The Law Society of Upper Canada’s

The Real Estate Law Summit April 21 and 22, 2004

WORKING WITH AGENCY AND

COMMISSION AGREEMENTS

Ira Barkin*

2

1. INTRODUCTION*

The financial and legal implications of agency and commission agreements are often overlooked by parties to a real estate transaction—with the result that real estate lawyers are only consulted infrequently on the agreements.1 This is unfortunate given that cost differences between typical commission rates, such as 2.5% and 5%, will often exceed the legal costs for the entire transaction. It is doubly unfortunate as many listing agreements promise little to the party to the real estate transaction, and contain vague terms that can lead to legal uncertainty in litigation.

This paper attempts to provide some practical advice for negotiating and drafting agency and commission agreements. First, it highlights terms in the agreements that can lead to trouble by contrasting a ‘model’ agreement with standard-form agreements. Next, it discusses the legal implications of the inclusion of certain standard-form terms, illustrated by reference to recent case law. Brief reference will also be made to the effect of recent legislative developments, as a new act regulating realtors is likely to be proclaimed shortly.2 As most listing agreements are contracts between a vendor and its realtor, the focus of the discussion will be on these listing agreements, not so-called “selling agent” agreements with the buyer. Commercial realty agreements involving freehold properties are presented as examples, but many of the same principles apply when dealing with leasehold and residential realty.3

Throughout, the paper will refer to agency and commission agreements as “listing agreements”, real estate ‘agents’, brokers and brokerage houses as “realtors”, and the person who retains them as the “vendor”. This terminology has the benefit not only of brevity, but also of clarity. Listing agreements create an unusual legal relationship between the realtor and the vendor. It has been forcefully argued that realtors are not true ‘agents’ of the vendor: they do not typically possess the authority to contractually bind the vendor in a sale agreement, and the vendor generally has sufficient information and independence in decision-making to not be truly vulnerable to the

* I am grateful to Miles Hastie of Goodmans LLP for his very material contribution to this paper.

1 Despite the fact that the parties must receive a copy of any written listing agreement: Real Estate and Business Brokers Act, R.S.O. 1990, c. R-4 [“REBBA”], s. 35(1).

2 In 2002, Bill 180 enacted the Real Estate and Business Brokers Act, 2002, S.O. 2002, c. 30 [“REBBA 2002”], to replace the REBBA. The new act has yet to be proclaimed, apparently because the draft regulations are still being subjected to public consultation. It completely reorganizes the statutory, regulatory and disciplinary powers the government exercises over realtors, but does not dramatically impact the issues in this paper. For a legislative overview, see: http://www.e-laws.gov.on.ca/DBLaws/Source/ExplanatoryNotes/English/2002/exS02030_e.htm.

3 For a discussion of leasehold listing and commission agreements, please see R. A. Goldenberg, “How to Structure Listing Agreements and Commission Agreements” (The Six-Minute Commercial Leasing Lawyer Returns, Law Society of Upper Canada, 10 June 1999) [unpublished]. With respect to residential real estate transactions, realtors involved in these transactions may be extremely reluctant to allow amendments to standard form listing agreements. The standard form agreements are perceived by the realtor industry to provide carefully constructed limits on their liability and a fair deal to both parties. In a typical residential real estate transaction, where the solicitor involved is paid a fixed fee for services, it may also not be economical for the solicitor to engage in negotiations with the realtor over these terms.

3

actions of the agent.4 Nevertheless, case law invariably treats the relationship between listing realtors and the vendor as one of agency.5

2. WHAT TO LOOK FOR IN A LISTING AGREEMENT

Terms of listing agreements generally pursue the following four objectives, common to most commercial agreements. From the realtor’s perspective, the objectives are as follows:

• maximize profits (by ensuring a favourable commission rate and structure);

• maximize the opportunity to profit (by setting a flexible commission trigger);

• minimize duties, liabilities and expenses under the contract (by inserting limitations on liability and indemnification clauses); and

• ensure certainty in enforcement of contractual rights (by making the commission easy to extract).

The vendor will generally have the opposite objectives, but its sensitivity to the different objectives will determine which clauses should be most carefully scrutinized.

The table below compares the types of clauses that a realtor will seek to include (reflected by the standard-form agreements used by the Ontario Real Estate Association and Toronto Real Estate Board), and the types of clauses that you may wish to consider including if acting for a vendor (reflected by the model agreement). The model agreement is not intended to be an exhaustive or detailed form of a listing agreement. Instead, it is intended to highlight, in a practical manner, certain of the essential elements of a listing agreement that a vendor should consider. A full copy of the model agreement appears in the Appendix.

