Real estate contracts - Real estate brokerage

Learning Outcomes

This article explains how real estate brokerage operates in the land-sale context, including:

• Identifying the formal requirements for valid listing agreements and commission provisions, with emphasis on Statute of Frauds issues, signature requirements, and common exam-tested variations.
• Distinguishing among exclusive right-to-sell, exclusive agency, and open listings, and predicting how each structure affects the broker’s entitlement to a commission when the seller or buyer acts independently.
• Determining, under traditional and modern rules, when a broker has earned, deferred, or forfeited a commission in scenarios involving seller default, buyer default, failed contingencies, or defective title.
• Interpreting typical listing-agreement language that conditions payment on closing, funding, or other events, and applying those conditions and any excuses (such as wrongful prevention) on multiple-choice questions.
• Applying agency and fiduciary-duty principles to brokers, including duties of loyalty, disclosure, confidentiality, obedience to lawful instructions, reasonable care, and accounting, and identifying conduct that constitutes a breach.
• Evaluating a broker’s obligations to buyers and other non-clients, particularly duties to avoid misrepresentation, disclose known latent defects, comply with statutory disclosure regimes, and refrain from unfair or deceptive practices.
• Analyzing dual agency, subagency, and transaction brokerage, including required disclosures and informed consents, inherent conflicts of interest, and the frequent MBE remedy of commission forfeiture for undisclosed dual agency.
• Assessing remedies and consequences when either the broker or principal breaches the brokerage agreement, focusing on damages, rescission, equitable remedies, and strategic exam approaches for isolating the dispositive facts.

MBE Syllabus

For the MBE, you are required to understand real estate brokerage relationships and contracts, with a focus on the following syllabus points:

• The nature, formation, and enforceability of brokerage (listing) agreements.
• Types of broker authority: exclusive right to sell, exclusive agency, and open listings.
• Rules governing when a broker earns, or forfeits, a commission.
• The role of the Statute of Frauds and typical writing requirements for commission claims.
• The broker’s fiduciary duties of loyalty, disclosure, confidentiality, obedience, care, and accounting.
• Duties owed to third parties (including buyers) and liability for misrepresentation or nondisclosure.
• Dual agency, subagency, transaction brokerage, and required disclosures and consents.
• Consequences of breach by either broker or principal, including damages and forfeiture of commission.

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 frequently tested as part of the land-sale contract on the MBE. Brokers and agents are usually the ones who bring buyers and sellers together, and their rights and obligations are governed by a combination of contract law, agency law, and state licensing statutes. Typical questions ask:

• What kind of listing agreement exists?
• Has the broker earned a commission?
• Did the broker breach a fiduciary duty (e.g., by self-dealing or failing to disclose)?
• Is the brokerage agreement enforceable under the Statute of Frauds?
• Is dual agency properly disclosed?

Key Term: Real Estate Broker
A licensed intermediary who, for a fee or commission, assists in the sale, purchase, or lease of real property, and who usually acts as an agent for a seller or buyer.

Key Term: Listing Agreement
A brokerage contract between an owner (or buyer) and a broker that sets out the broker’s authority to market the property and the terms on which the broker will earn a commission.

On the MBE, assume generic common-law and majority rules unless a question gives a specific statute or rule for that jurisdiction.

Types of Brokerage Agreements

Brokerage (listing) agreements define the relationship between the seller (or buyer) and the broker. The three classic types tested on the MBE 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, no matter who finds the buyer (including the seller herself or another broker).

2. Exclusive Agency
   Only one broker is authorized to represent the seller, but the seller reserves the right to sell the property on her own. If the seller finds the buyer without any broker’s help, no commission is owed.

3. Open Listing
   The seller can employ multiple brokers and is obligated to pay a commission only to the broker who is the “procuring cause” of the sale.

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 listing where multiple brokers may be engaged and only the broker who is the procuring cause of the sale earns a commission.

Key Term: Procuring Cause
The broker whose efforts are the direct and primary cause of a buyer and seller entering into a binding contract for sale.

Many exclusive listing agreements require the broker to use “best efforts” to market the property—through advertising, showing the property, and cooperating with other brokers. This marketing effort is the consideration for the seller’s promise to pay a commission.

Exam Tip
Distinguish exclusive agency from exclusive right to sell. In an exclusive agency, the seller can still avoid a commission by selling on her own. In an exclusive right-to-sell agreement, a commission is owed if the property sells during the listing period, regardless of who finds the buyer.

Statute of Frauds and Brokerage Agreements

Most jurisdictions require brokerage agreements to be in writing to be enforceable, particularly when a broker is seeking a commission on the sale of real estate. This requirement often comes from a statute specifically governing broker commissions, and it functions similarly to the Statute of Frauds.

Key Term: Statute of Frauds (Brokerage Context)
The requirement, usually statutory, that brokerage agreements for the sale (or sometimes lease) of real property be in writing and signed by the party to be charged (typically the seller) to be enforceable.

A compliant writing generally must:

• Identify the parties (seller and broker).
• Describe the property.
• Specify the amount or method of calculating the commission.
• Be signed by the party to be charged (usually the seller or buyer who agreed to pay the commission).

If the listing agreement is oral, the broker will often be barred from recovering a commission, even if the broker clearly produced a buyer and the sale closed. Some states recognize limited equitable exceptions (e.g., unjust enrichment), but on the MBE you should assume that, absent a writing, the broker will usually lose the commission claim.

Revision Tip

Distinguish the land-sale contract (between buyer and seller) from the listing agreement (between seller and broker). Both are typically subject to writing requirements, but they are separate contracts with different parties and remedies.

Broker’s Right to Commission

The classic issue on the MBE is when a broker earns a commission.

Under the traditional rule, a broker earns a commission when:

• The broker produces a ready, willing, and able buyer,
• On the terms specified in the listing agreement (or other terms acceptable to the seller),
• Even if the sale never closes, unless the listing agreement provides 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 (or committed financing) to complete the transaction.

Many modern cases modify this rule by contract language that conditions the commission on an actual closing, or on the seller’s receipt of the purchase price. On the MBE, read the listing language carefully:

• If the agreement is silent, apply the traditional rule: production of a ready, willing, and able buyer is enough.
• If the agreement ties the commission to closing (or to the seller’s actual receipt of funds), the broker is paid only if that condition is satisfied or excused (e.g., by the seller’s wrongful conduct).

Common Commission Scenarios

• Seller refuses to sell after broker finds a qualifying buyer
  Under the traditional rule, the broker still earns a commission. The seller’s change of heart does not defeat the broker’s right.

• Seller lacks marketable title or cannot perform
  If the broker has produced a ready, willing, and able buyer, the broker is usually entitled to a commission even if the seller’s title is defective, unless the listing contract makes closing a condition to payment.

• Buyer’s default
  If a buyer who was initially ready, willing, and able later breaches the purchase contract (e.g., walks away without excuse), most courts still award the commission once it was earned, unless the listing agreement expressly requires actual closing.

• Failed financing contingency
  If the purchase contract is contingent on the buyer obtaining financing, and the buyer in good faith cannot obtain the loan, the buyer is often not “able,” and the broker may not have earned a commission unless the seller waives the condition or the listing agreement states otherwise.

• Open listing and competing brokers
  In an open listing, the commission goes to the broker who is the procuring cause—the broker whose actions directly led to the buyer and seller entering a binding contract. Merely introducing the buyer to the property is often not enough if another broker later carries the deal to completion.

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. The listing agreement is silent about requiring closing as a condition to payment. Is Broker entitled to a commission?

Answer:
Yes. Broker produced a ready, willing, and able buyer on the seller’s terms. Under the traditional rule, and absent contract language conditioning payment on closing, 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 purchase contract on the listed terms. Broker B claims he first mentioned the property to the buyer at a party but did not follow up. Who is entitled to the commission?

Answer:
Broker A. Under an open listing, the commission goes to the broker who is the procuring cause of the sale—the broker whose efforts actually resulted in the buyer and seller entering into a binding contract. Broker B’s casual introduction, without more, is not enough.

Worked Example 1.3

A seller signs a written exclusive agency agreement with Broker. The agreement states: “Broker earns a 5% commission if the property is sold during the listing term.” During the listing, the seller independently finds a buyer, negotiates the deal herself, and closes. She then refuses to pay Broker. Who prevails?

Answer:
Broker. This language is characteristic of an exclusive right-to-sell type commitment, not a pure exclusive agency reservation of the seller’s right to avoid a commission by self-sale. Because the contract does not reserve the seller’s right to sell without paying a commission, and ties the commission only to sale during the term, the seller owes Broker a commission once the property is sold.

Statute of Frauds Pitfall

Worked Example 1.4

An owner orally promises Broker a 6% commission if Broker finds a buyer. Broker procures a ready, willing, and able buyer, and the sale closes. The owner refuses to pay, asserting the Statute of Frauds. No written listing exists. Can Broker recover the commission?

Answer:
In many jurisdictions, no. Brokerage agreements for the sale of real property must be in writing to be enforceable. Even full performance in the form of producing a buyer and closing the sale may not overcome the statutory requirement. On the MBE, absent a written agreement, expect the broker’s commission claim to fail unless a specific statute or exception is provided in the fact pattern.

Broker’s Fiduciary Duties

Because a broker is an agent of the principal (usually the seller, but sometimes the buyer), the broker owes fiduciary duties that go beyond ordinary contract obligations.

Key Term: Fiduciary Duty (Broker)
The obligation of a broker, as agent, to act in the best interests of the principal, including loyalty, confidentiality, good faith, full disclosure of material facts, obedience to lawful instructions, reasonable care, and accounting for money or property.

Core fiduciary duties include:

• Loyalty
  The broker must put the principal’s interests ahead of the broker’s own and avoid conflicts of interest and self-dealing.

• Disclosure to the principal
  The broker must disclose all material information that could affect the principal’s decisions—such as higher offers, information about the other party’s financial strength, or knowledge that a buyer is willing to pay more.

• Confidentiality
  The broker must not reveal the principal’s confidential information (e.g., lowest acceptable price, financial distress) without consent, unless required by law.

• Obedience to lawful instructions
  The broker must follow the principal’s legal instructions (e.g., acceptable price range, showing restrictions), but must not obey illegal or discriminatory directions.

• Reasonable care and skill
  The broker must use the competence normally expected of a professional in that market—e.g., accurately transmitting offers, using correct forms, and avoiding misstatements.

• Accounting
  The broker must properly account for earnest money deposits and other funds received on behalf of the principal.

Breach of fiduciary duty may result in:

• Forfeiture of the commission (even if a sale occurs).
• Liability for damages caused by the breach.
• Possible rescission of the transaction itself.

Broker’s Duties to Buyers (Non-Clients)
Traditionally, all brokers involved in a sale were considered agents of the seller. Even so, a broker owes buyers duties not to misrepresent material facts and, in many jurisdictions, to disclose known material defects in the property. A broker who knows of serious hidden defects (e.g., flooding, structural issues) and fails to disclose them may be liable to the buyer for misrepresentation.

Worked Example 1.5

A seller lists her house with Broker. Broker learns from a prior inspection report that the basement floods each spring, but the seller instructs Broker not to mention it. A buyer asks Broker whether there are any water problems. Broker says, “No, I’m not aware of any issues.” After closing, the buyer discovers annual flooding and sues Broker. Has Broker breached duties?

Answer:
Yes. Broker has breached both the fiduciary duty of disclosure and honesty to the principal (by following an instruction to conceal a material fact) and the duty to avoid misrepresentation to the buyer. Broker risks losing any commission and being liable for the buyer’s damages.

Dual Agency and Subagency

A broker may sometimes represent both buyer and seller in the same transaction—this is dual agency.

Key Term: Dual Agency
An agency situation in which a broker (or brokerage firm) simultaneously represents both the buyer and the seller in the same real estate transaction.

Dual agency creates a fundamental conflict of interest because the broker owes a duty of undivided loyalty to both sides. Accordingly, most jurisdictions permit dual agency only if:

• It is fully disclosed to both parties, and
• Both parties give informed consent, usually in writing.

If a broker secretly acts as a dual agent—e.g., receiving a commission from both sides without disclosure—the broker typically:

• Breaches fiduciary duties of loyalty and disclosure.
• Forfeits the right to any commission from either party.
• May be liable for damages and subject to discipline.

