Find out how to handle a seller who breaches a purchase agreement or otherwise interferes with the payment of a fee you have earned.
On occasion, a buyer’s agent in a real estate sales transaction is confronted with a seller whose conduct interferes with the close of escrow. The seller’s conduct is inconsistent with or contrary to activities the seller is to perform so escrow can close. Without a closing, payment of the fee the buyer’s agent earned is compromised.
In this case, collecting a fee depends on the terms of the purchase agreement, the buyer’s listing agreement and escrow instructions.
The interfering seller pays
When a seller breaches a purchase agreement or wrongfully interferes with a broker’s collection of an earned fee, the buyer’s broker is due payment from the seller.
Consider a buyer’s agent who agrees on behalf of their broker to locate suitable real estate for a buyer. The agent fails to enter into an exclusive right-to-buy listing agreement with their buyer before starting their search for qualifying properties.
The agent locates a suitable property for sale. The owner has not employed a broker to list the property for sale. The buyer’s agent prepares an offer to purchase the unlisted property. It is reviewed with the buyer, signed and submitted to the seller. A fee provision in the purchase agreement form sets the amount of the fee the seller is to pay the agent’s broker if the buyer acquires the property. The fee provision calls for a fixed (or percentage) fee, payable on the close of escrow. [See RPI Form 150 §15]
The seller rejects the buyer’s offer and refuses to sign a counteroffer, stating they will not pay a brokerage fee.
The buyer then contacts the seller directly, without involving the buyer’s agent. The buyer is willing to pay the seller’s price, but feels the agent deserves to be paid for having brought negotiations to this point. The seller points out that neither the buyer nor the seller agreed to pay the broker a fee. The buyer’s offer called only for the seller to pay a fee — not the buyer — and the seller rejected the offer.
The seller and buyer eventually enter into a purchase agreement without providing for payment of a fee to the broker who employs the buyer’s agent. The transaction closes and the broker is not paid a fee.
When the agent discovers the buyer’s purchase of the property, the agent’s broker makes a demand on the seller for payment of the fee set out in the buyer’s offer previously rejected by the seller. The broker claims the seller owes them the fee if they acquired the seller’s property since the seller knew the buyer agreed to the fee and then induced the buyer to abandon efforts to provide for payment of the fee.
The seller claims they are not responsible for the payment of any brokerage fee since they rejected the purchase offer which contained the fee provision.
Collecting the fee
Three approaches arise for the buyer’s broker to resolve the failure to be paid an earned fee.
First, is the fee provision in the rejected purchase agreement offer enforceable against the seller who never agreed to it?
No! A seller is not bound by a fee provision in a purchase agreement which they rejected.
Second, is the broker able to collect their fee from the buyer based on the fee provision in the purchase agreement offer signed by the buyer?
Yes! The buyer did sign a writing (purchase offer) providing for payment of a fee to the broker on the buyer’s purchase of the seller’s property. The buyer acquired the property and, thus, the fee has been earned and is payable by the buyer — but not the seller as the provision states.
Finally, is the seller also responsible as an additional source for payment of the buyer’s agent’s fee based on the seller’s interference with payment of the fee?
Yes! Here, the seller wrongfully induced the buyer to breach a provision in a writing, signed by the buyer and known to the seller, calling for a fee to be paid to the broker on the buyer’s acquisition of the seller’s property.
Thus, the seller has unlawfully interfered with the broker’s existing contractual relationship with the buyer for payment of a fee on acquisition of the described property. Here, the broker’s evidence of their prospective economic advantage the seller interfered with is the fee provision in the purchase agreement offer received and reviewed by the seller.
Thus, the seller is also liable for payment of the buyer’s broker’s fee called for in the buyer’s offer since the seller:
- knew the fee provision existed in the offer signed by the buyer; and
- induced the buyer to exclude the brokerage fee with the unjustified and improper intent of interfering with an existing agreement — the fee provision — between the buyer and the broker. [Rader Company v. Stone (1986) 178 CA3d 10]
Editor’s note — The broker’s recovery of the fee from the seller is based on a tort theory called intentional interference with contractual relations. It is not a recovery based on the seller’s breach of a provision in the purchase agreement offer, which is a contract theory. The seller did not enter into the buyer’s purchase agreement offer with a provision establishing the broker as a third-party beneficiary who is to receive a fee on the buyer’s acquisition of the property.
As for the buyer, they do owe the fee under a contract theory. The buyer breached their signed written promise in the rejected purchase agreement offer to pay the broker a fee on the proposed transaction. As a result, the broker is awarded a money judgment for their fee against both the buyer and the seller. However, the broker can only collect the amount of the fee once — from one or the other, or a portion from both.