4 See, e.g., William F. Foster, Real Estate Agency Law in Canada, 2nd ed. (Scarborough: Thomson Canada Ltd., 1994) at 3-7.

5 Ibid., at 3; Raso v. Dionigi (1993), 12 O.R. (3d) 580 (C.A.). Selling realtors may occupy a different role vis-à-vis the vendor: see, e.g., Knoch Estate v. Jon Picken Ltd. (1991), 4 O.R. (3d) 385 (C.A.).

4

CLAUSE/ISSUE OUR MODEL AGREEMENT

STANDARD FORM AGREEMENT

I. Maximizing Profits: A Favourable Commission Structure

Commission:

The starting point of the “cash portion of the sale price” will exclude the amount of a vendor take-back mortgage and any other non-cash consideration.

The starting point of the “sale price” will include the amount of a vendor take-back mortgage and any other non-cash consideration.

Split Commission: Paying Multiple Realtors

Commission is to be split down the middle.

A saving is realized by the vendor if no co-operating broker is involved because a lower commission is payable.

Final commission rate to remain unchanged.

Primary (listing) realtor to pay a stipulated percentage of the final sale price from his commission.

No saving is realized by the vendor if a co-operating broker is not involved.

II. Maximizing the Opportunity to Profit: The Commission Trigger

Commission Trigger: Generally

Triggered on:

“Successful completion of the sale of the Property effected during the Term [of the listing agreement] from any source whatsoever.”

“’Successful completion of the sale of the Property’ means the transfer of registered title from the Vendor to the purchaser and the exchange of all documents and monies required under the Agreement of Purchase and Sale between the Vendor and purchaser with all escrow conditions having been satisfied or waived.”

Triggered on:

“any valid offer to purchase or lease the Property”

For clarification, commission is still due if “non-completion is owing or attributable to [the Vendor’s default or neglect.”

Expansive definition of “purchase” includes:

“the entering into of any agreement to exchange, or the obtaining of an option to purchase which is subsequently exercised, or the causing of a first Right of Refusal to be exercised, or an agreement to sell or transfer shares”.

5

CLAUSE/ISSUE OUR MODEL AGREEMENT

STANDARD FORM AGREEMENT

Holdovers: Commission Earned after Listing Agreement Expires

The Realtor is only entitled to earn commission during the holdover period:

“on a sale of the Property effected within three (3) months after the expiry of the Term”

“provided the Broker has notified the Vendor in writing within ten (10) days of the expiry of the Term of this Agreement of the name of such party or parties which the Broker or co-operating brokers have introduced to the Property”…

“for up to a maximum of five (5) parties”

“…with whom the Broker had conducted negotiations or made introductions during the Term of this Agreement.”

The Realtor is entitled to earn commission during the holdover period:

“if an agreement to purchase or lease is agreed to or accepted by me or anyone on my behalf within 90 days after the expiration of the Listing Period”

“so long as such agreement is with anyone who was introduced to the property from any source whatsoever during the Listing Period or shown the property during the listing period…”

An introduction to a buyer is deemed to include one to “related or affiliated corporations”.

III. Minimizing Duties, Liabilities and Expenses

Realtor’s Powers Realtor’s powers as agent explicitly limited:

“only the Vendor shall have the authority to accept offers and that the Broker shall not have any authority whatsoever to enter into any sale, financing or other contract on behalf of the Vendor”

No equivalent provision (although there is no explicit right to accept offers or enter into other contracts on behalf of the Vendor).

Realtor’s Powers and Obligations—Dual Agency

No equivalent provision. Realtor expressly entitled to act for both purchaser and vendor upon written notice, with a duty of loyalty owed to each.

Realtor’s Obligations Realtor’s specific obligations expressly laid out:

-preparation of legal materials -marketing -receipt of offers, recommenda-tion regarding each -receipt of Vendor instructions, conduct of negotiations -assistance in closing -keeping good financial records,

Realtor’s role described in general terms to “act as agent”, and be responsible for “listing the property”.

The vendor also acknowledges that the agent has explained (the limits of) the agency relationship.

6

CLAUSE/ISSUE OUR MODEL AGREEMENT

STANDARD FORM AGREEMENT

subject to audit -weekly progress reports on marketing plan, market condi-tions, recommendations

All with the expectation of continuity in assignment of individual staff members to the sale.

Liabilities Realtor expressly obliged to carry out obligations in a competent and professional manner.

Acknowledgement of an obligation to third parties for claims arising from Realtor’s work.

Realtor’s liability limited to that associated with “gross negligence or wilful act[s].”

Property Warranties Acknowledgement by broker that property being sold on ‘as is, where is’ basis.

Vendor’s warranty to Realtor of authority to execute, and warranty of disclosure of any “third party interests of claims on the property such as rights of first refusal, options, easements, mortgages, encumbrances or otherwise concerning the property, which may affect the sale or lease.”

IV. Ensuring Enforcement of Contractual Rights: Use of the Deposit

Commission: Enforcing Payment and the Deposit

The sale deposit is payable in trust to Vendors’ solicitors for investment, or as otherwise agreed in the Agreement of Purchase and Sale.

“Any deposit in respect of any agreement where the transaction has been completed shall first be applied to reduce the commission payable”.

“In the event the buyer fails to complete the purchase or lease and the deposit becomes forfeited, awarded, directed or released to the Seller, I then authorize you to retain as agreed compensation for services rendered, fifty (50%) per cent of the said deposit (but not to exceed the commission payable had a sale or lease been consummated)”.

7

3. HOW IS THE COMMISSION STRUCTURED?

There are statutory limitations on the structuring of commissions. Currently, “[a]ll commission or other remuneration payable to a broker in respect of a trade in real estate shall be upon an agreed amount or percentage of the sale price or rental”.6 The new statute regulating realtors, REBBA 2002, when proclaimed, will clearly prohibit a commission based upon a combination of flat rate and percentage-based commissions.7 Commissions based upon the difference between the listing price and closing price are expressly prohibited.8 REBBA 2002 will allow declining marginal commission brackets,9 but by implication, will prohibit increasing marginal commission brackets.

Generally speaking, whether a flat rate or percentage-of-sale commission structure is chosen, the final calculation of commission owing is straightforward. Few reported cases involve arguments over the interpretation of commission structuring clauses. 10 An identifiable portion of the cash being passed from purchaser to vendor is simply transferred to the realtor. In an arm’s length transaction, the divergent interests of the purchaser and vendor will often ensure a fair purchase price calculation. Two transaction features can complicate the commission calculation.

First, where a portion of the purchase price is comprised of non-cash consideration, a vendor may be disappointed over what is included in the “sale price” upon which commission is calculated. Conversely, the model agreement stipulates that the “sale price” is the “cash portion of the sale price”, a phrase whose meaning would exclude any non-cash consideration such as a vendor take-back mortgage.11

Second, a situation may arise where multiple realtors have a claim to commission. Most listing agreements grant the realtor the authority to co-operate with or retain another broker, and the buyer may already have one. A vendor clearly wants to avoid a situation where it faces a second

6 REBBA, s.34(2). It is unclear whether this clause contains a conjunctive or disjunctive “or”: arguably, a realtor could collect a combination of a flat rate commission and a percentage of the sale price.

7 REBBA 2002, s. 36(1).

8 REBBA, s. 34(1) and REBBA 2002, s.36(3).

9 REBBA 2002, s. 36(2).

10 There are no reported Ontario cases to date in which a commission clause has been challenged for being contrary to REBBA. Nor do there appear to be any reported Ontario cases where the principal issue was the interpretation of the commission-structuring clause.

11 Depending on the anticipated amount of a vendor take-back mortgage or other non-cash consideration, the realtor may insist on modifications to the model agreement. However, the model agreement may serve as a useful starting point on this issue.

8

claim for commission. Such situations may be unusual, but very expensive.12 The simplest way to accomplish this goal is to shift the burden of paying any additional commission to the listing broker. To this end, the standard form agreements provide that “[a]ny commission payable by me to any other broker shall be paid out of the commission I pay the Listing Broker”. The model agreement contains a similar provision and states that “there shall be no commissions or other fees or expenses payable by the Vendor to any sub-agent”. As commission clauses often require the same base commission to be split between two realtors, they can sometimes discourage the listing broker from negotiating with other brokers. The model agreement increases the base commission when multiple brokers are involved in order to reduce the disincentive to negotiate with other brokers.

4. WHAT TRIGGERS THE DUTY TO PAY COMMISSION?

The question of whether any commission is owed is probably litigated more often than any other issue relating to listing agreements. The terms in clauses describing commission triggers are vague and the case law is inconsistent. The Supreme Court of Canada case of H.W. Liebig & Co. Ltd. v. Leading Investments Ltd.,13 as discussed below, remains a leading case in the area after 18 years, despite the 3-1-3 divide on the bench.