Key Term: Subagent
A broker or salesperson who, with the principal’s authorization, assists another broker in performing the listing and who also acts as an agent of the same principal (commonly the seller), owing the same fiduciary duties.

Key Term: Transaction Broker
A broker who does not act as an agent for either party, but instead facilitates the transaction as a neutral intermediary with limited duties of honesty and reasonable care, rather than full fiduciary obligations.

On the MBE, if a broker (or firm) is representing both sides as agents without clear informed consent, treat it as an undisclosed dual agency and assume a breach of fiduciary duty.

Worked Example 1.6

Broker lists Seller’s property. Buyer contacts Broker directly and asks Broker to help negotiate the purchase. Broker agrees, tells Buyer “I’ll look out for you,” but never tells Seller that Broker is now also advising Buyer. The sale closes, and each side pays Broker a commission. Later, Seller learns that Broker urged Buyer to start with a low offer and sues Broker. What result?

Answer:
Broker has acted as an undisclosed dual agent. By representing both sides without informed consent, Broker breached the duty of undivided loyalty to Seller and likely forfeits all commissions and may owe damages. The dual agency must be disclosed to and consented to by both parties.

Breach of Brokerage Agreements and Remedies

Both the principal and the broker can breach a brokerage contract.

• Principal’s breach
  Examples: wrongfully revoking an exclusive right-to-sell listing, selling behind the broker’s back during an exclusive period, or refusing to pay a commission earned under the contract. The broker’s remedy is typically:

  • Expectation damages, usually measured by the agreed commission; and
  • Possibly reliance expenditures if appropriate.

• Broker’s breach
  Examples: failure to use reasonable efforts in an exclusive listing, abandonment of the listing, or serious fiduciary misconduct. Remedies for the principal often include:

  • Termination of the agency.
  • Refusal or forfeiture of the commission.
  • Damages for any loss caused (e.g., a lost higher offer that broker failed to present).

Exam Warning

On the MBE, watch for fact patterns where the broker’s right to commission depends on whether the buyer was “ready, willing, and able,” whether a contractual condition (such as financing approval or closing) was satisfied or excused, and whether any fiduciary breach (e.g., undisclosed dual agency, secret profit, concealment of defects) should cause forfeiture of the commission.

Broker’s Role in Property Disclosure

While the seller is primarily responsible for property condition disclosures, the broker:

• Must not actively conceal defects.
• Must correct prior statements that turn out to be false.
• In many jurisdictions, must disclose known latent material defects that are not readily observable.

This disclosure duty coexists with the traditional rule of caveat emptor, and the broker’s violation can support claims of misrepresentation or fraud.

Revision Tip

Remember: Most states require brokerage agreements to be in writing. Oral agreements may be unenforceable for commission purposes, even if the broker performs substantial services and the sale closes.

Key Point Checklist

This article has covered the following key knowledge points:

• Brokerage agreements can be exclusive right-to-sell, exclusive agency, or open listings, and each affects when a commission is owed.
• Most jurisdictions require listing agreements to be in writing to satisfy Statute of Frauds–type requirements for broker commission claims.
• Under the traditional rule, brokers earn a commission by producing a ready, willing, and able buyer on the seller’s terms, even if the sale does not close, unless the listing conditions payment on closing.
• In open listings, commission disputes are resolved by determining which broker was the procuring cause of the sale.
• Brokers are agents and owe fiduciary duties of loyalty, disclosure, confidentiality, obedience to lawful instructions, reasonable care, and accounting to their principals.
• Brokers also owe buyers limited duties, including honesty and, in many jurisdictions, disclosure of known material defects and avoidance of misrepresentations.
• Dual agency is permitted only with full disclosure and informed consent; undisclosed dual agency is a serious breach that usually results in forfeiture of commissions.
• Breach of fiduciary duty or material breach of the brokerage contract by the broker can lead to forfeiture of commission and liability for damages; wrongful refusal to pay a commission can expose the principal to contract damages.

Key Terms and Concepts

• Real Estate Broker
• Listing Agreement
• Exclusive Right to Sell
• Exclusive Agency
• Open Listing
• Statute of Frauds (Brokerage Context)
• Ready, Willing, and Able Buyer
• Procuring Cause
• Fiduciary Duty (Broker)
• Dual Agency
• Subagent
• Transaction Broker