Oral fee agreements during negotiations
A promise orally given to an agent by a buyer or seller for payment of a brokerage fee on their purchase or sale of property is unenforceable by the agent’s broker against the person orally promising to pay the fee. Occasionally, an oral fee arrangement is later reduced to a writing signed by the buyer or seller who had orally agreed to pay the fee. On earning the fee and it not being paid when due, the broker may enforce the signed written agreement and collect their fee from the person who signed it.
Oral fee agreements are unenforceable even when mentioned in the agent’s written correspondence sent to the buyer or seller. It is not enough that the agent signs the correspondence containing the oral fee arrangement. The person who is to pay the fee needs to sign the writing — correspondence — which sets forth the fee before collection of the fee from that person may be enforced. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]
However, a buyer’s broker and their agent need only have an oral fee agreement with a buyer for the broker to recover their fee from a seller when:
- the seller is aware of the oral fee agreement between the broker and the buyer; and
- the seller, without proper cause or privilege, acts to interfere with the fee agreement and causes the broker not to receive their fee on the buyer’s acquisition of the property.
Thus, when the buyer has arranged for payment of a brokerage fee, either by a signed writing or by an oral agreement, and the seller knowingly interferes with that written or oral arrangement by inducing the buyer to breach their promise, the seller owes the broker the fee agreed to by the buyer. [Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 C4th 376]
The contingency fee and the seller
Fee provisions in purchase agreements and escrow instructions typically state the fee earned is payable out of the sales proceeds due a seller on the close of escrow, called a contingency fee provision.
When escrow does not close, the brokerage fee earned is not paid. However, the contingency fee may still be due the broker based on the seller’s conduct.
Consider a seller who refuses or is unable to remove liens on the real estate in order to convey title as agreed. No contingency provision exists allowing the seller to cancel if they fail to obtain a release of the liens.
Escrow does not close due to the liens. The broker makes a demand on the seller for payment of their fee, claiming the fee was earned and is now unpaid due to the seller’s failure to close escrow as agreed.
The seller claims the broker is not entitled to receive a fee since no sales proceeds were received from which escrow can pay the fee.
Here, the seller cannot avoid paying the brokerage fee by relying on provisions calling for the fee to be paid from funds the seller is to receive on closing. The seller breached the purchase agreement preventing the close of escrow and, in turn, the receipt of sales proceeds — the events triggering payment of the fee.
The contingency fee provision in the purchase agreement and the escrow instructions merely designates the time for payment of a fee previously earned (on acceptance of an offer). It does not defeat the broker’s right to compensation they have fully earned simply because the event allowing escrow to pay the fee does not occur due to the seller’s unexcused failure to perform on the purchase agreement. [Steve Schmidt & Co. v. Berry (1986) 183 CA3d 1299]
In a listing agreement, a broker and their client — seller or buyer — may agree to any legally enforceable condition which is to be satisfied before the broker earns their fee. Conditions include locating a ready, willing and able buyer for a seller’s property or locating suitable property for a buyer on the listed terms or any other terms entered into by the client.
When the condition for earning the fee occurs as called for in the listing, such as the seller’s acceptance of an offer, the fee is immediately due and payable to the broker.
In contrast, most purchase agreements used to write up a buyer’s offer include a boilerplate contingency fee provision. The wording of the provision shifts the time for payment of the fee the broker has already earned under the listing agreement from the acceptance of the purchase agreement offer to the time of closing.
Method of payment by the seller
Unless altered, fee provisions in purchase agreements typically set a fixed-dollar or calculable dollar amount which is payable by the seller and due on the close of escrow. Escrow instructions are drawn to provide for the payment of this agreed-to fee.
However, sellers frequently are presented with mere unilateral instructions to escrow for payment of the fee owed the broker. Two issues arise on the use of unilateral instructions for the payment of brokerage fees:
First, unless the broker also signs escrow’s instructions to pay their fee, sellers will occasionally alter the amount, time or method of payment prior to closing.
Second, unless the buyer also enters into and signs the instructions for the seller’s payment of the fee, the seller can cancel escrow’s authorization to pay the fee on closing, even when the broker has signed the instructions.