In drafting and negotiating clauses involving commission triggers, the objective is to provide precise language delineating circumstances for commission claims not only during the term of the contract, but also after the expiry of the contract, outside the four corners of the contract, and in some circumstances, even with parties with whom there is no direct written contract.

a) Claims for Commission in the Absence of a Listing Agreement

Dealing with the last issue first, REBBA current provides that there must be written evidence of all listing arrangements in order for a realtor to make a claim for commission. A realtor may only bring an action for commission where: (i) there is a written listing agreement and the realtor brings the purchaser to the property or vendor; (ii) the realtor is entitled to commission by virtue of an agreement signed by the vendor; or (iii) the realtor “has obtained” an offer in writing that is accepted.14 The first situation concerns normal listing agreements. The second illustrates that Agreements of Purchase and Sale can be the basis upon which a claim for commission is made. The third indicates that realtors are not precluded from claiming commission where there was no written contract between the realtor and vendor.

12 REBBA, s.32(2) and REBBA 2002, s. 33(3) both prohibit a realtor from claiming commission from a vendor that has already signed an exclusive listing agreement, without the written consent of that party. Nevertheless, the precautions described may avoid acrimony.

13 (1986), 25 D.L.R. (4th) 161 (S.C.C.).

14 REBBA, s.23. These restrictions have been removed from REBBA 2002, although s.51(1)(18)(v) allows the Lieutenant Governor in Council to make regulations “prescribing conditions that must be met before commissions or other remuneration may be charged or collected”.

9

Strictly speaking, REBBA does not provide realtors with a statutory right of commission or cause of action.15 It limits the circumstances under which commission claims can be made. Actions must be founded in oral contract, restitutionary claims (such as unjust enrichment or quantum meruit), or exceptionally, in tort. Case law, however, sometimes appears to treat satisfaction of the statutory conditions as a necessary and sufficient condition to ground a commission claim.16 These cases provide further justification for a clause in the listing agreement that indicates that all commission owing to co-operating realtors is to be paid by the listing realtor in a manner akin to the model agreement. The mere existence of a listing agreement may be sufficient to defeat certain restitutionary claims.17

A clause allocating responsibility to the listing realtor to pay commission may not be adequate where the second realtor approaches the vendor independently. In such circumstances, the original listing agreement, if it is exclusive, may contractually oblige the vendor to inform the listing realtor.18 In order to make out its commission claim, the second realtor must also establish that it “obtained the offer”19 and that it was accepted. Accordingly, in the worst-case scenario, it may be advisable for the vendor to decline an offer so as to completely defeat this sort of commission claim.

15 Keachie Jr. v. St. John (1958), 12 D.L.R. (2d) 21 (Ont. C.A.) at 22.

16 E.g., Cash v. George Dundas Realty Ltd. (1974), 1 O.R. (2d) 241 (C.A.), aff’d [1976] 2 S.C.R. 796. Both the Court of Appeal and the Supreme Court of Canada thoroughly canvassed the issue of what it means to have “obtained an offer in writing”, interpreting that phrase in keeping with what modern realtors are expected to do in order to earn commission. The Court of Appeal allowed the appeal and granted the commission, but the words “oral contract”, “restitution”, or “unjust enrichment” appear nowhere in the judgment. Instead we find the statement that “the simple denial by the vendor of any intention to pay a commission to the agent cannot frustrate the agent in asserting his claim under cl. (b) [of the statute] when an acceptable offer by these processes is thereafter produced and executed in a direct sequence of events in which the real estate agent plaintiff is intimately involved.” It is possible that the statutory requirements are a hair’s breadth from a further requirement of the cause of action, that the realtor be the real and efficient cause of the sale: e.g., Rooke v. Lillicroft (1974), 48 D.L.R. (3d) 204 (Ont. H.C.), citing Travis v. Coates (1912), 27 O.L.R. 63.

17 Claims in unjust enrichment or quantum meruit are exceptionally difficult to establish in the presence of a contract dealing with the same subject matter. A contract will provide a juristic reason for enrichment, defeating the first cause of action. Quantum meruit claims will only succeed where the contract is silent on remuneration or the circumstances suggest that the parties intended to replace an old contract, but never did: Century 21 Success Inc. v. Gowland, [2003] O.J. No. 4645 (Sup. Ct.).

