Recently we considered a situation where a buyer, who had executed a buyer-broker agreement with his agent, backed out of a purchase transaction. In that case, the buyer owed a commission to his agent because the agreement stipulated that the commission was earned when the buyer entered into the purchase agreement.

That case raises questions about sellers and their agents. Is a listing agent’s commission earned when a purchase agreement is entered into, or only upon the closing of the transaction? Of course the answer to this question will depend upon the particular listing agreement that is used. Listing contracts vary from state to state and within states. In California the form that is probably most commonly used would be the Exclusive Authorization and Right to Sell listing agreement produced by the California Association of Realtors® (CAR). Under the terms of that agreement there are three distinct sets of circumstances in which a commission may be owed by the seller to the listing agent.

(1) If a buyer is procured (not necessarily by the listing agent directly) "who offers to purchase the Property on the [stipulated] price and terms, or on any price and terms acceptable to Seller." This is similar to the buyer-broker agreement. If the seller enters into a purchase contract during the term of the listing, the commission has been earned.

Indeed, if an offer is made that matches the price and terms set forth, the commission is earned. Although we acknowledge that there could be disputes as to whether an offer really matched the price and terms.

(2) "If, without Broker’s prior written consent, the Property is withdrawn from sale, conveyed, leased, rented, otherwise transferred, or made unmarketable by a voluntary act of Seller during the listing period, or any extension." A listing contract does not obligate a seller to sell; but if the seller changes his mind or in some way refuses to sell, a commission is owed.

(3) This is known as a "safety clause" provision. It is negotiable at the time the listing agreement is drawn up. It provides that a commission will be due the listing agent if, within a specified time period after the end of the listing period, a purchase agreement is entered into with some prospective buyer who had been shown the property, or who had made an offer, during the listing period. For this to apply, the listing agent must supply the seller with the names of all applicable prospective buyers within 3 days after the end of the listing period.

There is one scenario that hasn’t been considered yet. Suppose the buyer backs out of the transaction. Is the listing agent still owed a commission? After all, the commission was earned when buyer and seller entered into the purchase agreement. In this situation the listing agreement seeks both to balance equities and to confront reality. It would typically be unlikely that the seller would have the funds to pay a commission if the transaction fails, and, besides, the failure is due to the buyer’s action, not the seller’s.

Thus the listing agreement provides that, in the case of buyer default, a commission is due the listing agent "only if and when Seller collects damages by suit, arbitration, settlement or otherwise." Moreover, the amount of commission due the listing agent is limited by the amount of the settlement. It can never be more than the commission would have been, but it could be less. It is to be the lesser of one-half the net damages recovered (i.e. after any expenses are taken out) up to what would have been full compensation.

Suppose the listing commission was to have been 4% of a $500,000 transaction (i.e. $20,000), but the buyer has defaulted. If the seller was able to recover $10,000 (net) in damages, the commission owed the listing agent would be $5,000.

Typically, commissions are paid when a transaction closes; but a closing is not always necessary for a commission to have been earned.

Published: September 18, 2008

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .