Protect Your Right to Compensation with Proper Employment Agreement

Posted on March 27, 2004 by Michelle Lind

Although a real estate employment agreement is not required for a broker to represent a party in a transaction, most listing brokers have an employment agreement with the seller and an increasing number of brokers have an employment agreement with the buyer. These employment agreements, commonly known as listing agreements and buyer-broker agreements, specify how and when a broker is paid a commission for services rendered. Therefore, it is important for brokers to understand the laws relating to real estate employment agreements.

Requirements and Prohibitions

Real estate employment agreements must comply with certain requirements. All real estate employment agreements must: (1) be written in clear and unambiguous language; (2) fully set forth all material terms, including the terms of broker compensation; (3) have a definite duration or expiration date, showing dates of inception and expiration; and (4) be signed by all parties to the agreement. A.R.S. §32-2151.02(A).

A real estate employment agreement is a personal services contract. As such, it is not assignable. Therefore, a broker may not assign an employment agreement to another broker without the express written consent of all parties to the agreement at the time of the assignment. See Olson v. Neale, 116 Ariz. 522, 570 P.2d 209 (1977) (listing agreement); see also, A.R.S. §32-2151.02(B).

Additionally, a broker is prohibited from attempting to procure a real estate employment agreement from a seller or buyer who is already subject to an existing exclusive real estate employment agreement, unless the broker obtains written acknowledgment from the seller or buyer that the execution of additional real estate employment agreements could expose the party to liability for substantial additional commissions. A.R.S. §32-2151.02(C). REALTORS® may not enter into contractual relationships with sellers or buyers currently subject to an exclusive employment agreement even if they do disclose the potential for two commissions. See Code of Ethics, Standard of Practice 16-14. Therefore, a broker should inquire whether the buyer or seller has signed an employment agreement with another broker before taking a listing or entering into a buyer-broker agreement.

Listing Agreements

A listing agreement establishes the duties of the broker and seller, including the terms under which the broker will earn a commission. Generally, the seller’s obligation to pay the real estate broker a commission pursuant to a listing agreement does not arise until the broker performs its obligation of presenting a ready, willing and able buyer to purchase the property in accordance with the listing, or at some other price and terms agreeable to the seller, during the term of the listing. However, actual payment of the commission generally does not occur until close of escrow. See, J.D. Land Co. v. Killian, 158 Ariz. 210, 762 P.2d 124 ((App. 1988) (if purchase contract was entered into before the expiration of the listing, a commission is owed, even if the transaction closed after expiration of the listing.)

Although there are several types of listing agreements, the exclusive-right-to sell listing is the most common form. An exclusive-right-to-sell listing agreement gives a single broker the exclusive right to sell the property for the specified period. An exclusive listing also gives the broker the right to a commission if a sale is made by another broker during the term of the listing. Galbraith v. Johnston, 92 Ariz. 77, 373 P.2d 587 (1962) (broker whose listing agreement entitled him to commission should land be sold within one year after expiration of listing to anyone with whom broker had negotiated was entitled to a commission without proving that he was procuring cause of sale).

Additionally, a commission will be due if the seller unilaterally withdraws the property from market and sells it without the assistance of any broker. Larson-Hegstrom & Associates, Inc. v. Jeffries, 145 Ariz. 329, 701 P.2d 587 (App. 1985) (seller obligated to pay brokerage commission under an exclusive listing of a shopping center after seller transferred the property to a church for “$10 and other valuable considerations.”)
Depending on the language used in an exclusive listing agreement, a seller may be obligated to pay the broker a commission if the property is transferred in any way during the term of the listing. But see, Mealey v. Orlich, 120 Ariz. 321, 585 P.2d 1233 (1978) (“taking” by U.S. government was not a “sale” under listing agreement when listing agreement did not address condemnation).

A broker is not entitled to a commission for locating a buyer during the term of the listing, when the buyer does not enter into a contract with the seller until after the expiration of the listing, absent a provision specifying the terms of compensation after expiration. In Hyde Park-Lake Park, Inc. v. Tucson Realty & Trust Co., 18 Ariz. App. 140, 500 P.2d 1128 (App. 1972), the broker and seller entered into an exclusive listing agreement that provided for payment of a commission in the event a sale was made within 90 days after expiration of the listing agreement to a party whose name had been submitted in writing to seller during term of agreement. The Court held that this clause was enforceable. However, in Hearrold v. Gries, 115 Ariz. 560, 566 P.2d 1036 (1977), the court found that a broker was not entitled to a commission where buyer procured by the broker during the term of the listing, purchased the property after the listing had expired, because the listing agreement had no provision for payment after expiration. Therefore, a broker should specifically address when a commission is due after expiration in all employment agreements.

Buyer-Broker Agreements

A buyer-broker employment agreement is used when a buyer employs a broker to work with the buyer exclusively to locate property and negotiate terms acceptable to the buyer for the purchase of the property. Generally, by executing a buyer-broker agreement the buyer agrees to work exclusively with the broker and to compensate the broker. However, oftentimes, the compensation the buyer is obligated to pay to the broker is offset by any compensation the broker receives from the listing agent.

Prerequisites to an Action to Collect a Commission

The Statute of Frauds states in pertinent part:

No action shall be brought in any court in the following cases unless the promise or agreement upon which the action is brought, or some memorandum thereof, is in writing and signed by the party to be charged, or by some person by him thereunto lawfully authorized: . . . [u]pon an agreement authorizing or employing an agent or broker to purchase or sell real property, or mines, for compensation or a commission.
A.R.S. §44-101(7).

Thus, the Statute of Frauds prohibits a real estate broker from bringing an action for a commission without a written, signed employment agreement that contains the terms and conditions of the commission agreement. McAlister v. Cooper, 91 Ariz. 191, 370 P.2d 767 (1962). (Note: The Statute of Frauds does not extend to agreements between brokers to cooperate in making sales for a share of commissions. Nutter v. Bechtel, 6 Ariz. App. 501, 433 P.2d 993 (1967)). In order to satisfy the Statute of Frauds, the agreement must show the fact of employment, the amount of the commission to be paid, and some description of the property. Nowell v. Andrew Wright Enters., 143 Ariz. 79, 691 P.2d 1107 (App. 1984). Further, the specific amount of commission must be contained in the agreement; the “going rate” as a commission amount is too indefinite. Broadway Realty & Trust v. Gould, 136 Ariz. 236, 665 P.2d 580 (App. 1983).

Laws Strictly Enforced

These laws are designed to protect buyers and sellers against unfounded claims for a commission. Therefore, the requirements for broker employment agreements have been strictly enforced in Arizona.

Note: This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.