Table of Contents
Commissions
Commissions based on a percentage of the purchase price of the property sold have always been the most common form of compensation in the real estate industry. Although fee-for-service and even wage programs exist in the industry today, commissions continue to dominate. This topic is about how commissions are earned, shared, disputed, used and misused in real estate.
Central to any discussion of commissions has to be a discussion of “procuring cause.” Accordingly, Understanding Procuring Cause is the first subject in this topic. The subject includes sections explaining the Legal Definition of Procuring Cause as well as Applying Procuring Cause to Real Estate. If procuring cause has to be the first subject in any discussion of commission, Sharing Commissions has to be second. Finally, no discussion of commissions would be complete without some mention of Commissions and Antitrust.
return to top Understanding Procuring Cause
Procuring cause is a legal standard. It is really just the judicial gloss that has accumulated over the years around the clause in a listing agreement that says the seller will pay the listing broker a commission if the listing broker procures a buyer ready, willing and able to purchase the property. If you look at the listing agreement you use, you will see a “compensation” clause of some kind that contains a “ready and willing buyer” provision entitling the broker to the commission. Understanding “procuring cause” means understanding what the simple clause means legally.
return to top Legal Definition of Procuring Cause
The legal definition of “procuring cause” is, as legal definitions are wont to be, a little on the arcane side. An abstract definition commonly used by courts defines the standard as: “The proximate cause; the cause originating a series of events, which, without break in their continuity, result in the accomplishment of the prime object.” Courts apply this abstract procuring cause definition to real estate commissions by saying that procuring cause is “a cause originating a series of events which without break in their continuity result in the accomplishment of prime objective of the employment of the broker who is procuring a purchaser ready, willing and able to buy real estate on the owner’s terms.”
Legal definitions have not, of course, prevented disputes over procuring cause. The “cause originating a series of events which without break results in the accomplishment of prime objective” part of the definition is far from self-explanatory. There are endless court cases in which the actions of the broker are tested to see whether they were sufficient to “cause” the buyer to purchase. Invariably these fights involve some variation of the one broker shows and another broker writes theme. These kinds of procuring cause fights are about whom among competing brokers actually “caused” the buyer to enter the contract. This subject is covered in depth in the Applying Procuring Cause to Real Estate section of this topic.
The other part of the procuring cause definition most tested in court cases is the buyer’s actual readiness, willingness and ability to purchase. In such cases what is being fought over is not just who caused the buyer to enter the contract, but when that buyer is actually “procured.” When, exactly, is the buyer “procured?” Is it when they enter a binding contract? It is when the seller actually gets the money? Is it somewhere in-between?
We are fortunate here in Oregon to have had both the “caused” and “procured” parts of “procuring cause” worked out by the Oregon Supreme Court. Here, in the Court’s own words, is the legal standard in Oregon:
“When a broker is engaged by an owner of property to find a purchaser for it, the broker earns his commission when (a) he produces a purchaser ready, willing and able to buy on the terms fixed by the owner, (b) the purchaser enters into a binding contract with the owner to do so, and (c) the purchaser completes the transaction by closing the title in accordance with the provisions of the contract. If the contract is not consummated because of lack of financial ability of the buyer to perform or because of any other default of his, * * * there is no right to commission against the seller. On the other hand, if the failure of completion of the contract results from the wrongful act or interference of the seller, the broker's claim is valid and must be paid. In short, in the absence of default by the seller, the broker's right to commission against the seller comes into existence only when his buyer performs in accordance with the contract of sale."
The Court’s statement makes clear that in Oregon a commission is not due until the buyer takes title in accordance with the contract. The single exception is a sale that is not completed because of the “wrongful act or interference of the seller.”
Requiring a closed transaction before a brokerage fee can be earned makes the buyer’s performance of the contract part of procuring cause. That goes a long way toward explaining why the work of real estate agents does not end with the acceptance of the sale agreement. Although often cast in terms of “agency duty,” the continuing efforts of the agents to close the sale after the parties have a contract is really just an artifact of being paid commissions under a procuring cause standard.
If continuing efforts on the behalf of the client is an artifact of procuring cause, one would expect changes in what agents do or are expected to do for clients when commissions give way to fee for service arrangements. The beginnings of such changes can be seen in the industry today. MLS only and Limited Service brokerage models are fee based. It is hardly surprising that these fee based relationships significantly change the continuing efforts of the agents. It really doesn’t have anything to do with agency duties or providing minimum services. Click Here for detailed discussion of working with MLS Only and Limited Service listings.
Being clear on what it means to “procure” a buyer in Oregon is useful in dealing with procuring cause issues. We know as a result of the clear standard that no commission is due any agent if the buyer for whatever reason does not close the transaction. Entitlement to a commission is less clear when the deal fails because of the seller’s actions instead of the buyer’s. Although a commission can be due if the buyer’s failure to close is the result of the “wrongful act or interference of the seller,” it is not clear exactly what acts a court might consider “wrongful” or what kind of seller “interference” would justify a commission on a failed deal.
