Brokerage agreements: what the courts look for.

The following is the first in a two-part series by the authors. Part two will be featured in the July 6 edition ...

In our experience, the terms that a broker generally uses in a brokerage agreement rarely, if ever, are understood by the parties to the agreement.

We are particularly referring to the following terms:

1. Ready, willing and able;

2. Meeting of the Minds; and

3. Procuring Cause

The reason for this misunderstanding is because, in their decisions, the courts have been vague and inconsistent in dealing with these terms. In this article we shall attempt to offer a better understanding of these terms and an insight as to the court's interpretation of these terms.

1. The Ready, Willing and Able Buyer

The words "ready and willing" rarely present a problem when litigating for a commission. Courts generally give these words the common every-day meaning to these terms. The word "able", however, may present substantial problems at trial. An "able" buyer has been defined by the courts as one who is financially capable of purchasing the property. We find that most buyers consider themselves as "able" because of backup financial sources, including relatives, investors, and available banking connections.

Courts have held, however, that it is not sufficient for a prospective buyer to merely state that it had sufficient assets to make the purchase. The buyer at the very least, must prove facts from which a court may infer that it possessed the necessary financial ability. It has been held that there must be some "tangible evidence" that would permit such an inference.

In a brokerage case recently decided by a New York court, the purchaser testified that it had $40,000 of the $400,000 deposit required for a contract of sale but that because of his "fine credit standing" he could obtain a mortgage loan for the balance.

The purchaser also testified that if additional funds were required, they would come from his wealthy brother who promised to lend the funds if necessary. The court held that the purchaser was not personally able to purchase the property, and had to rely on the financial assistance of third parties. Since the purchaser failed to present any proof of a written financial commitment or obligation from the third party or any evidence of the third parties financial soundness, the court held that the broker's proof on financial inability was insufficient.

It is impossible to set forth any rules which will cover every situation. As the Appellate Courts decide these cases, however, attorneys will be able to furnish better guidelines as to the degree of proof required to establish the financial ability of the purchaser.

Courts have held that preparation of a contract of sale by the attorneys for the seller will deem the purchaser to be a ready, willing and able buyer. The execution of the contract of sale by both the buyer and the seller will satisfy the courts that the buyer, in fact, has the financial ability to purchase the property. Support for this argument, is that prior to executing a contract of sale, the seller is deemed to have satisfied itself as to the buyer's financial ability and the seller will be deemed to have waived its defense that the buyer does not have the ability to purchase the property.

We should note that as a practical matter, proving a buyer's financial ability is not an easy matter. It requires that the buyer, who will gain no benefit from the outcome, must appear in court, usually against his will, and bare his financial condition in a courtroom filled with virtual strangers.

2. Meeting of the Minds Absent an agreement to the contrary, it is generally accepted that a broker will earn a commission when there is a "meeting of the minds" on all "essential business terms" between the seller and a ready, willing and able buyer. Unless the parties have agreed otherwise, it is not required that title close or a contract of sale to be signed by the buyer and the seller in order for commissions to be earned. The parties are, of course, free to modify these rules by agreement to provide for additional conditions that must be satisfied before the broker is entitled to a commission.

Although the general rules stated above may seem clear on their face, there has been extensive litigation interpreting these principles. The result has been a considerable number of court decisions, which too often are difficult to reconcile. The terms that must be agreed upon by the buyer and the seller have been defined by one court as those terms "customarily encountered in such a transaction."

Although it is clear that all the legal details customarily negotiated by the attorneys need not be resolved in order for the broker to be entitled to commissions, it remains unsettled as to what particular business terms must be agreed upon before a broker earns a commission for bringing the parties together. The law in this area is unclear but we do know that mere agreement as to price does not constitute a meeting of the minds sufficient to entitle a broker to a commission.

In a recent case, the court held that agreement on price, together with agreement on the cash component of the price, the specifics of a second mortgage and payment of the broker's commission by the buyer was sufficient to constitute a meeting of the minds. In determining that the broker was entitled to a commission, the court also explained that failure to agree on a closing date was not fatal since a "reasonable time" to close would be presumed.

Another court has determined that where there was no evidence as to agreement on the closing date, the type of mortgage or the type of deed, agreement on the essential terms had not been reached and therefore on this basis alone, the broker's action would fail.

We do know that not every item and condition which might later appear in a written contract need be settled to entitle the broker to a commission.

However, due to the complexity of real estate transactions today, there is no hard and fast rule regarding the extent of the agreement that must be reached for a meeting of the minds to be established.

The courts will have to continue examining each fact pattern on a case -by-case basis in order for attorneys to render an opinion as to whether sufficient evidence is available for a successful litigation.