Broker Commission Against Public Policy

Below are summaries of recent court cases affecting the real estate industry.

January 1, 2004

The District Court of Appeal of Florida, Third District, reversed an earlier court decision and denied a broker a commission from the sale of land to a school district. The court determined that a contingency fee contained in the listing violated the state’s public policy forbidding contingency fees for property purchased with public funds.

Maria Martin-Hidalgo, a licensed real estate broker, met with the director of the Miami-Dade County school district's real estate department, who expressed an interest in purchasing a 60-acre site (a 50-acre parcel and a 10-acre parcel) to construct a high school building.

Following the meeting, the broker investigated the availability of the parcels and consulted another broker who was familiar with real estate in that part of the county. The second broker stated that the 50-acre parcel in question was owned by Michael Cease and the 10-acre parcel was owned by the Act Realty Co.

The brokers met with Act Realty and persuaded the company to list the 10-acre parcel with them. Their written agreement states that the company would take the first $1 million from the sale of the parcel and that the brokers would receive a commission for any amount over $1 million.

The school district agreed to buy the 10-acre parcel for $1,164,650. When Act Realty refused to pay their commission, the brokers filed a lawsuit. Following a bench trial, the trial court awarded them the commission, and Act Realty appealed.

The District Court of Appeal of Florida, Third District, reversed the trial court's ruling. The court based its decision on a Florida case from another appellate court, which had ruled that the awarding of contingency fees on property purchase made with public funds was against the state's public policy. The earlier decision held that such contracts "suggest the use of sinister and corrupt means for the accomplishment of the ends desired."

Looking at the commission agreement, the court found that the agreement created the possibility for use of "sinister and corrupt means," as the brokers were rewarded for obtaining as high a price as possible for the property. Therefore, the court reversed the trial court. Instead, the court awarded the commission amount to the school board, finding that Act Realty also should not benefit from an illegal contract. The court also refused to award the brokers a fee for the time they spent negotiating the sale, finding that because the agreement violated public policy, the brokers were not entitled to make such a recovery.

In a dissent, one of the appellate judges said no argument had been made that the brokers used illegal means to obtain the commission, a precondition for forbidding the awarding of contingency fees.

Co-brokerage Agreement With Out-of-State Broker Illegal

Connecticut’s highest court affirmed the ruling of a trial court that a Connecticut broker’s agreement to split the commission with a broker licensed in another jurisdiction is not legal under Connecticut law.

In 1996, Stein and Co., a licensed real estate brokerage in Illinois, and Dow and Condon, a Connecticut-licensed real estate brokerage, entered into a co-brokerage agreement. The agreement, which covered the acquisition of a site for a Federal Express facility in Connecticut, called for Stein to receive 80 percent of the commission and Dow to receive the other 20 percent. The agreement stated that Stein would handle all communications with Federal Express and negotiate with all potential landlords, while Dow was to select potential sites for the facility.

In 1997, Stein entered into a commission agreement with Brookfield Development Corp. that called for a commission of $408,000 to be paid in two installments, half due at closing and the other half at the time of occupancy. Brookfield was unable to finance the project and the deal collapsed. In 1998, Brookfield and Federal Express located another suitable property and so amended the lease agreement to reflect this location change. Following the amending of the lease agreement, Brookfield sent Stein half of the commission, stating in a letter that the rest would be paid in accordance with the commission agreement. Brookfield never paid the other half of the commission, so Dow filed a lawsuit. The trial court ruled that the co-brokerage agreement between Dow and Stein was an illegal contract under Connecticut law and therefore ruled in favor of Brookfield. Dow appealed.

The Supreme Court of Connecticut affirmed the ruling of the trial court. The court found that the state’s real estate license law bars an unlicensed party from bringing a lawsuit in the state's courts for a real estate commission. Another section of the law bars a Connecticut real estate licensee from splitting a commission with an unlicensed individual. The trial court had ruled that because Dow had violated the state's license law through its commission-splitting agreement with Stein, it was not entitled to recover the remaining commission from Brookfield. The appeals court agreed with the trial court that the co-brokerage agreement was an illegal commission-splitting agreement, and so affirmed the lower court's ruling.

Dow argued that the statute was intended to bar commission payments to individuals or entities that did not hold a valid real estate license anywhere, not a commission-splitting agreement between two licensed brokerages, one of whom was licensed in Connecticut. The court rejected this argument, ruling that the statute barred commission splitting with any individual or entity not licensed in Connecticut. Since the agreement was therefore an illegal contract, the court ruled that state law barred Dow’s commission lawsuit.

The court next addressed Dow’s argument that the state's real estate commission had issued a policy statement explicitly allowing real estate licensees to pay referral fees to licensees in other jurisdictions. The court rejected this argument for a number of reasons, most importantly because a referral fee and a commission-splitting agreement are two different types of agreements, and the policy statement did not address the co-brokerage agreements. The court then stated in a footnote that this decision does not consider the issue of whether a commission can be recovered by a licensed broker who pays a referral fee to an unlicensed person "who has not engaged in the real estate business in this state."

Editor's Note: The Connecticut Association of REALTORS® filed an amicus curiae brief in favor of the brokerage's position.

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