Real Estate Commissions – Are They Payable if I do not close?
In the past couple of years, we have been involved with numerous Agreements of Purchase and Sales in the residential real estate market that have not closed on account of both the vendor and purchasers default. More often than not, the buyer is the party that initiates the breach of contract, typically as a result of one of the following two reasons:
(1) The buyer is unable to obtain financing for the purchase of the property; and the Agreement of Purchase of Sale was unconditional; in other words, no clause in the Schedule “A” to the Agreement was included to protect the purchaser in the event financing could not be obtained to close the transaction; and
(2) The purchaser of the property was in the midst of selling their own property, the proceeds of which would be used to close on the Agreement of Purchase and Sale of their new property. However, the buyers of their existing property breached the contract; and therefore, they did not have the proceeds to close on their own deal. These can be complex scenarios where one breach of contract leads to a whole series of breaches, which can end up in protracted litigation.
What has been a consistent question from vendor and purchaser clients is the following: are realty commissions payable in the event a transaction does not close?
As you likely know, on the sale of real property, the vendor signs a Listing Agreement with a real estate brokerage, which markets the property in exchange for a commission (typically in the range of 5 to 6% of the purchase price of the property). In the event a separate brokerage identifies a buyer that inevitably tenders an offer that is accepted by the vendor, the brokerage, also called the cooperating broker, is typically entitled to 50.0% of the commission payable by the vendor to the listing brokerage (i.e., 2.5%).
The terms and conditions of the Listing Agreement between the vendor and real estate brokerage and the Buyers Representation Agreement between the purchase and brokerage must be reviewed carefully. Numerous cases in Ontario have been heard, that have required the defaulting party to pay the realty brokerage commission irrespective of whether a transaction closes, on the basis of a term in the Agreement, similar to as follows:
“The buyer [or seller] agree to pay such a commission even if a transaction is not completed if such non-completion is due to the buyer [or seller’s] default or neglect.”
Accordingly, prior to signing any type of Agreement with a realty brokerage, it is imperative that you review the terms and conditions thereof to ensure that you will not be hit with a large bill for commissions even if a transaction does not close, whether your fault or otherwise. If you have any questions about a real estate deal or dispute, contact Goldstein Law Firm in Toronto for a free consultation.