Form-of-the-week: Release and Cancellation of Employment Agreement – Form 121
A seller of real estate enters into an exclusive right-to-sell listing agreement with a broker. The broker is employed to market a property and locate a buyer to acquire the property.
The fee earned for the broker’s services is set out in the fee provisions of the listing agreement. The fee provisions contain both a withdrawal-from-sale and a termination-of-agency clause. [See first tuesday Form 102 §3.1]
The withdrawal-from-sale clause entitles the broker to be paid a full listing fee if, by actions of the owner during the listing period, the property is:
- withdrawn from the market;
- transferred to others;
- further leased without the broker’s consent; or
- made unmarketable. [See first tuesday Form 102 §3.1(b)]
Further, the separate termination-of-agency clause entitles the broker to collect a full listing fee if the seller cancels the broker’s employment during the listing period, whether or not the seller intends to continue to market the property for sale.
Documenting the cancellation
When a seller, by word or by conduct, clearly indicates they no longer intend to sell the property, the agent needs to prepare a Release and Cancellation of Employment Agreement form for the seller to review and sign. [See first tuesday Form 121]
This release and cancellation agreement becomes a new contract between the broker and the seller, effectively replacing the listing agreement.
The release and cancellation agreement may call for immediate payment of the full broker fee agreed to in the listing in exchange for mutually agreeing to cancel the listing agreement.
Alternatively, negotiations with the seller may call for the future payment of a broker fee in the event the property is:
- placed on the market for sale;
- refinanced (if the broker was retained to arrange new financing); or
- leased to anyone within a specified time period after the date of the agreement.
A compromise might be the payment of a partial fee on cancellation with the balance due if the property is marketed or sold within a specified period, say one year.
This release and cancellation agreement is also used when a buyer wants to cancel an exclusive right-to-buy listing. On cancellation, the broker is deprived of the opportunity they acquired under the listing to earn a fee on the buyer’s acquisition of a property. Thus, the broker has the right to be paid the agreed fee.
In this case, the agreement entitles the broker to a fee if, within a specific time period after cancellation, the buyer purchases property similar to that which the broker was retained to locate.
In short, if the client accomplishes themselves or through others what they retained the broker to do, and the client does so during the agreed period following cancellation, the broker is entitled to the fee.
However, the broker cannot require the client to relist with them if they decide to buy or sell within the cancellation period. This coupling of the cancellation to future employment is an illegal tying arrangement. [Calif. Business and Professions Code §16727]
Reimbursement on cancellation
A cancellation agreement may also call for a client to immediately pay a broker fee for the broker’s and their agent’s time, effort and expenses expended during the employment under the listing. The client and broker may negotiate an appropriate hourly rate at the time of settlement.
The broker will not later be able to collect a fee if the seller sells the property after the listing is canceled since the broker settled for a lump sum amount to end the relationship and eliminate all claims under the listing.
If the broker believes the client may use their services in the future, or will refer other clients, the broker under the circumstance might just waive their fee and move on, but only after entering into a cancellation agreement containing a release.