Avoid Legal Battles Over Broker Commissions

Are you a real estate investor that is doing everything possible to avoid a legal battle? One of the most common legal battles in the real estate industry often happens over broker commissions. How do you avoid this? What precautions can you take to limit your risk?

Broker Commissions Basics

Commission agreements that spell out how brokers are paid typically use form documents. The commission formula sometimes changes, but the terms and conditions usually stay the same. Consequently, standard terms and conditions of commission agreements are often ignored by brokers and owners once the agreement is signed. Since the broker’s income is tied to the terms of those agreements, close attention to details is vital to all parties involved.

Legal disputes are not unique to any location. Judges and juries nationwide are showing resistance to insert terms into commission contracts or allow parties to ignore the terms of a contract. Recently there’s been an increase in the number of disputes.

Some have settled out of court, yet a fair number have gone to litigation. This can be reversed through the efforts of brokers and owners who invest more time and effort putting together agreements and abiding by them. This is the best method of prevention.

For example, a building owner in Detroit was forced to pay a commission because the original agreement did not contain an expiration or termination date. The building owner argued that there are a number of key terms understood and agreed to prior to signing the agreement that was not contained in the final written agreement. The judge overruled this argument stating that the contract was clear as written.

Judges and juries are not real estate professionals. The term “procuring cause” may have a standard definition in the real estate business, but mean nothing to a juror if it goes that far. All parties involved must make sure the language is clear. A judge or jury will not rewrite a contract to save either party from a bad business decision.

Even after a favorable commission contract is successfully negotiated and written, it’s not okay to simply file it away. Either party cannot claim they forgot about the agreement.

The lesson here is to carefully note important terms and conditions, especially those that relate to performance, compensation, and termination.