News & Noteworthy

Brokers are Afforded Great Protection by New York Courts

Posted on September 20, 2017

This post has musings from recent briefing we did representing a broker seeking a commission for a real estate transaction.  In New York, the default rule for real estate brokers is that they earn their commission when they produce a buyer who is “ready, willing and able” to purchase at the terms set by the seller.  This is a default rule because the seller (or lessor) and broker can, and often do, agree on different terms concerning a commission.  Perhaps most common, the seller and broker agree that a commission is only due if and when the seller actually closes on the sale of the property to the buyer produced by the broker – with the broker getting paid at the closing table out of the sale proceeds.

As with many other commercial transactions, disputes arise when the parties do not reach clear, express agreement of terms, preferably in writing.  Assume there is no agreement, the broker markets the property and finds a willing buyer, but the seller changes his mind and does not sell.  A broker can successfully sue for its commission if it proves the broker was the “procuring cause” of the transaction.  One appellate court (in a case we litigated) set the standard for procuring cause, holding the broker’s efforts “must be a direct and proximate link, as distinguished from one that is indirect and remote,” between the introduction of the property and the consummation of the deal.  In other words, a broker must do more than merely introduce a buyer to a property, but the broker does not necessarily have to negotiate the deal’s final terms or attend the closing.

Ordinarily, a buyer that does not retain the broker is not responsible for a seller’s commission.  Where a buyer or lessee retains a broker for a property search or other services relating to the deal, even where the same broker represents the seller, the buyer may have liability concerning the commission.  In many transactions, the broker representing a buyer or lessee will get compensated by the seller or lessor upon the closing of a transaction.  Most times, the seller pays and there is no dispute.  When the broker does not get paid, whether because the purchaser does not protect the broker by ensuring a provision for payment of commission in the contract or decides not to purchase, a dispute can arise.  In addition to the possibly relevant issue of whether the broker was the “procuring cause” of the deal, a court might also examine the purchaser’s conduct.  In cases without an express agreement between a buyer and its broker, New York courts have held that a buyer can still have an enforceable “implied” contract with its broker.

Over fifty years ago in Duross Co. v. Evans, 22 A.D.2d 573, 257 N.Y.S.2d 674 (1st Dep’t 1965), the court recognized an implied contract claim.  The broker found the buyer a suitable parcel, and the buyer authorized the broker to submit an offer that the seller accepted.  The seller issued a contract of sale providing for the seller to pay the commission upon closing, but the buyer refused to sign the contract.  The Court held the broker stated a valid claim that the buyer had an implied agreement to purchase, thus allowing the broker to get paid a commission, and the buyer breached by refusing to enter into the contract.  Another cautionary tale about the importance of a purchaser having a clear written agreement with its broker is found in Williams Real Estate Co. v. Viking Penguin, Inc., 228 A.D.2d 233, 644 N.Y.S.2d 19 (1st Dep’t 1996), the court recognized a broker’s claim that it had an oral exclusive brokerage agreement by which the lessee agreed to protect the broker.  The court upheld a claim that the lessee breached the oral agreement by entering into the lease with a different broker.