Form-of-the-week: Demand on Client to Pay Broker Fee – Enforcement of Safety Clause in an Expired Listing – Form 123-1
A fee due after the listing expires
A broker is retained to represent a seller by entering into an employment agreement, commonly called a listing. The listing, either exclusive or open, contains a safety clause stating the broker has earned the agreed fee when:
- an individual has direct contact with the broker (or their agent) regarding the property during the listing period, called solicitations;
- the broker treats the individual as a prospective buyer due to their inquiries or conduct, by handing them a package of information about the property, called negotiations;
- negotiations with the prospective buyer terminate without their entering into an agreement to purchase the property;
- the listing period expires and the broker timely registers the individual by name with the seller as a prospective buyer; and
- the individual and the seller, with or without the broker’s further involvement, later commence negotiations within an agreed to period of time following the expiration of the listing, called the safety period, and eventually complete a sale of the property. [See RPI Form 102 and 103]
The safety net for an agent’s due diligence efforts
To market a property and locate a buyer, the seller’s broker and their agent invest their time, talent and money in anticipation of earning a fee. A safety clause in the fee provision of a listing agreement sets an extended period after the listing period expires for the broker to earn that fee. [See RPI Form 102 §3.1(d) and 103 §4.1(c)]
The safety clause preserves the broker’s and agent’s expectations of earnings for having relayed detailed property information to prospective buyers during the listing period. Oftentimes, a prospective buyer, on receiving further facts on a property, becomes disinterested and ends negotiations, then later reappears after the listing has expired to buy the property.
A broker earns a fee under the safety clause when:
- property information is provided to prospective buyers during the listing period by the seller’s agent;
- the seller is notified of the identification of the prospective buyers as soon as possible after termination of the listing [See RPI Form 123-1]; and
- the property is acquired by a prospective buyer disclosed on the list as a result of negotiations conducted during the safety period.
The seller is entitled to the identification of the prospective buyers the agent dealt with on expiration of the listing under agency law. If the seller requests the information from the agent, it needs to be provided — with or without the existence of a safety clause. However, when a safety clause exists, the agent perfects their rights to later earn a fee when they hand the client the buyer information.
The terms of the safety clause
A safety clause is part of the fee provision in a listing agreement. Both the open and exclusive types of seller’s and buyer’s listing agreements contain safety clause provisions. [See RPI Form 102 §3.1(d) and 103 §4.1(c)]
The safety clause imposes an obligation on the seller to pay a fee on a sale which results from negotiations with registered prospective buyers handled by anyone within the safety period. [See RPI Form 123-1]
Like the period of employment for an exclusive listing agreement, the safety clause contains an expiration date for the extended time period after the listing expires 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 the seller’s behalf.
The safety clause period commences on termination of the listing period. Thus, the termination of a listing commences the running of both the safety clause period and the period for putting the seller on notice of prospective buyers. A listing is terminated when:
- the seller withdraws the property from the market during the listing period;
- the seller terminates the agency before expiration of the listing period; or
- the listing agreement expires.
On premature termination of the agency, withdrawal or expiration of the listing period, the agent needs to send the seller the list of prospective buyers they have maintained. The timely delivery of the identification notice is necessary to perfect the right of the broker to earn a fee under the safety clause if a prospective buyer conducts negotiations with the seller during the safety period and as a result buys or leases the property. [See RPI Form 123-1]
Perfecting the safety clause
A broker has the burden of perfecting their right to a fee under the safety clause.
Several crucial activities need to be performed by the seller’s agent to perfect the broker’s right to a fee under the safety clause, including:
- providing information about the listed property to prospective buyers the agent or buyer’s agents have contact with;
- documenting dealings with prospective buyers by maintaining a File Activity Sheet in the listing file [See RPI 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 RPI Form 122]
Negotiations which result in a sale do not need to be concluded during the safety clause period for the broker to earn a fee. Further, escrow does not need to close prior to the expiration of the safety period.
When negotiations take place during the safety clause period which lead to a sale of the listed property to a registered prospective buyer, the broker has earned their fee. An acceptance of a purchase offer or the close of a sales escrow relates back to the date negotiations took place, a date which, if it falls within the safety clause period, entitles the broker to a fee. [Leonard v. Fallas (1959) 51 C2d 649; see RPI Form 123-1]
Perfecting the right to a fee for work done
On expiration of the listing, a seller’s agent hands their seller a registration form. The registration form contains the list of the prospective buyers the agent provided property information to. After delivering the registration form, the agent closes their file on the property. [See RPI Form 122]
The registration form is designed for the agent to routinely enter the names of all prospective buyers who, during the listing period, were in contact with and received information about the property from the seller’s broker or their agents. Further, the form lists any prospective buyers the agent knows have been provided information about the property through a buyer’s agent.
Likewise, when a buyer’s listing agreement expires, a buyer’s agent will hand the buyer a list of qualifying properties the buyer was presented information on during the listing period. [See RPI Form 123]
Within the safety period after the listing agreement expires, if a buyer registered by the agent on the list of prospective buyers enters into negotiations with the seller and purchases the property, the broker is entitled to a fee as earned under the listing agreement.
Similarly, when a property registered by the buyer’s agent under a buyer’s listing agreement is purchased by the buyer due to negotiations occurring during the safety period, the buyer’s broker is entitled to their fee as earned under the listing.
On the agent’s discovery of the completed sale, the broker needs to make a written demand on the seller or buyer for their fee earned and unpaid under the safety clause in the expired listing. [See RPI Form 123-1]
Realty Publications, Inc. (RPI)’s Demand On Client To Pay Broker Fee form is used by an agent when the client, within one year after termination of a listing agreement, has entered into negotiations which later result in a transaction with a registered client or property to enforce collection of their fee. [See RPI Form 123-1]
The Demand On Client To Pay Broker Fee form references: