The Broker’s Agreement Required Payment of the Commission Through Escrow, But Escrow Never Closed. Why Did The Buyer Have To Pay A $1.7 Million Commission?Posted: February 8, 2010
A California Broker entered a contract with a Buyer to locate commercial property for development; the broker would be representing the Buyer exclusively. They located a project, and the Buyer entered a contract to buy the property from the seller. The contract also required the seller to build over 175 condo units and obtain a certificate of occupancy before escrow would close.
There were delays, the certificates were never issued, the condo market collapsed, and escrow never closed. The broker sued the Buyer for its commission, which was $1.74 million.
The Buyer’s claimed it did not have to pay the commission, because escrow never closed. The Brokerage agreement stated that “the commission was to be paid the Broker through escrow at closing.”
The court, looking at the entire brokerage agreement, disagreed that close of escrow was a condition to payment. The agreement provided that commission was to be paid in the event that a property was purchased, and went on to define purchase as meaning “all acquisitions of any direct or indirect beneficial interest in the property..” The court started with the general rule that, under a Buyer-Broker agreement, “unless the contract provides otherwise, the broker earns commission upon the buyer entering a contract to buy, regardless of whether the sale closes escrow.
After entering the contract, the buyer obtained “equitable title,” while the seller retained “legal title,” as security for the purchase price. Equitable title is a beneficial interest in the property, triggering the commission requirement.
What about requiring payment to be made through escrow, which never closed? That was not enough. The court, reviewing prior decisions, found that payment through escrow describes the timing of the payment, not a condition to earning the commission.
I think the Buyer may have intended otherwise, but the Broker agreement was not clear. The standard in California is that the commission is earned generally when the broker puts together the willing buyer and seller together, and close of escrow is not required. If a buyer wants the commission to be conditioned on closing, the agreement has to clearly explain that the commission is not earned unless escrow closes.
RC Royal Development v Standard Pacific Corp. (2009) 177 Cal.App. 4th 1410.