It sometimes happens that agents bring together buyers and sellers and negotiate terms of transactions which do not close, only to discover later that the parties concluded a sale without their participation or payment of commission. Listing agents can be protected for a specific period pursuant to the terms of the listing agreement, but this scenario can also arise in a situation in which no listing was signed.
Agents may not wish to press their claim for payment of a commission, for reasons related to the expense of litigation compared to the amount of the commission, or the risk of bad public relations. But can the agents recover, if they elected to pursue claims?
A recent decision by the California Court of Appeal for the Fourth District, Torelli v. J.P. Enterprises Inc., has ruled in favor of agents on this issue.
In Torelli, the buyer, Carolyn Melstrom, herself a licensed agent, met Guy Torelli in 1995 while viewing a property for sale. Ms. Melstrom was looking for residential income property for her family. Mr. Torelli suggested that they visit a property which he had listed in 1994 for J.P. Enterprises Inc. Mr. Torelli assisted Melstrom to prepare an offer to purchase the property for $1,375,000.00 which included a five percent (5%) commission to be split between Torelli and The O'Brien Company, which was Ms. Melstrom's broker.
Mr. Torelli faxed the offer to J.P. Enterprises; in turn, J.P. Enterprises sent him a signed counteroffer for $1,430,000.00 which, with few exceptions, accepted the terms of the offer, including the commission agreement. By its terms, the counteroffer would be deemed revoked unless accepted by 6:00 p.m. on February 3, 1995. However, Ms. Melstrom did not accept the counteroffer before it expired.
The reason for nonacceptance of the counteroffer became obvious later. By letter that same date (February 3, 1995), the Melstroms wrote to the seller suggesting direct negotiations because, they said, Mr. Torelli "had been less than forthright" with them.
Thereafter, The O'Brien Company prepared an offer from the Melstroms which J.P. Enterprises accepted on February 16, 1995. No commission was paid to Mr. Torelli. After he discovered that a sale had been made without him, Mr. Torelli filed a complaint for money damages arising from breach of contract and intentional interference with a contract. J.P. Enterprises filed a motion for summary judgment (seeking to get a judgment in its favor without a full trial), arguing that any contract between it and Mr. Torelli expired when its counteroffer was not accepted before its expiration. The trial court granted the motion and gave judgment for J.P. Enterprises.
The Court of Appeal reversed, and its language is so compelling that I quote it at length. "The trial court erred. The promise to pay the broker a commission did not die with the expiration of the counteroffer to the buyer. When the seller signed the counteroffer, it became bound by an implied promise not to deprive the broker of the benefits of the bargain to pay the commission. The law does not allow a broker to be cheated out of his or her commission by the simple artifice of entering into direct negotiations and making substantially the same bargain, albeit without the commission. Accordingly, we reverse the judgment."
The Court ruled that the absence of the listing agreement did not deprive Mr. Torelli of his commission. "Rather, the right to the commission then depends on the document which does set forth the commission agreement, [here] the real estate sale contract itself .... It is, however, an error to slide from the idea that a broker's right to a commission depends on an agreement the function of which is to serve as a contract between two other parties -- the buyer and seller -- to the idea that the broker's right to a commission necessarily may be defeated if the buyer and seller do not sign the precise piece of paper embodying that agreement. As far as the broker's right to a commission is concerned, the broker-seller contract set forth in a counteroffer must be distinguished from the seller-buyer contract which would be formed if the buyer signed the counteroffer. Any other rule would lead to a gross inequity where the buyer did not sign the particular piece of paper setting forth the counteroffer, but nevertheless bought the property on substantially the same terms as set forth in the counteroffer."
"If ... a broker may recover when a sale is not consummated due to the seller's fault, it naturally follows that a broker may recover when a sale is consummated because the buyer and seller, having been brought together by the broker, entered into direct negotiations. ... [I]t is hard to imagine a more blatant example of an attempt to cheat a broker out of a commission than the case before us."
"... [E]very contract has an implied covenant not to do anything which injures the right of the other party to receive the benefits of the agreement. ... Having made an agreement to pay Torelli a commission which was memorialized in the counteroffer, J.P. Enterprises could not thereafter, consistent with the implied covenant of good faith, make a deal with the buyer on substantially the same terms as it contemplated in the counteroffer without paying Torelli the agreed commission. The omission of a provision for Torelli's commission in the final agreement was the functional equivalent of a with-fault repudiation of the entire sale. While no writing may have expressly prohibited J.P. Enterprises from entering into direct negotiations with the Melstroms, the implied covenant of good faith meant that J.P. Enterprises still had no right to use those negotiations to deprive Torelli of his commission for having found the Melstroms in the first place."
The court was careful to limit the scope of its ruling. "We express no opinion on the question of whether a subsequent agreement between buyer and seller on substantially different terms than originally proposed in the counteroffer would alter the result."
It is easy to understand why Mr. Torelli filed suit -- in this one transaction, he was "stiffed" $35,000.00, an amount worth fighting for. Mr. Torelli may also have the right, if he prevails at trial, to recover his attorney's fees in this case, depending on whether the counteroffer which J.P. Enterprises signed contains a provision entitling the "prevailing party," including the agent, to recover his attorney's fees.
The Torelli decision does not mean that Mr. Torelli prevailed against J.P. Enterprises. Reversing the summary judgment simply means that he can take to trial his claims for breach of contract and intentional interference with contract. However, the decision is clearly favorable to agents and provides strong authority for recovery of commissions in similar situations.