Listing Contracts: Sellers Beware
Under Wisconsin’s standard listing contract forms, a seller may owe a commission to a broker even if the sale of the property does not close. However, a well-drafted contract can change that, should a seller so desire.
Listing contracts. Many sellers believe a broker’s commission is earned only upon the closing of the sale of the property. Yet under Wisconsin’s WB-5 Commercial Listing Contract, WB-3 Vacant Land Listing Contract, and the WB-1 Residential Listing Contract, a commission is earned when the seller “accepts an offer which creates an enforceable contract for the sale of all or any part of the property”—regardless of whether the sale is consummated. With the recent Wisconsin Supreme Court decision in Ash Park LLC v. Alexander & Bishop, Ltd., 2015 WI 65 (July 7, 2015), sellers and brokers can expect Wisconsin courts to enforce these provisions.
The Ash Park property. The facts in Ash Park LLC v. Alexander & Bishop, Ltd. were undisputed. Ash Park LLC executed a standard form listing contract (WB-3 Vacant Land Listing Contract) with a broker, Re/Max Select LLC. The contract provided that Ash Park shall pay a commission to Re/Max if Ash Park “accepts an offer which creates an enforceable contract for the sale” of the land. In other words, the listing contract required a commission even without a closed sale. Subsequently, Ash Park entered into a purchase contract for the sale of the land with Alexander & Bishop, Ltd, but the closing never occurred. Ash Park sued Alexander & Bishop and obtained a specific performance judgment. Yet despite the judgment against it, Alexander & Bishop never paid for or acquired the property. Re/Max intervened in the lawsuit prior to final adjudication, seeking its commission, along with prejudgment interest, costs and attorneys’ fees.
The supreme court weighs in. After protracted litigation, the case reached the Wisconsin Supreme Court. The issue before the court was whether the purchase contract was an “enforceable contract” under the listing contract, thus entitling Re/Max to a commission. Analyzing the plain meaning of the words, the court said an “enforceable contract” is one for which a party can go to court and obtain a remedy for breach. Since Ash Park had already won a judgment on the purchase contract, that contract was enforceable—indeed, enforced. From there, the court concluded that “the purchase contract between Ash Park and Alexander & Bishop constitutes an ‘enforceable contract’ within the meaning of the listing contract between Ash Park and Re/Max.” (Emphasis added.)
Principles and policy. The supreme court rejected Ash Park’s two counterarguments. First, the court ruled that Alexander & Bishop’s failure to pay the judgment had no bearing on whether or not the purchase contract was enforceable: “The enforceability of a contract turns on whether there is a remedy available for a breach, not whether a judgment issued in response to a breach is satisfied.” Second, the court determined that forcing a seller to pay a commission even without a closed sale does not violate public policy. The court explained: “The result in the instant case does seem harsh to Ash Park. But . . . [d]eclining to order Ash Park to pay Re/Max its commission is not only contrary to the contract language; it is also unfair to Re/Max, which expended efforts to locate a buyer.” In the end, the supreme court held that the purchase contract was enforceable, and Re/Max was entitled to its commission under the listing contract, even though no sale had ever closed.
Advice for sellers. The supreme court noted that the Ash Park listing contract was “freely negotiated.” Quoting a real estate treatise, the court provided some sage advice for sellers: “To avoid incurring a commission without a closing, the seller’s lawyer should consider modifying the language in [the listing contract] so that the commission is not earned until the conveyance of the property actually closes and title passes.”
Stafford Rosenbaum LLP can help sellers negotiate and revise listing contracts to provide that commissions are earned only upon the successful closing. If you would like to know more about listing contracts, please contact your Stafford Rosenbaum LLP attorney or any one of Stafford Rosenbaum’s Real Estate Team members.