All too often, clients engage an attorney for the first time in a commercial real estate transaction when they desire to make an offer to purchase property, or after having received an offer to sell property. Yet, there is an important step in the process that is often overlooked – the review and negotiation of the listing agreement. Regardless as to whether an attorney is representing the owner of the real property, the purchaser of the property, or the broker/salesperson who will be listing the real property for sale, clients need to be advised of the significant rights and obligations created and set forth in the listing agreement. Listing agreements are not boilerplate agreements and can be negotiated in many ways. They must contain statutory requirements to be enforceable. Nonetheless, clients often sign the listing agreement without any review or negotiation. Keep in mind that the owners of real estate property are not the only party to benefit from a thorough review and understanding of listing agreement; commercial real estate brokers and salespersons will benefit as well. Although the emphasis in this article is on representing the seller or listing broker, counsel should be aware that many of the concepts discussed herein may also apply to buyer/broker agreement.
The legal consequences related to listing agreements have been the subject of much litigation in Minnesota. As a result, an understanding of the intricacies associated with listing agreements is essential to representing a client comprehensively in a commercial real estate transaction. At the outset, therefore, there are several issues the attorney drafting or reviewing a listing agreement should bear in mind. For example, the attorney should understand: (i) what type of listing agreement is appropriate for the subject transaction; (ii) what is the appropriate length or term of the listing agreement; (iii) which events or conditions entitle the broker to compensation; (iv) what is the length of the override period; and (v) what circumstances entitle either party to terminate the listing agreement. In addition, a broker (and broker’s counsel) must be concerned about and cognizant of language in a purchase agreement which governs payment of the commissions to brokers. Such language must be consistent with the terms of the listing agreement.l
There are at least three types of listing agreements that can be used in commercial real estate transactions. The first, and most common form, is the Exclusive Right to Sell Agreement. In this type of listing agreement, the listing broker is entitled to receive a commission even if the owner sells the property without the listing broker being involved. The Exclusive Right to Sell Agreement protects the broker’s commission by providing that the seller must pay the broker even if the property is sold through the efforts of the seller or the efforts of another broker without the participation of the listing broker. Gudim Realty, Inc. v. Hughes, 284 Minn. 39, 42, 169 N.W.2d 216, 218 (Minn. 1969); Dostal v. Fore-M, LLC, 2006 WL 1320501 at *2 (Minn. Ct. App. 2006).
The second type of listing agreement is the Net Listing Agreement. In this type of listing agreement, a broker’s commission is the amount, if any, by which the actual purchase price for the property exceeds the price specified in the listing agreement. The Net Listing Agreement implies that the broker is entitled to the commission when the sale is consummated, regardless of whether the buyer pays the full purchase price to the seller. Stromberg v. Smith, 423 N.W.2d 107, 109 (Minn. Ct. App. 1988). This type of listing agreement is not commonly used as there are potential conflicts of interest between the seller and the broker. For example, if the fair market value of the property is included in the listing agreement, the broker does not have an incentive to accept an offer in this amount since the broker will not receive any commission.
The third type of listing agreement is known as the Open Listing Agreement or Non-Exclusive Listing Agreement. In this type of listing agreement, the owner may simultaneously list the property with more than one broker. The first broker to secure a sale earns the commission but no commission is earned if the seller procures the buyer. This type of listing agreement is not often used since brokers are reluctant to expend the time and resources to market the property without an assurance of compensation. The Non-Exclusive Listing Agreement is also a minefield for litigation over which broker was the procuring cause of the sale. See Rees-Thomson-Scroggins, Inc. v. Nelson, 276 Minn. 453, 150 N.W.2d 568 (Minn. 1967).