For example, a broker consents to fee arrangements by including a fee provision in the purchase agreement offer calling for payment in full on closing. Here, the seller cannot enforce contradictory escrow instructions (or cancel instructions) calling for the brokerage fee to be paid in installments, unless the broker consents to the change (or cancellation). [Seck v. Foulks (1972) 25 CA3d 556]
Escrow instructions for paying the fee
Escrow instructions are the final arrangements for the payment of a brokerage fee on a transaction in which the broker is due a fee. It does not matter which agent dictates instructions, or if they do so by use of a transaction coordinator. Their paramount, co-existing objective is to eliminate the risk that the brokers will not be paid on the close of escrow.
The brokerage fee has already been earned on the acceptance of a purchase agreement offer. However, payment of the earned fee is made contingent on the close of the sales escrow, a 30- to 60-day period after the brokers have earned their fees.
During the escrow period, sellers who have committed themselves to pay the fee sometimes decide for sundry reasons they no longer want to pay the fee.
The ability of the seller to interfere with payment of the fee and still close escrow depends entirely on aspects of the fee instructions dictated by the agents.
When dictating escrow instructions regarding the payment of the fee, brokers and their agents have several options which provide varying degrees of assurance their fee will be paid. Payment arrangements for brokerage fees include:
- instructions signed only by the seller, called unilateral fee instructions, which authorize escrow to pay the brokerage fee from the net proceeds due the seller on closing;
- an assignment accompanied by unilateral fee instructions from the seller which authorizes escrow to pay the brokerage fee from the seller’s net proceeds;
- a lien on the seller’s net proceeds to secure payment of the brokerage fee which is accompanied by unilateral fee instructions signed by the seller;
- instructions signed by the seller and brokers, to which the buyer is not a party, authorizing escrow to pay the brokerage fee from the seller’s net proceeds; and
- mutual instructions signed by the seller and buyer, whether or not entered into or approved by the brokers, which authorize escrow to pay the brokerage fee from the seller’s net proceeds.
When the agent dictating the instructions fails to specify the type of payment-of-fee provision to be used by escrow, the typical fee provision used by escrow services is a “default fee provision.” In it, the seller alone instructs escrow, by way of supplemental (and unilateral) escrow instructions, to pay the brokers from funds accruing to the seller on close of escrow.
Mutual vs. unilateral instructions
Of all the fee arrangements available to brokers for payment of their fees, the unilateral fee instructions (signed only by the seller) leave the brokers with the least assurance a fee will be paid on the close of escrow.
Unilateral fee instructions give the seller the sole and absolute ability to cancel, revoke or alter the brokerage fee instructions and still close escrow. When unilateral instructions are canceled, no conflict arises which interferes with the escrow officer’s ability to close escrow. Further, third parties — such as the broker or a lender — cannot control escrow’s closing as they are not a party to the mutual instructions of the buyer and seller.
For example, if a seller cancels their unilateral fee instructions, escrow has to close and pay all net proceeds to the seller — including funds originally intended for payment of the brokerage fee. Thus, no funds remain in escrow as a source of recovery of their fee by the brokers. [Contemporary Investments, Inc. v. Safeco Title Insurance Co. (1983) 145 CA3d 999]
The addition of the broker’s consent to or approval of the seller’s unilateral fee instructions adds no assurance that the seller will not cancel, revoke or alter the separate fee instructions.
When the seller’s fee instructions — to which the buyer is not a party, whether or not joined in by the brokers — call for either an assignment of an amount equal to the brokerage fee or a lien on the seller’s net proceeds in the amount of the fee, the seller may still cancel, revoke or alter the fee instructions and close escrow without payment of the agreed-to brokerage fee (although escrow will retain but not disburse the amount assigned or liened by the brokers for their fee).
To avoid the risk of losing an earned fee, the best protection a broker has against the seller’s cancellation, revocation or alteration of the brokerage fee instructions is to instruct escrow to prepare mutual instructions as the seller’s agreement to pay the brokerage fee, and have it signed by both the buyer and the seller. Such an arrangement prevents escrow from relegating the fee to separate, unilateral fee instructions signed only by the seller (and possibly the broker).
When mutual instructions call for payment of the brokerage fee, the seller can still cancel payment of the fee and close escrow, but the seller has to have the collaboration of the buyer since the buyer is a party to the fee instructions. To alter mutual fee instructions, the buyer has to also sign the fee cancellation instruction. Thus, the buyer (as well as the seller) becomes responsible for payment of the brokerage fee as wrongfully withheld.
Further, mutual instructions call for any change in the fee provision agreed to by the seller and the buyer to be subject to the broker’s approval. Thus, the broker “locks in” payment of their fee when escrow closes, reducing the risk of interference with the payment of their earned fee.
This article was previously posted in 2014, and has been updated.