Sometimes it seems there is no end to the lengths sellers will take to avoid paying commission to the listing broker. As a recent unreported Wisconsin Court of Appeals case illustrates, the courts will not tolerate obvious commission evasion shenanigans.

The seller listed 29 acres with the listing broker. An offer to purchase was accepted for part of the acreage. The offer was contingent “upon a corporation being formed and the parties accepting the terms and conditions of the corporation” before closing. It also provided, “[the buyer] to pay 50% of purchase price with the buyer + seller forming a corporation,” per the contingency. A dispute arose between the seller (who apparently was a real estate licensee) and the listing broker over what commission would be due on this sale. The buyer and the seller then released each other from the offer to purchase.

The listing broker placed a commission lien on the property, triggering the seller’s lawsuit against the broker. The circuit court found that the seller dissolved the original offer for the purpose of avoiding the broker’s commission and then entered into a different transaction with the buyer that would achieve the same result without involving the broker. The court held that by acting to deliberately avoid the commission, the seller breached the implied duty to act in good faith. The court awarded monetary damages to the broker, including attorney’s fees. The seller appealed to the Wisconsin Court of Appeals.

On appeal, the seller pointed out that a commission was due under the terms of the listing contract only if there was an “enforceable” purchase contract. The seller argued that no enforceable contract was formed because satisfaction of the contingency regarding the creation of a corporation was entirely within the discretion of the parties. As such, the offer was too indefinite to satisfy the meeting of the minds standard for contract formation. In addition, the seller claimed that the offer was unenforceable because the contingency to form a corporation was not satisfied.

The circuit court had concluded that it was unnecessary to address these arguments because of its ruling based on the seller’s duty of good faith. The seller disagreed, relying upon a passage from the Gerruth Realty Co. v. Pire case. In Gerruth, a subject to financing clause reading, “this offer to purchase is further contingent upon the purchaser obtaining the proper amount of financing” was declared unenforceable for lack of definite terms. (See Page 2 of the September 2006 Legal Update, “Contract Law Basics,” at www.wra.org/LU0609.) In the passage the seller relied on, the court stated that it would “not reach the question of good faith on the part of the defendants because we believe the contract cannot be made certain by the surrounding circumstances. In our view, the good-faith issue arises only after the determination of the meaning of the ambiguous phrase.” The Court of Appeals, however, was not persuaded because Gerruth was about good faith in the context of an offer and the seller’s dispute involved a listing contract.

This case is instructive because it touches upon a number of important issues.

1. Seller’s implied duty of good faith: The case is decided based upon the seller’s breach of the implied duty of good faith in the listing contract. “Every contract implies good faith and fair dealing between the parties” and “a promise against arbitrary or unreasonable conduct.” WIS J I-CIVIL 3044. Good faith means honesty in the conduct or transaction concerned; an honest intention to abstain from taking unfair advantage of another through technicalities of law, failure to provide information or to give notice, or other activities that render the transaction unfair.  Peter M. Chalik & Associates v. Hermes, 56 Wis. 2d 151, 201 N.W.2d 514 (1972), Libowitz v. Lake Nursing Home, Inc., 35 Wis.2d 74, 150 N.W.2d 439 (1967). In this case, the courts held that once a valid offer is procured and accepted by the seller and the broker has performed his part of the listing contract, the seller cannot then in bad faith terminate the offer in order to avoid paying commission. The court’s ruling focuses on the seller’s bad faith in sabotaging the listing broker’s commission and does not evaluate the status of the offer.
2. Was the offer enforceable? The Commission section of the listing contract indicates in item 1 that a broker may earn a commission if the “Seller sells or accepts an offer which creates an enforceable contract for the sale of all or any part of the property.” The term “enforceable contract” has been defined in the courts in two different ways. Some Wisconsin cases indicate that an offer to purchase is not enforceable if there is an unresolved condition or contingency, while other cases discuss whether a contract is enforceable in terms of specific, definite contract terms, whether the statute of frauds was violated, etc. The seller made one argument that the corporation contingency was indefinite and another that it was not satisfied so it would have been interesting to see what direction the court would have taken.
3. Commercial commission lien: The broker filed a commission lien under Wis. Stat. § 779.32 that got the seller’s attention and led to legal action and the decision in the broker’s favor. Wisconsin’s commission lien law authorizes real estate brokers in commercial real estate transactions to place a lien on a property to ensure payment of the commission at closing. Stay tuned for legislation designed to make Wisconsin’s commission lien law more effective by (a) removing the “30-day notice of intent to file a lien” requirement and (b) making other necessary clarifications.

Gallagher Real Estate, LLC v Barian, Inc. (No. 2008AP2606-FT, 2009).
www.wisbar.org/res/capp/2009/2008ap002606.htm

Debbi Conrad is Director of Legal Affairs for the WRA.