Why this matters: Learn to appreciate a safety clause provision in exclusive representation agreements as assurance a fee is earned after expiration when your client sells or buys due to your efforts during the employment.
A fee earned after the representation expires
A broker is employed to assist a client under either an exclusive or an open representation agreement. These agreements typically contain boilerplate fee provisions which include a safety clause.
In a seller representation agreement, a safety clause in a fee provision states the broker earns a fee when:
- a prospective buyer contacts the seller broker or their agent during the representation period requesting additional information on the property;
- the prospective buyer is given a marketing package containing detailed property information;
- discussions with the prospective buyer end without a sale;
- on expiration of the representation, a notice is delivered to the seller-client identifying the prospective buyer; and
- the prospective buyer and the seller commence negotiations within the safety period which result in the buyer acquiring the property. [See RPI Forms 102, 103.1 and 103.2]
A safety clause in the fee provision of a representation agreement provides an additional period after the representation period expires for a broker to earn a fee.
For an example, a seller broker employed under an exclusive seller representation agreement, or their agent, has contact with prospective buyers during the retainer period. Each prospective buyer is delivered a marketing package disclosing detailed information and data on conditions affecting an evaluation of the property.
The agent maintains a registration form in their property file and enters information on each prospective buyer they have contact with, directly or indirectly through a buyer broker. The agent enters each prospect’s name, address, phone number and email address. [See RPI Form 122]
After “follow-up” conversations with the prospective buyers, the buyers have no further contact with the agent or the broker. The representation period expires, and the property remains unsold. The client is unwilling to renew the representation agreement.
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Continuing the previous example, the broker delivers to the seller-client a copy of the registration form the agent maintained with information on prospective buyers. The registration form contains a list of prospective buyers the broker or their agent had contact with who were provided additional property information. On delivering the prospective buyer registration form, the broker closes their file on the property and the client.
Later, a prospective buyer the broker registered with the seller enters into negotiations with the seller during the safety clause period. The buyer eventually acquires the property.
Here, the broker earns a fee when the buyer acquires an interest in the seller-client’s property, based on:
- fee provisions in the seller representation agreement;
- delivery of the list identifying prospective buyers; and
- an identified buyer enters negotiations with the seller-client during the safety clause period and later acquires the property.
Likewise, a buyer broker employed under an exclusive buyer representation agreement maintains a list of qualifying properties reviewed with the buyer-client during the representation retainer period. On expiration of the representation without acquiring a property, the broker delivers the list of properties to the buyer-client. [See RPI Form 123]
During the safety period, the buyer negotiates with the seller of a registered qualifying property and eventually acquires the property. Here, the broker earned a fee and makes a demand on the buyer for payment.
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A fee earned, demanded and the procuring cause defense
Several months after the seller representation agreement expired, the seller broker discovers the seller-client negotiated and sold the property to a buyer the broker registered under the safety clause. The broker makes a written demand on the seller for their fee earned under the safety clause in the now-expired representation agreement, which the seller rejects. [See RPI Form 123-1]
The seller claims the broker has no right to a fee since the broker was not the procuring cause of the sale, which requires the broker to obtain the buyer’s signature and submit the offer to the seller.
The broker claims a procuring cause defense does not apply to a fee earned under the safety clause since the broker located a prospective buyer and provided the buyer with property information.
Is the broker entitled to a fee from the seller?
Yes! The broker earned a fee under the safety clause in the representation agreement fee provision.
After the representation expired, the registered buyer acquired the property because of negotiations commenced during the safety period, either directly with the seller or through another broker.
Contrary to the claims of the seller, their broker need not be the procuring cause of a sale to earn a fee under the safety clause (nor during the representation retainer period). [Leonard v. Fallas (1959) 51 C2d 649]
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Demand for broker’s fee earned under the safety clause
Contacts by the seller broker with prospective buyers
The degree of involvement a seller broker or their agents need to qualify a buyer as a prospective buyer is set by the terms of the safety clause.
A person whose only relationship with the broker is observing a “For Sale” sign or an online advertisement is not a prospective buyer. [Simank Realty, Inc. v. DeMarco (1970) 6 CA3d 610]
To qualify as a prospective buyer, the buyer needs to commence negotiations. Negotiations begin the moment a buyer seeks information on the property from the broker. The broker diligently delivers a marketing package with detailed property information to the buyer. The broker need not obtain an offer from a buyer for the buyer to become a prospective buyer.
Price paid is different from the seller’s asking price
Now consider a seller-client who contacts a registered buyer regarding the property during the safety clause period under their representation agreement with their broker. Negotiations result in the prospective buyer purchasing the property for less than the asking price sought in the expired representation agreement.
The seller broker on discovery of the transaction makes a demand on the seller for payment of a fee earned during the safety period.
The seller refuses to pay, claiming the broker is not entitled to a fee since the price paid for the property was less than the asking price they agreed to.
The broker claims they earned a fee under the safety clause since the property was acquired by a registered buyer following negotiations during the safety clause period.
Here, the broker is entitled to the agreed fee under the safety clause, since the buyer:
- reviewed aspects of the property with the seller broker during the representation period;
- was registered as a prospective buyer with the seller on expiration of the representation;
- negotiated with the seller (or another agent of the seller) during the period covered by the safety clause; and
- ultimately acquired an interest in the property.
