Broker Held Entitled to Commission Even Without Completed Sale

October 08, 2009

In RC Royal Development and Realty Corporation v. Standard Pacific Corporation (2009) 2009 DJDAR 14254, the appellate court held that a buyer's broker had earned its commission at the time that the buyer entered into a purchase contract, and that the close of escrow was not a condition to the obligation to pay that commission. After an agency agreement was executed, the buyer entered into a purchase contract to acquire real property in Los Angeles. The buyer did not close on the transaction, forfeited a portion of the deposit to the seller, and the broker sued for the commission.

The agency agreement provided that the broker would receive a commission, paid by the buyer, if the property was "purchased" within 1 year. "Purchase" was defined to mean any acquisition of "any direct or indirect beneficial interest in the Property". The commission was to be paid through close of escrow. The broker argued that the commission was earned when the real property purchase contract was executed, as a "beneficial interest" in the property had at that point been acquired. In turn, the buyer argued that it was not obligated to pay a commission because escrow never closed and it had not acquired any "beneficial interest".

The court examined the definition of beneficial interest, noting that in real estate transactions, the purchaser acquires a "conditional equitable title to the property in fee simple" upon execution of the purchase contract. This is why the purchaser is vested with the right to any condemnation award (in the absence of an agreement to the contrary). The court noted that the buyer had not terminated the purchase contract prior to the expiration of its due diligence period, but the opinion does not suggest that this mattered: "[The broker] earned its brokerage commission on August 19, 2005, when [buyer] and [seller] executed the buy-sell contract."

The fact that the contract provided for payment of the commission through escrow was, to this court, just a limitation on the time of payment. The court noted that language which required a closing to be a condition to the obligation to pay the commission could have been drafted, citing a case where the listing agreement provided, "In the event of consummation of the sale of the property hereinabove referred to, party of second part is to be entitled to a commission. . . "

Brokers and clients should both be aware of this decision, and ensure that they carefully review their listing agreements to ensure that they are consistent with their expectations. The implication of RC Royal is that even if the buyer had terminated the contract during its due diligence period, the commission would have been payable. It is difficult to imagine that would be consistent with the expectations of most buyers.