Brokers and the law of contracts.

Brokers and the law of contracts

Real estate brokers are frequently required to negotiate brokerage agreements with the attorney representing their client. These negotiations are usually conducted during the contract signing or closing, and afford the broker little opportunity to seek their own lawyer's counsel.

Accordingly, we consider it important for brokers to understand some basic doctrines regarding contracts. It should be noted, however, that these rules are not absolute, and if at all possible, brokers should consult a lawyer prior to signing a brokerage agreement prepared by or negotiated by his client's attorney.

Signing Without Reading

A person is usually bound by a contract which he signed even though he claims that he never read the document.

Commission

Since the amount of commission is an essential ingredient of every contract, the brokerage agreement should usually be definite as to such amount. The agreement may not be valid if commissions are not capable of calculation under the agreement. It has been held by some courts that an agreement which requires further agreement as to commission is too indefinite for enforcement.

Time

When the agreement fixes no time for completion, courts will hold that it should be completed within a "reasonable time". "Reasonable time" is a vague concept used by the courts and is measured by the time required to accomplish the sale or lease under customary conditions.

Consideration has been defined as some right, profit or benefit accruing to one party, or some forbearance or detriment given by the other. A promise made in an agreement which is not supported by consideration is usually unenforceable.

It has been held that services rendered as a gratuity, without expectation of pay does not constitute sufficient consideration to support a promise.

To illustrate this doctrine, we refer to a recent case where prior to showing an apartment a broker required his customer to sign an agreement which stated: "I make no charge for services in helping you find an apartment. In consideration, therefore, you agree to recognize me as broker if you ultimately purchase this apartment."

The customer ultimately purchased the apartment and the broker sued the customer relying on the agreement. The court held that the agreement was unenforceable because it lacked consideration. The broker never charged for showing apartments and the court decided that even though they designated the showing of the apartment as a consideration in the agreement, it was insufficient to support a promise by the customer to pay a commission.

Modifications

A special rule provides that modifications or amendments to contracts are valid without consideration if such amendment and modification is in writing and signed by the parties.

Requirement that Agreement be in Writing

Under a law commonly known as the Statute of Frauds, in New York, a brokerage agreement is not required to be in writing. (Brokers should note that in New Jersey brokerage agreements must be in writing.)

The Statute of Frauds goes on to provide, however, that any contract which requires more than one year to complete must be in writing. We caution those brokers who are to receive a payout of their commissions beyond one year, that if such agreement is not in writing, it will be unenforceable.

Construction of Contracts

In resolving a controversy where the parties know, or should know of a custom or usage in the real estate business, such custom is deemed to form a part of the contract.

The courts will rely on this theory, where an owner, having dealt with a broker over a period of time and a sale is consummated, is heard to say: "We weren't aware that you were expecting a commission". The court will hold that brokers earn their living by making deals and the owner should have been aware of this practice even if it wasn't actually discussed.

Wilful Default Clause

In previous columns we cautioned brokers of the problems in signing an agreement that contains a wilful default clause. We showed that the courts have ruled that "wilful default" pertains to default in a contract of sale and if there is no contract signed, there is no default.

Ambiguity 

In interpreting an agreement which contains an ambiguous provision, the courts have always followed the common sense doctrine that the provision is strictly construed against the drafter of the agreement. It would appear, however, that the courts are not applying the doctrine when interpreting brokerage agreements.

In a case recently decided by the Court of Appeals, New York's highest court, an ambiguous provision in a brokerage agreement drafted by the client was construed against the broker.

Of the seven judges on the Court of Appeals, three dissented with a specific warning to brokers: "Brokers should know that commission agreements will be read very strictly against them, whether or not they are the drafters. This is a message to be heeded at the time of contracting, if they are to have any hope of enforcing their bargains and collecting their commissions."

The ominous tone of the dissenting opinion should alert brokers to be even more conscientious about their brokerage agreements.