Collecting Commissions When Exclusive Agreements Are Breached

What happens when a property owner attempts to circumvent paying a commission to a broker, particularly in the face of an exclusive listing agreement? A Superior Court decision in New Jersey in 1986, Kislak Co., Inc., v. Seymour Geldzahler (210 N.J. Super. 255; 509 A.2d 320; 1986), discussed the considerations involved and how a broker can collect damages.

Kislak Co., a licensed New Jersey broker, sought to compel the defendant to pay a commission on real estate allegedly sold while under an exclusive sale agreement with Linda Stiles, a licensed real estate salesperson employed by Kislak. Stiles had approached the defendant, Seymour Geldzahler, an experienced real estate owner and developer, and obtained an exclusive authorization on October 8, 1982, to sell his property, Warren Village. This authorization provided that for three months, Kislak had the exclusive authority to sell the property; a commission of $50,000 would be paid upon the successful completion of a sale.

A similar agreement was renewed on February 28, 1983, which made the $50,000 commission payable in two parts: $25,000 at closing and $25,000 12 months later. The new agreement also contained the following language, demanded and drafted by the defendant: "Your authorization is tied to our agreement with Howard Birch [who had an offer pending] dated February 15, 1983, only." This agreement was valid through May 1, 1983, and contained the same requirement that Geldzahler refer all inquiries received about Warren Village to Kislak.

On February 15, 1983, Stiles obtained an offer exceeding $1.1 million, which the defendant conditionally accepted. After Geldzahler’s attorney prepared the contracts, the attorney for the company with the pending offer requested changes that he inserted in a rider. Despite negotiations concerning the changes, the parties were unable to reach an agreement and terminated the proposed deal.

Meanwhile, at some time prior to February 28, 1983, a broker from Gupka Realty contacted Geldzahler. Geldzahler told Gupka that he had a written exclusive agreement with Kislak that expired on February 28 and instructed Gupka to wait to present his offer until after the February 28 end to the exclusive agreement with Kislak. Geldzahler did not inform Kislak of this inquiry, of his contact with Gupka, or of Gupka’s presentation of an offer on March 1, 1983.

On March 5, 1983, Stiles produced another offer that was rejected. Geldzahler then sold the property to Gupka’s buyer for $1.2 million and the deal closed on September 7, 1983.

Both Geldzahler and Gupka knew that the exclusive agreement with Kislak was in effect and that Geldzahler received Gupka’s inquiry prior to February 28. When confronted with the apparent clear language of the listing agreement, which stated, "The undersigned agrees to refer to you all inquiries received regarding the purchase of said property, whether from real estate broker, prospective purchasers, or others," the defendant argued that the contact between him and Gupka did not constitute a "serious inquiry," and as such, need not have been referred to the plaintiff.

The court rejected that argument quickly, noting that the language of the agreement was unambiguous. Gupka, a real estate broker, clearly fell within the class of persons from whom inquiries should be referred. The provision required "all inquiries" to be referred to the listing broker with no distinction made between "serious" and "nonserious" inquiries.

Geldzahler further contended that even if his communication with Gupka constituted an inquiry, he had no obligation under the terms of the exclusive agreement to notify Kislak. Indeed, Geldzahler made it clear in his testimony that he would not refer inquiries to Kislak.

Geldzahler’s argument that he was not required to place inquiries on Kislak’s doorstep also was not found to be persuasive. The court observed that the purpose of granting an exclusive right to sell is twofold. For the principal, an exclusive agreement encourages the broker to exercise his or her best efforts in selling the property within a discrete time period; for the broker, the agreement allows a time period to utilize all available resources fully with the assurance that the efforts will be without interference from other brokers and will be rewarded if the property is sold within the time frame of the exclusive agreement.

Moreover, every contract harbors an implied covenant of good faith in which neither party shall do anything that will destroy or injure the right of the other party to receive the fruits of a contract. It is precisely this type of activity—warming another deal on the back burner in case the deal brewing on the front burner turns cold—that an exclusive agreement was designed to avoid. Geldzahler’s actions could not be termed good faith compliance with the exclusive listing. The court found it to be nothing less than subversion of the agreement.

Having found a breach of the agreement, the court explored the measure of damages for the broker. Ordinarily, the amount of compensation to which a broker is entitled is ascertained by reference to an employment contract. Geldzahler contended that the appropriate measure of damages was not the commission, but damages for breach of contract in which Geldzahler breached the clause that required referral of all inquiries to Kislak, the listing broker.

The presence of a referral term has been recognized in many states as an essential component of an exclusive agreement—so much so that it has been found, of itself, to confer upon a broker the exclusive right to sell. In determining the applicable measure of damages, the court found no reason to distinguish between breach of a referral provision and breach of a term providing that a commission will be deemed earned if the property is sold or exchanged during the period of the exclusive agreement. The appropriate measure of damages for breach of a term requiring referral of all inquiries to the listing broker, which is part and parcel of the exclusive agreement, is the stipulated commission in that agreement. Accordingly, the court awarded the plaintiff $50,000.

Many agents routinely dismiss their chances of recovering against owners who attempt to sidestep their obligations under listing agreements, feeling that it is too difficult to win and the damages may not warrant the trouble. Cases such as this one, however, may give agents with legitimate claims cause to reconsider.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.