Brokerage contracts: conditions vs. promises.

The distinction between conditions and promises in the context of brokerage agreements is significant. If a provision of the contract is deemed a condition, then its non-performance could render the contract unenforceable, whereas if the provision is deemed a promise, then even if there was non-performance, the broker's rights under the contract might remain valid and enforceable.

This issue is particularly relevant to real estate brokers when their agreements provide for payment upon the occurrence of some event, for example commissions to a mortgage broker to be paid on the closing of the loan. If the loan does not close, is the broker entitled to its commission?

To determine whether a provision in a contract is a condition or a promise, courts look to the actual language of the contract. Certain words such as "only," provided that," and "contingent upon" are generally construed to be conditions.

A 1908 case has laid the foundation for the present New York law. The case held that where an agreement provides for payment upon the happening of an event, depending on the language used, such provision may be construed to fix the time for payment, or as a condition precedent to payment. The case involved a contract for the sale of real estate which provided that commission was to be paid to the brokers "on the closing of title.' The Court held that the relevant provision "...merely fixed the time when the brokerage should be payable if the contract was performed, and that the actual closing of title was not a condition precedent to recovery of the brokerage."

Since the provision was not considered a condition, the broker was entitled to his commission.

Although the general rule is that a broker is deemed to have earned a commission upon procuring a buyer who is ready, willing, and able to purchase the property at the price and terms offered by the seller, parties to a brokerage agreement may add whatever conditions they desire to their agreement. Today, sellers frequently include in their agreement a condition that the contract of sale actually be consummated and that title closes before the broker is deemed to have earned his commission. The language familiar to all brokers, "commission shall be due and payable only, if, as, and when title closes," has been generally deemed to be a condition to payment.

A case involving an agreement containing an express provision that payment is conditioned on closing was argued before the New York Court of Appeals, New York's highest court. The Court held that where the language of the agreement is "plainly conditional," the broker has not earned his commission by merely presenting a willing purchaser. The relevant determination for the court was whether the brokerage agreement included a condition rendering the commission contingent upon closing, or whether it was agreed that the commission was already earned, but that payment was only deferred until the time of closing.

Absent an express condition in the brokerage agreement, courts, in order to avoid a forfeiture, will likely decide that a provision is a promise and not a condition. Legal writers have noted that where it is doubtful whether the words create a promise or an express condition, they are interpreted as a promise. Such an interpretation protects both parties to the transaction and also does not involve the consequence that a slight failure to perform wholly destroys all rights under the contract." This interpretation enables real estate brokers to receive their commission when their brokerage agreement does not expressly condition their commission upon the happening of some event, which does not occur.

(Jay J. Gurfein is senior partner of Gurfein & Graubard. He is a frequent lecturer at brokerage seminars and is on the faculty of New York University School of Continuing Education. Craig M. Deitelzweig is a law clerk at Gurrein & Graubard.)