Getting Paid When Purchase Options Are Exercised

One of the most difficult tasks for a real estate agent may be the successful collection of a commission due upon the renewal or an extension of a lease. Listing agreements will often state that not only is the agent's commission payable when the agent procures a ready, willing, and able tenant, but a commission is also due if that same tenant renews the lease.

Does it make a difference if the agent's listing was for sale only, not for lease? In other words, is the agent entitled to a brokerage commission if the tenant does not have the right to renew the lease but does have the right to purchase the property? This was at the heart of a decision handed down by the Arkansas Appellate Court several years ago in Moeller v. Theis Realty, Inc., 13 Ark. App. 266; 683 S.W.2d 239 (1985). A listing agreement for the sale (not lease) of the property was in effect when the owners entered into a lease containing an option to purchase the property.

On October 10, 1979, the owners entered into an exclusive listing contract with the broker. The listing agreement, which was to expire January 10, 1980, stated that the broker "shall have the sole and exclusive right to sell said property." It further provided that "if the property is sold or otherwise disposed of by Agent or any other person during the period of this contract, Owner agrees to pay Agent a professional fee of 10 percent of the gross amount of the sale." On December 28, 1979, the owners executed a lease agreement between themselves, as lessors, and Ratliff Brothers, as lessee. The lease was for three months, commencing on January 1, 1980, and ending March 31, 1980. The lease included an option to purchase, which was effective during the term of the lease.

Almost three months after the exclusive listing agreement for the sale of the property had expired, the Ratliff Brothers exercised the option to purchase. That occurred on March 31, 1980. When the agent realized that the tenant had exercised its option to purchase, the agent claimed its commission, which the owners refused to pay. Shortly thereafter, the broker filed suit for its commission on the sale to Ratliff Brothers.

The owners based their defense of the suit on several alternative theories. It was noted that while the agent had an exclusive listing agreement to sell the property, what had actually occurred was a lease of the property. Any sale that took place was only as a result of the tenant's option to purchase the property, and not the result of the broker producing a ready, willing, and able buyer for that property. The owners contended that the lease with an option to purchase was not a disposition of the property as that term was used in the listing agreement between the parties.

The Arkansas court supported the broker by rejecting the notion that the option to purchase would not trigger a commission. The court found it unnecessary to deal with the owners' argument concerning whether a lease with an option to purchase is a disposition of property. The option was granted during the listing period, and the tenant exercised the option. The court also noted that the tenant exercised the option after the exclusive listing contract had expired. It saw little difference in the granting of an option that is ultimately exercised and the execution of a contract to sell that is signed during the listing period but performed afterward.

The court reasoned that the option here effectively prevented the broker from exercising its exclusive right to sell the owners' property during the remainder of the exclusive listing. Also, the exercise of the option by Ratliff Brothers consummated the sale by the owners in derogation of the broker's rights under the exclusive listing agreement. Therefore, the broker was entitled to its commission according to the listing agreement.

If the facts had been slightly different, it is possible that the court may have come to a different conclusion. For example, the court relied in part upon the fact that the lease containing the option was executed during the period when the exclusive listing was in effect. Would there have been a different result if the parties had waited two weeks and then executed the lease? Perhaps; clearly, it then would have been more difficult to argue that the tenant's option to purchase prevented the agent from marketing the property. As it was, the overlap between the execution of the lease and the remaining period of the exclusive lease agreement was only 13 days.

Always take steps to protect your interests when faced with a conditional fee (such as earning a commission upon the future exercise of an option). The language contained in the exclusive listing agreement in the Arkansas case appears to have been sufficient to withstand the challenge made by the owners. However, an additional provision allowing the agent to recover attorney's fees in the event of a lawsuit to recover the commission might have made the owners think twice about litigating the matter. It could be much cheaper, quicker, and less stressful than trying to assert the agent's rights in court.

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.