by Thomas V. Bennett
The Massachusetts Supreme Judicial Court (SJC), the state's highest court of appeal, has clarified when a real estate broker is entitled to be paid a commission. (1)
The case involved a broker who sued for a real estate commission where the seller was unable to conclude the transaction due to the fact that there was hazardous waste located on the premises. The Trial Court judge found for the broker on the basis that the only reason why the closing did not occur was because of the seller's inability to back up the promise that the land was free of toxic materials such as gasoline. The Massachusetts Appeals Court reversed the judgment and the SJC granted the broker's application for further appellate review. The SJC in reviewing the applicable law noted that the cases have held that a broker earns a 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.
The SJC noted that the requirement that the sale actually be consummated is subject to an exception. The cases have held that a broker has an enforceable claim when the first two requirements are met, and the failure of completion of the contract results from the wrongful act or interference of the seller or where the seller wrongfully defaults.
The SJC upheld the Appeals Court reversal of the Trial Court's finding in favor of the broker holding that the seller's obligation to remove the hazardous materials from the property was a condition of the contract like a mortgage contingency which permitted the buyer to terminate the agreement. The SJC found it relevant that the agreement did not give the buyer a right to a claim for damages for willful default but only gave the buyer the right to terminate the contract. The SJC noted that the trial judge did not find, and that there was no basis of finding, that the failure of the sale was a product of any bad faith or wrongful interference by the owner.
There is a need to digress here for a moment. In the judicial system, just as in our system of government, there are two court systems. One is the state court system and one is the federal court system. On occasion when a federal court takes a case but the subject matter of the dispute involves state law, the federal court must apply state law. If that law is not clear then the federal court will interpret what it believes to be state law. The broker in the SJC case relied on such a federal case, (2) and the SJC took the opportunity in this case to state that the federal case was not correct.
In the federal case there was a dispute in which the broker brought a suit to recover against a seller where at the closing the parties discovered a defect in the title which no one knew of previous to the closing. The United States Court of Appeals for the First Circuit (the Federal Court) detected a "gray area" in Massachusetts law concerning a default by seller that did not amount to wrongful acts or interference. The Federal Court held the seller could be liable for broker's commission even if the seller's default was innocent concluding that the SJC would adopt that conclusion if it were faced with facts like those in the federal case. In so doing the Federal Court assumed that the SJC would prefer a "bright line rule" which would award the broker commission when the seller defaults on a binding purchase and sale agreement whether the default is innocent or motivated by bad faith.
The SJC stated that the Federal Court did not state Massachusetts law correctly. The SJC reiterated that the law in Massachusetts is that a broker is not entitled to a commission unless it appears that the closing is prevented by wrongful conduct on the seller's part. The SJC stated that it continued to believe that ordinarily when the owner of a property lists it with a broker for sale, the owner's expectation is that the money for the payment of the commission will come out of the proceeds of sale. The SJC acknowledged that brokers have legitimate expectations that if the broker brings the parties together on mutually acceptable terms that the broker expects a commission for his or her labor. Nonetheless, the SJC concluded that the broker is in a better position than the seller to protect those expectations by including in the brokerage contract a provision that the broker is entitled to its commission when it produces a ready, willing and able buyer whom the seller for whatever reason refuses to accept. The SJC stated in the absence of such a provision the burden is rightfully placed on the broker in light of the fact that many sellers, unlike brokers, are involved in real estate transactions infrequently and thus are unfamiliar with their legal rights.1. Hillis v. Lake, 658 N.E.2d 687 (Mass. 1995)
2. Bennett v. McCabe, 808 F.2d 178 (1st Cir. 1987)