There are certain statutory requirements that must be met for a listing agreement between the owner of real property and the broker to be valid. The first, and most important step, is to have the parties enter into a written listing agreement. Aside from the practical benefit to both parties of memorializing an agreement in a written document, a broker must have a written listing agreement in order to commence an action to recover an unpaid commission. Minn. Stat. §82.85, Subd. 2. In addition, brokers are required to obtain a signed listing agreement (or other signed authorization from the owner of the property or a person authorized to offer the property for sale or lease) before advertising to public that the property is available for sale or lease. Minn. Stat. §82.66, Subd. 1(a). The next steps necessary for a valid and enforceable listing agreement are set forth in Minn. Stat. §82.66, Subdivision 1(b) which requires that the written listing agreement include, among other things: (i) a definite expiration date; (ii) a description of the real property involved; (iii) the list price and any terms required by the seller; (iv) the amount of any compensation or commission or the basis for computing the commission; (v) a clear statement of the events or conditions that will entitle the broker to a commission; and (vi) information regarding an override clause, including a statement to the effect that the override clause will not be effective unless the broker provides the seller with a written protective list within seventy- two hours after the expiration of the listing agreement. The Minnesota Supreme Court has determined that substantial compliance with the statutory requirements is sufficient. Rosenberg v. Heritage Renovations, LLC, 685 N.W.2d 320, 325 (Minn. 2004); Reuben v. Gibbs, 297 Minn. 321, 323, 210 N.W.2d 857, 858 (Minn. 1973). However, please note that a broker cannot recover compensation under quasi-contract or implied-in-fact contract theories in light of the statutory requirement of a written agreement to recover compensation. Krogness v. Best Buy Co. Inc., 524 N.W.2d 282, 286-7 (Minn. Ct. App. 1994); Cambridge Commercial Realty, Inc. v. Brooklyn Hotel Partners, LLC, 2014 WL 1272451 at *4 (Minn. Ct. App. 2014). The key here for everyone involved is to be sure there is a written and signed listing agreement.
It is important for the attorney to understand and advise clients on override clauses. An override clause is a provision in the listing agreement allowing the broker to receive a commission when, after the listing agreement has expired, the property is sold to a person with whom broker or salesperson had negotiated or shown the property prior to the expiration of the listing agreement. Minn. Stat. §82.66, Subd. 1(d)-(e). An override clause cannot extend beyond six months after the expiration of the listing agreement. Minn. Stat. §82.66, Subd. 1(c). A broker shall not seek to enforce an override clause unless a protective list has been furnished to the seller within seventy-two hours after the expiration of the listing agreement. Minn. Stat. §82.66, Subd. 1(d)(1). A protective list is the written list of names and addresses of prospective purchasers with whom a broker has negotiated the sale or lease of the property or to whom the broker had shown the property prior to the expiration of the listing agreement. Minn. Stat. §82.55, Subd. 16; §82.66, Subd. 1(e). The Minnesota Court of Appeals has held that a broker has the right to a commission when the broker has been the procuring cause of the sale, even when the sale is completed after the listing agreement has terminated, provided the broker complies with the override clause and protective list requirements. Douglas v. Schuette, 607 N.W.2d 142, 145-6 (Minn. Ct. App. 2000); Lynn Beechler Realty Co. v. Warnygora, 396 N.W.2d 717, 719-20 (Minn. Ct. App. 1986). Thus, take the time to work through the override clause and protective list requirements with your client to be sure everyone is on the same page with the obligation to pay a commission post-expiration or post-termination of the listing agreement.
A quick word about termination of the listing agreement. The general rule is that a listing agreement that includes a definite expiration date as required by Minn. Stat. §82.66, Subd. 1(b)(1) will expire by its terms. Of course, the parties may also mutually agree to terminate the listing agreement before it expires. A listing agreement that fails to provide a definite expiration date but is otherwise in substantial compliance with the statutory requirements is terminable at will. Rosenberg v. Heritage Renovations, LLC, 685 N.W.2d 320, 326 (Minn. 2004). Again, work through the listing agreement to arrive a mutually agreeable expiration date.
Regardless as to which type of listing agreement is used in a commercial real estate transaction, your clients need to be advised of the rights and obligations arising out of the listing agreement. This is true even if you are counseling the commercial real estate broker or salesperson, as their right to obtain compensation for their hard work will depend on the validity of the listing agreement. The listing agreement is not a boilerplate document; rather, it is a document which requires careful consideration, review, negotiation and drafting.
Author’s Note: This article incorporates material found in the Minnesota Real Estate Purchase and Sale Deskbook, Vol. 1, 2nd Ed. (2015) at §§2.4 and 2.8 written by Marvin Liszt, Esq., Mitchel Chargo
If I were to sell my commercial building, I would make sure to have it appraised first. Well, I also agree with you that it will be wiser to hire a lawyer who will be able to help with the business contracts. Thank you for sharing that a broker must be considered too.
It’s interesting to know that there are non-exclusive agreements when it comes to real estate brokerage. I’m planning to look for a commercial real estate broker soon in order to get some insight on how the market is doing right now. That way, I can decide if now is the time to start investing.