At settlement, one of the largest closing costs is the real estate broker’s commission. When things go smoothly and your home sale closes on time, your settlement attorney will deduct the commission from your sales proceeds and pay it to your real estate broker. But what happens when the closing gets delayed or fails to occur at all?
Depending on the circumstances, a number of questions arise:
l Are you on the hook for a hefty real estate broker’s commission if the deal does not close through no fault of either party?
l What about if the deal does not close because the buyer breached the contract? Should you return his earnest money deposit?
l What if you just get cold feet and decide not to go through with the sale?
The exact moment when you become legally liable to pay a real estate broker’s commission depends on several factors. In Virginia, you will generally become liable to pay a broker’s commission when you sign a listing agreement with a licensed real estate broker that provides for the payment of a commission. Also, the real estate broker must continuously market your home, resulting in a ready, willing and able buyer entering into a written contract that contains all the essential terms acceptable to you.
In the District of Columbia and Maryland, there is an important additional requirement: The contract must, in fact, settle.
These factors are deceptively simple. Unfortunately, the presence or absence of any one or more of these factors does not determine when you may owe a commission. They are evaluated on a case-by-case basis.
There is a common misconception that sellers will become liable for the broker’s commission if the broker brings a full-price offer from a ready, willing and able buyer. This is not true. While a ready, willing and able buyer is one critical condition that may trigger your liability to pay a sales commission, no commission will be owed unless that ready, willing and able buyer enters into a ratified contract in which all essential terms are acceptable to you. A full-price offer that contains unacceptable earnest-money deposit amounts, closing dates, contingencies or other conditions may not necessarily trigger the payment of a commission.
Because you may become liable for a broker’s commission in Virginia even if your deal does not close, you may wish to modify the listing agreement before signing it. You may wish to provide that your liability to pay a broker’s commission will only arise upon the closing of a contract. In addition you may want to add that such broker’s commissions shall only be payable from your sale proceeds at the settlement.
In the District of Columbia and Maryland, if your sale does not close through no fault of your own, you will not owe a broker’s commission. However, many contracts used in these jurisdictions contain a clause that provides that if your buyer is in default under the contract and you retain his earnest-money deposit, you may become liable to pay half of that earnest-money deposit to your broker in lieu of his commission. It is important to be aware of this clause when evaluating whether to return any portion of your buyer’s earnest-money deposit and how much of an earnest-money deposit you will accept with your ratified contracts.
If you just get cold feet and decide not to go through with a sale in Virginia, you are likely to be liable for a broker’s commission. In the District of Columbia and Maryland, the standard listing agreement makes you liable for a broker’s commission only when your “buyer performs and settles.”
However, in all jurisdictions, you are likely to be in default under your contract and could subject yourself to a costly lawsuit brought by your buyer for his damages or even for specific performance of the contract. If your buyer prevails, the courts can order you to go through with your sale. You would also then become liable for brokerage commissions, because the buyer will have then performed and settled.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.