The sale price of the interest acquired in the property has no effect on the enforceability of the safety clause for earning a fee. Further, the amount of the fee the broker earns is set by the percentage of the price paid (or the fixed fee) stated in the representation agreement fee provisions. [Delbon v. Brazil (1955) 134 CA2d 461]
A seller’s dual liability exposure when changing brokers
On expiration of a seller representation agreement, the seller employs a different broker to sell the property as their exclusive representative. Further, the prior seller broker perfected the safety clause under their expired representation agreement by notice of prospective buyers.
A registered prospective buyer returns to negotiate the purchase of the property during the second seller broker employment and acquires the property. [See RPI Form 102 §3.1(d)]
Here, the seller is exposed to liability for the payment of two fees. Both the prior broker and the current broker are entitled to a fee as earned under two different representation agreements.
A broker soliciting employment with a seller the broker knows has previously marketed the property through another broker avoids creating this dilemma for the seller by inquiring into the prior broker’s representation. Of course, the inquiry is about any unexpired period for a safety clause in the representation agreement with the prior broker.
What the second seller broker needs to confirm is the seller’s awareness they may be exposed to multiple fees when the property is sold to a prospective buyer registered under the expired representation.
Prior to having any contact with these registered buyers, the second broker needs to negotiate a fee-sharing agreement with the prior broker. An agreement with the prior broker is set out in a form and reviewed with the seller-client.
On expiration of a representation, the seller avoids the dual liability situation by renewing the representation agreement with the same broker, rather than employing a different broker. The renewal advantage is held by the current seller broker with an exclusive representation agreement.
The renewal of a representation agreement with the same broker sets a new date for expiration. The renewal of a representation agreement resets the need to register prospective buyers until the renewal period expires. [See RPI Form 120]
Renewal of representation with the same broker also preserves the efforts the seller broker made educating the seller-client, compiling information on the property and marketing the property.
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Safety clause vs. procuring cause
The procuring cause theory is today used only in an open seller listing agreement to determine whether a fee is earned. The clause is not to be conflated with the prior discussion about a fee earned under a safety clause.
A seller broker’s activities during employment under an open listing qualify as the procuring cause of a buyer and entitle the broker to a fee when the broker or their agent are either the:
- direct cause of a sale to a buyer; or
- cause of a continuing series of events which result in a sale to the buyer.
Consider a trust deed broker employed under an exclusive representation agreement by a mortgage loan originator (MLO) in need of assistance to locate an investor to purchase the mortgages the MLO originates.
The representation agreement contains a fee provision with a clause stating the broker earns a fee when the broker initiates a transaction which is successfully completed. Further, the representation agreement fee provision contains a safety clause addressing transactions with registered mortgage investors after expiration of the representation.
Note: These two fee clauses are diametrically opposed — inconsistent with one another. One calls for a fee to be earned on transactions initiated and completed by the trust deed broker. The other calls for a fee on any sale of trust deeds to a registered investor after the representation expires.
On expiration of the representation without arranging a transaction, the broker hands the MLO-client a list of several investment firms who buy trust deeds (mortgages) or represent mortgage investors.
Later, before expiration of the safety period, an investment firm registered by the agent enters into negotiations with the MLO and buys mortgages from the MLO.
The trust deed broker discovers the transactions and demands a fee from the MLO-client. The broker claims they earned a fee since the broker introduced the MLO to the investment firm and the firm purchased mortgages from the MLO within the safety clause period.
The MLO claims the broker is not entitled to a fee since the broker was hired to initiate and complete transactions and registering the names of investment firms does not comply with this contingent fee condition.
Is the broker entitled to a fee?
No! The broker is not entitled to a fee. The fee provisions called for the broker to complete transactions to earn a fee. Registering the names of firms known to the broker to buy mortgages was not a condition for earning a fee.
The fee provisions calling for completed transactions required the broker to be the procuring cause of trust deed sales, not just soliciting, negotiating or naming prospective buyers. The earning of a fee is contingent on the broker’s initiation of a transaction and successful completion. [Hedging Concepts, Inc. v. First Alliance Mortgage Company (1996) 41 CA4th 1410]
Fee provisions requiring a broker to be the procuring cause of a transaction automatically void any safety clause in the representation agreement. A safety clause and a procuring cause clause are incompatible fee provisions — one or the other, but not both in the same representation agreement. [Delbon, supra]
The prospective buyer remained interested and bought
A seller employs a broker under a representation agreement without a safety clause in the fee provisions. Here, the broker is entitled to a fee when they negotiate with a buyer during the representation period who later acquires the property, a procuring cause situation.
During the representation period, the seller broker or their agent are contacted by a buyer who is delivered information on the seller-client’s property. The buyer has difficulty arranging purchase-assist financing. After several discussions, the seller broker and the buyer no longer engage in negotiations.
On expiration of the representation, the property remains unsold and the representation agreement is not renewed. A few months later, the seller contacts the buyer to see whether they are still interested in purchasing the property. They are, and negotiations resume. The buyer arranges financing and acquires the property.
On discovery of the sale, the broker makes a demand on the seller for a fee. The broker claims they were the procuring cause of the sale and earned the fee on closing of a transaction. They presented the property to a buyer who remained interested in the property and eventually purchased it.
The seller claims the broker is not entitled to a fee since the buyer acquired the property through negotiations independently commenced by the seller after the representation expired.
Here, the broker is entitled to a fee as the procuring cause of the sale. The broker’s contact with the buyer set into motion an uninterrupted chain or series of events, separated only by time, which eventually resulted in a sale. [E.A. Strout Western Realty Agency, Inc. v. Lewis (1967) 255 CA2d 254]
Editor’s note — When the representation agreement includes a safety clause and the broker registers prospective buyers to perfect the right to collect a fee, this type of dispute over procuring cause activity is avoided.
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