Real estate contracts - Real estate brokerage

Learning Outcomes

After reading this article, you will be able to identify the legal requirements for valid real estate brokerage agreements, distinguish between types of broker authority, explain when a broker earns a commission, and recognize the broker’s fiduciary duties to clients. You will be equipped to apply these principles to MBE-style questions on real estate contracts and brokerage.

MBE Syllabus

For the MBE, you are required to understand the legal framework governing real estate brokerage relationships and contracts. This includes:

  • The nature and formation of brokerage agreements.
  • Types of broker authority: exclusive right to sell, exclusive agency, and open listings.
  • When a broker is entitled to a commission.
  • The effect of the Statute of Frauds on brokerage contracts.
  • The broker’s fiduciary duties to the principal.
  • The consequences of breach of duty or contract by the broker or principal.
  • The impact of dual agency and disclosure requirements.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which of the following best describes an "exclusive right to sell" listing agreement?
    1. The seller may employ multiple brokers and pay only the one who finds a buyer.
    2. The broker is entitled to a commission if the property is sold, regardless of who finds the buyer.
    3. The broker is paid only if the broker personally procures the buyer.
    4. The seller may sell the property herself and pay no commission.
  2. A broker procures a ready, willing, and able buyer who offers the full asking price, but the seller refuses to complete the sale. Is the broker entitled to a commission?
    1. Yes, unless the contract states otherwise.
    2. No, unless the buyer sues the seller.
    3. Yes, but only if the buyer closes.
    4. No, unless the broker is also the buyer.
  3. Which duty does a real estate broker owe to the principal?
    1. Only to find a buyer.
    2. Only to obey the principal’s instructions, even if illegal.
    3. To act in good faith and disclose material facts.
    4. To guarantee the buyer’s performance.

Introduction

Real estate brokerage is a key area tested on the MBE. Brokers act as intermediaries between sellers and buyers of real property. Their rights and obligations are governed by contract law, agency law, and statutory requirements. Understanding when a broker earns a commission, the types of brokerage agreements, and the broker’s fiduciary duties is essential for MBE success.

Types of Brokerage Agreements

Brokerage agreements define the relationship between the seller (or buyer) and the broker. The three main types are:

  1. Exclusive Right to Sell: The broker has the sole right to market the property and is entitled to a commission if the property is sold during the listing period, regardless of who finds the buyer.
  2. Exclusive Agency: Only one broker is authorized, but the seller may sell the property herself without owing a commission.
  3. Open Listing: The seller may employ multiple brokers and is obligated to pay a commission only to the broker who actually procures the buyer.

Key Term: Exclusive Right to Sell A listing agreement granting one broker the exclusive right to sell the property and earn a commission if the property is sold during the listing period, regardless of who finds the buyer.

Key Term: Exclusive Agency A listing agreement authorizing one broker to act as the seller’s agent, but allowing the seller to sell the property herself without owing a commission.

Key Term: Open Listing A non-exclusive agreement where multiple brokers may be engaged and only the broker who is the procuring cause of the sale earns a commission.

Statute of Frauds and Brokerage Agreements

Most states require brokerage agreements to be in writing and signed by the party to be charged, under the Statute of Frauds. Oral agreements may be unenforceable for commission purposes.

Key Term: Statute of Frauds (Brokerage Context) The legal requirement that brokerage agreements for the sale of real property must generally be in writing and signed to be enforceable.

Broker’s Right to Commission

A broker earns a commission when the broker produces a ready, willing, and able buyer on the terms specified in the listing agreement, even if the seller later refuses to complete the sale, unless the agreement states otherwise.

Key Term: Ready, Willing, and Able Buyer A purchaser who is prepared to buy on the seller’s terms and has the financial capacity to complete the transaction.

Broker’s Fiduciary Duties

Brokers are agents of the principal (usually the seller) and owe fiduciary duties, including loyalty, good faith, full disclosure of material facts, and obedience to lawful instructions. Breach of these duties may result in forfeiture of commission and liability for damages.

Key Term: Fiduciary Duty (Broker) The obligation of a broker to act in the best interests of the principal, including loyalty, honesty, and disclosure of material facts.

Dual Agency and Disclosure

A broker may not represent both buyer and seller in the same transaction (dual agency) without full disclosure and consent from both parties. Failure to disclose dual agency is a breach of fiduciary duty.

Worked Example 1.1

A seller enters into an exclusive right to sell agreement with Broker. Broker procures a buyer who offers the full asking price and is financially qualified. The seller, however, changes her mind and refuses to sell. Is Broker entitled to a commission?

Answer: Yes. Broker produced a ready, willing, and able buyer on the seller’s terms. Unless the agreement states otherwise, Broker is entitled to a commission even if the seller refuses to complete the sale.

Worked Example 1.2

A seller signs open listings with three brokers. Broker A finds a buyer who signs a contract, but Broker B claims he introduced the buyer to the property first. Who is entitled to the commission?

Answer: The commission goes to the broker who is the procuring cause of the sale—typically the broker whose efforts resulted in the buyer and seller entering into a binding contract.

Exam Warning

On the MBE, watch for questions where the broker’s right to commission depends on whether the buyer was “ready, willing, and able” and whether the seller’s refusal to sell was justified by a contract contingency or condition.

Revision Tip

Remember: Most states require brokerage agreements to be in writing. Oral agreements may be unenforceable for commission, even if the broker performed services.

Key Point Checklist

This article has covered the following key knowledge points:

  • Brokerage agreements may be exclusive right to sell, exclusive agency, or open listings.
  • Brokers generally earn a commission by producing a ready, willing, and able buyer on the seller’s terms.
  • The Statute of Frauds usually requires brokerage agreements to be in writing and signed.
  • Brokers owe fiduciary duties of loyalty, good faith, and disclosure to the principal.
  • Dual agency requires full disclosure and consent.
  • Breach of fiduciary duty may forfeit commission and result in liability.
  • Commission disputes in open listings are resolved by determining the procuring cause.

Key Terms and Concepts

  • Exclusive Right to Sell
  • Exclusive Agency
  • Open Listing
  • Statute of Frauds (Brokerage Context)
  • Ready, Willing, and Able Buyer
  • Fiduciary Duty (Broker)
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