Commission Awarded in Failed Short Sale

A lender has to pay a broker's commission after waiting too long to nix a short-sale transaction.

November 1, 2009

An Iowa appellate court ruled in the case Stewart v. All States Quality Foods, L.P. that a broker is entitled to his commission in a failed short sale of a warehouse because the lender acted in bad faith by waiting until closing to demand a larger share of the proceeds.

In May 2006, the broker received an offer to buy the warehouse. The lender, which had taken steps to wind down the business activities of the financially troubled owner, authorized the broker to submit a counteroffer, which was accepted. The broker drafted a document detailing the likely distribution of closing proceeds, which included a share of $110,000 to the lender.

At this time the warehouse tenant, whose lease agreement gave it the right of first refusal to buy the property, sought to exercise that right. The tenant gave the broker its earnest money, and the broker informed the lender and the owner of the offer, as well as the fact that the parties were ready to close.

The lender responded that it would not accept less than $130,000 and the transaction collapsed.

The broker filed a lawsuit, claiming that he had satisfied the terms of the listing agreement and was entitled to a commission. The trial court ruled in his favor and the lender appealed. The Court of Appeals of Iowa affirmed the lower court’s decision, saying the lender had improperly interfered with the contract by allowing the broker to forward a counteroffer without disclosing that the lender would allow the transaction to close only if it received a certain amount from the sale.

While the lender had the right to demand a specific figure from the sale, it knew that the tenant’s offer was unlikely to reach that threshold. Nevertheless, the lender authorized the transaction to proceed without alerting the parties that it would seek to obtain a higher sum, through various concessions, than the sale price alone could generate.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.