effort to properly present the property for sale and locate a buyer who is willing to acquire the property. However, during the listing period and before a buyer is located, the seller terminates the agency by canceling the listing. The property remains for sale.
The broker makes a demand on the seller for payment of a full listing fee, claiming the termination-of-agency clause in the fee provision of the listing agreement calls for payment of a fee as earned when the seller prematurely terminates the agency. The seller claims the broker is not entitled to a full brokerage fee, but only to money losses based on an accounting for his time, effort and costs incurred to market the property, called quantum meruit, since an agency is terminable at will allowing a seller to legally terminate a broker’s agency at any time.
Is the broker entitled to collect a full fee from the seller upon the seller’s exercise of his legal right to terminate the agency?
Yes! While a seller may terminate the broker’s agency at any time, the seller cannot terminate the agency during the listing period and avoid payment of a fee if a termination-of-agency clause exists. The termination-of-agency clause in the listing agreement couples cancellation with the payment of a fee.
The seller has chosen between:
- continuing to work with the broker for the duration of the listing period and paying a fee if a buyer is located before expiration of the listing period; and
- terminating the broker’s agency and paying the broker his full listing fee, whether or not the property is withdrawn from the market.
No alternatives to breach
Occasionally, a listing agreementn will fail to include a withdrawal-from-sale and a termination-of- agency clause. Without these provisions, a broker will be unable to collect a full brokerage fee on a withdrawal or termination since no amount is agreed to be paid on the occurrence of either event, only a sale.
Thus, only a breach of the listing occurs for lack of alternative performance provisions in the exclusive listing agreement.
On a breach by the seller of a listing which does not contain a withdrawal-of-property or termination-of-agency clause, the terminated broker will only be entitled to recover:
- the out-of-pocket costs incurred to service the listing; and
- the value of his time and effort expended under the listing, called quantum meruit recovery. [Hedging Concepts, Inc. v. First Alliance Mortgage Company (1996) 41 CA4th 1410]
Documenting the cancellation
An agent needs to be certain the seller intends to withdraw his property from sale or terminate the agency before ceasing all efforts to market the property and locate a buyer. Marketing efforts should be continued until the seller makes his decision known directly to the agent.
When a seller, by word or by conduct, clearly indicates he doesn’t want the property to be sold, or at least not by the listing broker, the agent should confirm the seller’s intentions by preparing a Release and Cancellation of Employment Agreement form for the seller to review and sign. [See Form 121 accompanying this article]
This release and cancellation agreement establishes a new contract between the agent’s broker and the seller, effectively replacing the listing agreement.
The release and cancellation agreement may call for immediate payment of the full brokerage fee agreed to in the listing in exchange for mutual cancellation of the listing agreement. Alternatively, it could call for payment of a fee should the property be sold, placed on the market, exchanged, optioned, refinanced (if the broker was retained to arrange new financing) or leased to anyone within a safety period following cancellation, for example, one year. A compromise could be the payment of a partial fee with the balance due should the property be sold within the safety period.
This release and cancellation agreement is also used when a buyer wants to cancel an exclusive right-to-buy listing. On cancellation, the buyer’s broker is deprived of the employment opportunity he acquired under the listing to earn a fee and has the right to be paid a full listing fee.
In this case, the agreement entitles the broker to a fee if, within the agreed to safety period, the buyer purchases property similar to that which the broker was retained to locate.
In short, if the client now accomplishes on his own what he previously retained the broker to do, and does so during the safety period, the broker is entitled to his fee.
Listing agreements provide that on termination of the employment without the seller having sold the property the broker is to identify prospective buyers he has had contact with and provided information on the property, called negotiations. The purpose for the identification of property is to protect the broker from loss of the effort he and his agents have invested marketing the property and locating buyers during the listing period.
By registering prospects on termination of the listing, the broker is entitled to a full listing fee should one of the prospects return to buy the property within a set period of time after temination of the employment, called a safety period. Thus, it is prudent for a broker and his listing agent to give notice identifying prospective buyers on the premature termination of the listing by cancellation.
Editor’s note — The broker cannot require the client to relist with him if he decides to buy or sell within the safety period. This coupling of the cancellation to future employment would be an illegal tying arrangement. [Calif. Business and Professions Code §16727]
Reimbursement on cancellation
A cancellation agreement can also call for a client to pay the broker compensation for his and his agent’s time, effort and monies expended during the employment under the listing. The client and broker can negotiate an appropriate hourly rate at the time of settlement.
The broker will not later be able to collect a fee should the property sell after the listing is canceled when the broker settles for a lump sum amount to end the relationship since he eliminates all further claims under the listing agreement.
However, by entering into a settlement the broker would be compensated immediately, on cancellation, rather than waiting for a transaction that might not happen. With a cash settlement, the broker can ensure he will not be out-of-pocket on this listing.
If the broker believes the client may use his services in the future, or will refer other clients, a cash settlement for out-of-pocket expenses is a fair alternative.
By being reasonable, both about the client’s decision to cancel and about the value of his professional services, the broker is bargaining for continued good will.
At the same time, the client obtains his objective — cancellation of the listing agreement — while the broker remains protected, just in case the property is relisted, sold, or leased.