Two reoccurring patterns emerge from the legal standard of procuring cause used by Oregon courts. In one pattern, competing brokers fight over who “caused” the sale. In the other pattern, the dispute involves whether the seller wrongfully prevented or interfered with the buyer’s performance. Both of these patterns are discussed in the following Applying Procuring Cause to Real Estate section of this topic.
return to top Applying Procuring Cause to Real Estate
In the Legal Definition of Procuring Cause section of this topic, we saw that procuring cause fights tend to fall into one of two patterns. In one pattern, competing brokers fight over who “caused” the sale. In the other pattern, the dispute involves whether the seller breached the listing agreement by wrongfully preventing or interfering with the buyer’s performance. The second pattern is by far the more rare, if not the more easily understood.
return to top Seller Wrongful Interference
The key to understanding whether a commission is due because of the “wrongful act or interference of the seller” is the legal concept of a “wrongful act.” A “wrongful act” is “any act which in the ordinary course will infringe on the rights of another to his damage, unless it is done in the exercise of an equal or superior right.” The seller’s willful and unexcused refusal to perform under a valid contract would be “wrongful” because it would infringe on the buyer’s rights under the contract to the buyer’s damage. Similarly, a seller who conspires with the buyer to terminate a purchase agreement and substitute a new one for the purpose of avoiding a commission wrongfully interferes with the closing of the transaction. That is the case because the seller’s actions demonstrate bad faith in the performance of the listing agreement to the broker’s damage and are thus “wrongful.”
A reoccurring “wrongful act” scenario occurs when the seller refuses to take a full price offer for the purchase of the property. Agent entitlement to a commission, either listing or seller side, in such circumstances depends on the seller’s refusal being in some way “wrongful.” There is nothing in the law that would require a seller to accept a full price offer, or any offer, simply because the property is advertised for sale. Refusal to accept an offer is never “wrongful” with respect to the buyer because asking for offers at an advertised price creates no legal obligation to accept any particular offer at that price or any other price.
Because the seller is not legally obligated to accept any offer simply because they listed the property, any “wrongful” act in not accepting a particular offer will have to be “wrongful” with respect to the listing broker’s rights, not the buyer’s rights. The seller’s action with respect to the listing broker can be wrongful only if it deprives the listing broker of some legal right. The legal right at issue, of course, is the right to a commission under the listing agreement. That, in turn, takes us full circle to procuring cause because the broker is entitled to the commission only if the buyer is “willing and able to buy on the terms fixed by the owner.” Click Here for a detailed discussion of the procuring cause standard in Oregon.
The “willing and able to buy on the terms fixed by the owner” part of the dispute will turn on the nature of the buyer’s offer. It must be an offer that meets the terms fixed by the seller or the “procured” part of the fight is over. Typically, those terms are found in the listing agreement itself. Unfortunately, all that is usually found in the listing agreement is the listing price. Thus, only one of the terms (the listing price) is actually fixed. What about the rest of the terms of an offer? How can the terms be said to be “fixed by the seller” in a case where the seller rejects an offer at the listed price?
The key again is the requirement that the seller’s actions be “wrongful.” What the broker will ultimately need to show is that the seller’s rejection of the full price offer was in breach of the listing agreement. To do that, the broker will have to show the terms of the offer would be acceptable to a reasonable seller in the same circumstances. That standard may prove difficult to meet given the contingencies associated with a typical buyer’s offer. There is, of course, a lot more to what is and isn’t an acceptable offer than just the price.
Lawyers, of course, understand the nature of wrongful acts and will always argue their client’s actions were not wrongful because the actions were done in the exercise of an equal or superior right. For instance, faced with the buyer’s demand to close, the seller will claim a prior material breach on the buyer’s part justified the seller’s refusal to perform. Similarly, a broker claiming the seller’s bad faith performance of the listing agreement can expect the seller to counter with a claim that the broker did not perform their end of the bargain. In a “refusal to accept a full price offer” fight, the seller will simply point out why the offer was unacceptable even though at the listed price. It is hardly surprising then that collecting a commission simply because the seller refuses a full price offer is a very uphill and uncertain undertaking.
Less uncertain by far are cases in which the seller and buyer conspire to deprive the broker of the commission by terminating the transaction and later making a new one on the same terms. There is no question in such a case that the actions of the both the buyer and the seller are wrongful. The only issue, therefore, will be proving the intent. Similarly, where the seller refuses to perform a valid contract without excuse, there is no question of the seller’s actions being wrongful. That wrongful action (unexcused failure to perform a valid contract) will entitle the broker to the commission under the procuring cause standard used in Oregon.
return to top Competing Brokers
The legal definition of procuring cause focuses on “cause.” Cause is about responsibility. What procuring cause fights are about is figuring out who is responsible for the buyer purchasing this house at this time. For there to be a fight about responsibility, you have to have more than one person claiming they are responsible for the sale.
In the typical competing broker case, you have one agent who has in some way helped the buyer identify the property and another agent who helped them write the contract or assisted the buyer in performing the contract once written. Choosing between competing brokers requires a close examination of the entire course of events, from the time the buyer first learns of the property until they close the transaction. What this examination of events is aimed at is finding the actions that proved essential to the outcome.
