Transaction-Brokers and Commissions

 

I am aware of the legal concept that if an agent breaches his fiduciary duty to a client, the agent may forfeit his right to a commission, regardless of whether that breach of duty caused damage to the client. Does that same concept apply to transaction brokers?

No.   In the recent decision of Hoff & Leigh, Inc. v. Byler, No. 01CA2005, 2002 WL 31601004 (Colo. App. Nov. 21, 2002) the court held that the principle from Moore & Company v. T-A-L-L, Inc., 792 P2d 794 (Colo. 1990), that an agent who breaches his or her fiduciary duty to a seller forfeits the commission, regardless of the damages caused to the seller, was not applicable to a transaction-broker. To avoid paying a transaction-broker a commission, the unhappy client must prove he has suffered actual damages caused by the transaction-broker’s mistakes.

In the Moore case, a listing broker was acting as a seller’s agent. With the help of a cooperating broker, the listing agent brokered a sale for the full list price of the property, approximately $1.4 million from the seller to “Buyer 1.” Before Contract 1 closed, a second prospective competing buyer (“Buyer 2”)contacted the listing broker and expressed interest in buying the property for $1.6 million. The listing broker in the Moore case then made two mistakes. First, he failed to attempt to solicit a back-up offer from Buyer 2 and inform the seller of Buyer 2’s interest. Second, the seller’s agent provided the identity of Buyer 1 to Buyer 2. Buyer 2 ended up contacting Buyer 1 and purchasing Buyer 1’s contract rights for $300,000.

While it was clear that the listing broker had breached duties to the seller in the Moore case, it was not clear that this breach had caused the seller any damages. The seller was already obligated to sell the property to Buyer 1 for $1.4 million, the seller’s full asking price. Had the seller known of Buyer 2, the seller may not have been able to benefit from Buyer 2’s eagerness to pay $1.7 million for the property. Nevertheless, the Supreme Court of Colorado in the Moore decision held that regardless of whether the listing broker’s breach caused the seller damages, the breach of the seller’s agent’s fiduciary duties caused the seller’s agent to forfeit his right to a commission.

The holding in the recent Hoff & Leigh case establishes that the Moore case does not apply to transaction-brokers. In Hoff & Leigh, there was only one broker, the transaction-broker who listed the property for the seller. The seller refused to pay the transaction-broker at closing, and the listing broker sued for his commission. The seller defended, in part, by alleging that the transaction-broker had breached his duties to the seller; however, the seller failed to present any evidence of any damage which the alleged breach caused the seller. The seller tried to rely on the holding of the Moore case to avoid his obligation to pay the listing broker a commission, regardless of whether the seller had suffered damages.

In rejecting the defendant’s argument, the Hoff & Leigh court ruled: “As noted, a transaction-broker is not an agent of either party to the real estate transaction and thus does not owe fiduciary duties to either party.” Transaction-brokers are still responsible for the consequences of their mistakes, but only to the extent those mistakes actually damage clients. All other things being equal, brokers will have an easier time pursuing commissions as a transaction-broker rather than as an agent.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN