Harold Shilberg signed a sales contract to sell his apartment building to licensed real estate broker Thomas A. Horning for $715,000. The agreement, prepared by Horning, said Shilberg agreed to pay Horning, a broker representing himself, a commission as “compensation for services” of 3 percent of the sales price.

Shilberg was advised in writing Horning is a licensed broker acting as a principal.

Purchase Bob Bruss reports online.

The sales agreement gave Horning 21 days after acceptance by Shilberg to provide the seller with a mortgage prequalification letter. Horning failed to provide such mortgage evidence. Shilberg cancelled the sale.

Broker Horning then sued the seller for specific performance of the sales contract, or in the alternative, for damages for Shilberg’s alleged contract breach.

While this lawsuit was pending, Shilberg sold the property to another buyer for $920,000. Horning then demanded the $21,450 sales commission Shilberg agreed to pay him in the contract, plus the $205,000 extra profit Shilberg received by selling to another buyer.

If you were the judge would you award real estate broker Horning his $21,450 sales commission plus his $205,000 lost profit?

The judge said no!

There is no law requiring a property seller to pay a licensed real estate broker who is buying the property as a principal any real estate sales commission, the judge began.

Buyer Horning was obligated by the sales contract to provide evidence he could obtain a mortgage to purchase the property, the judge continued. But the buyer failed to do so within the 21 days specified in the sales contract, he noted.

“Where a broker agrees to purchase property on his or her own behalf, there is no agency or employment relationship with a third party and therefore no entitlement to a commission or other compensation,” the judge emphasized. “Any agreement to pay a purported commission or other compensation to a broker purchasing property on his or her behalf is, in essence, an agreement to a reduction in the sales price,” the judge ruled.

Therefore, broker Horning is not entitled to any sales commission or lost profits in this failed transaction, the judge concluded.

Based on the 2005 California Court of Appeal decision in Horning v. Shilberg, 29 Cal.Rptr.3d 717.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

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