The actions of an agent that are essential to a buyer closing a deal cannot simply be listed from showing to walkthrough inspection. Every deal is different. To decide procuring cause you have to find the point in time when the buyer decides this is the house they want to purchase. At that point, the buyer has been procured. Everything that comes after that decision is simply the buyer doing what has to be done to accomplish what the buyer has already decided to do. The agent who brings the buyer to the decision to purchase point is the procuring cause of the sale.
This way of looking at procuring cause is quite foreign to real estate agents. Real estate agents tend to think procuring cause is about the amount of work an agent does with a buyer or who represented the buyer or who worked with the buyer. It is not. Sellers do not pay agents to work with, assist or represent buyers. It just seems that way to the agent. What sellers pay for is the same thing they have always paid for: a buyer ready, willing and able to purchase on terms set by the seller. The amount of work involved for the buyer’s agent is completely irrelevant to the seller. The seller is paying the buyer’s agent to find the buyer and bring them to the place where they will do what is necessary to purchase the seller’s house.
Because procuring cause happens when the decision to purchase is first made, competing broker cases mostly split between showing and writing. One agent shows the property and another agent ends up writing the deal. There are, of course, thousands of variations on the theme. In the old days, local boards would sometimes try to resolve messy procuring cause fights by having “rules” like the “threshold rule” or the “he who writes” rule.
The “threshold rule” favored showing by siding with the agent who first gets the buyer to look at the property. The “he who writes” rule favored writing the contract by siding with the agent who actually got the buyer’s signature on the line. Such local rules are now banned by the National Association of REALTORS®. Banning rules, of course, doesn’t have any effect on the actual dispute between agents when one shows and the other writes. Showing and writing remain important events that have to be considered in determining procuring cause.
Because showing will always play an important role in procuring cause, a common ploy is for the agent who is going to write a deal for a buyer who has been working with another agent to schedule and conduct another showing. Such maneuvering generally fools no one. If the buyer is committed to the purchase already due to the efforts of the other agent, the second showing will not change anything. If the buyer is not committed, because they don’t trust the other agent or that agent has abandoned them or some other legitimate reason that would explain why they are going to another agent, the second showing will not change anything. The real question is why the buyer is not writing with the first agent, not whether the second agent showed the property.
Procuring cause ploys have developed at every transaction stage. For instance, there have been cases of agents convincing buyers involved in a dual representation transaction that they need “their own agent,” getting the buyer to sign an exclusive buyer service agreement and then claiming the selling side of the commission in a deal already written. That simply will not work under a procuring cause standard. Such cases point clearly at the difference between procuring cause and representation. The seller, through the listing agent, is not paying for buyer representation. The seller is paying for the buyer, not the buyer’s representation.
For REALTORS®, procuring cause fights are a matter for arbitration by a Professional Standards Panel of their local board. Procuring cause arbitration requires the Principal Broker’s permission. An agent considering bringing a procuring cause action should therefore start by bringing the matter to their principal broker. From there, filing is a matter of contacting the local board for an arbitration packet and following the procedures outlined in the packet. Larger boards have on-line filing programs that make filing a procuring cause claim fast and easy.
Procuring cause arbitration at the local board level is conducted under rules established by the National Association of REALTORS® (NAR). NAR publishes detailed “factors” for the use of arbitration panels in determining procuring cause. You can review these detailed factors online at: http://www.realtor.org/LetterLw.nsf/pages/95procuringcausefactors?OpenDocument.
In addition to the detailed factors published by NAR for the use of REALTOR® arbitration panels, NAR also offers procuring cause guidance to brokers in the form of seven questions that should be asked whenever procuring cause is in dispute. The questions are:
- When and how was the original introduction [of the buyer to the property] made?
- Did the original introduction start an uninterrupted series of events leading to the sale?
- Did the broker/salesperson who made the original introduction maintain contact with the buyers?
- Did the broker/salesperson engage in conduct that prompted the buyer to look elsewhere for assistance?
- If more than one cooperating broker was involved, was the second broker/salesperson aware of the prior introduction of the buyer to the property?
- Was the introduction of a second broker an intrusion into the transaction or the result of estrangement or abandonment by the original broker?
- Did the cooperating broker initiate a separate series of events, not dependent on the original broker’s/salesperson’s efforts, that led to the successful transaction?
Notice how the NAR questions focus on continuity of actions and events. Questions 2 and 7 are the decision questions. The rest of the questions are questions that support the answer to questions 2 and 7. In every case, the decision maker must decide between competing agents whose actions lead to the sale.
It is not hard to see that determining between competing agents whose actions lead to a sale can be very difficult. That difficulty creates uncertainty when competing broker situations arise. It is for that reason that experienced agents watch for potential procuring cause situations and either avoid them (no, I can’t write this for you) or negotiate around the problem (let me get this straightened out with the other agent before we write this). Negotiating around potential procuring cause problems may, of course, not always be possible. In such cases, documenting the buyer’s reasons for not continuing with the other agent will be a lot more useful if there is later a procuring cause fight than re-showing the property.
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