18 For an example of the reverse situation, where a second realtor attempts to claim against the listing realtor for an agreement between the two of them that is not in writing, see Staltari Realty Corp. v. Colliers Macaulay Nicolls (Ontario) Inc., [1998] O.J. No. 5052 (C.A.).

19 This phrase has special significance: see Cash v. George Dundas Realty Ltd. (1974), 1 O.R. (2d) 241 (C.A.); William Allan Real Estate Co. v. Robichaud (1990), 72 O.R. (2d) 595 (Gen. Div.), appeal dismissed (1993) 11 O.R. (3d) 734 (C.A.). It does not mean that the realtor was involved in “mere instrumentality concerned in some pre-contractual stage with simply introducing the parties”. In Cash, the Court of Appeal declined to enumerate all the duties of realtors, but observed that their role must be realistically appraised in a situation whereby they do not act as a true agent for the purchaser or vendor, and responsibility for drafting agreements is assigned to lawyers and other specialists.

10

b) Claims for Commission based upon an Agreement of Purchase and Sale

Courts do not look fondly upon realtors who attempt to base their claim for commission solely upon the terms of an Agreement of Purchase and Sale, whose terms are protected by privity of contract between the purchaser and vendor.20 The extent to which the Agreement of Purchase and Sale can be relied upon in order to interpret or expand upon a commission agreement is a different matter entirely.

H.W. Liebig, supra, broadly concerned the right of a realtor to collect commission after a purchaser defaulted under an Agreement of Purchase and Sale that the realtor arranged, and from which the vendor had released the purchaser and kept the deposit. A critical issue was whether to give effect exclusively to the language of the listing agreement, which required a completed sale for commission, or to read it harmoniously with the Agreement of Purchase and Sale, which required a “valid offer”. The court split 3-1-3 in favour of reading the agreements together, yet also decided 3-1-3 against the realtor’s claim for commission by the opposite majority, with LeDain J. tipping both balances.

As a clearer statement of Ontario law has not been forthcoming, drafters of listing agreements should take precautions to ensure that subsequent agreements do not distort the intended meaning of the listing agreement. The terms associated with triggered commission should be very clear, as discussed below. Inclusion of a boilerplate ‘four corners’ clause, limiting the scope and interpretation of the agreement to its express terms, may be prudent.

c) Claims for Commission based upon the Listing Agreement

Commission is triggered under the standard form agreements upon a “valid offer” to purchase the property. Case law indicates that the phrase “valid offer” means any offer made by a purchaser ready, willing and able to complete the transaction.21 The phrase employed in the model agreement makes commission payable upon a “completed sale”.22 The words “purchase” or “sale” in isolation should not be taken to be clear and should not be used.23 In this regard, the model agreement goes to great lengths to define what constitutes a “completed sale”.

20 See e.g. Northwestern Securities v. White (1962), 35 D.L.R. (2d) 666 (B.C.C.A.); but see Roi Corp. v. Burnham, [1995] O.J. No. 4044 (C.A.) for a vendor’s unsuccessful attempt to resile from a commission obligation under the Agreement of Purchase and Sale.

21 See H.W. Liebig, supra, per LeDain J. and La Forest J., citing Loveridge v. Cooper (1959), 18 D.L.R. (2d) 337 (Ont. C.A.), Jaques v. Lloyd D. George & Partners Ltd., [1968] 1 W.L.R. 625 (C.A.) and Dennis Reed Ltd. v. Goody, [1950] 2 K.B. 277. The extent to which a realtor must make this term obvious to the vendor is far less clear.

22 See H.W. Liebig, supra. Unfortunately, the courts have sometimes approached this terminology inconsistently, giving the phrase its natural construction in determining whether a completed sale has occurred at all, but treating the signing of an Agreement of Purchase and Sale as the ‘completion’ when determining if the transaction took place during the currency of the listing agreement: e.g. Royal LePage Real Estate Services Ltd. v. McArter, [2000] O.J. No. 349 (Sup. Ct.).

23 In H.W. Liebig, the court split on whether the word “sale” only meant a completed sale, which the transaction in question was not, or also meant the transfer of the beneficial interest in land that accompanies the signing of a valid Agreement of Purchase and Sale. The majority held that “sale” meant a completed sale, with three judges in the majority holding that clear language was required for commission to be earned from incomplete transactions. The

11

The commission triggering clauses should also make clear any conditions precedent to the claim. In an exclusive agency agreement, this is normally not an issue, because the listing agreement entitles the realtor to commission no matter who introduced the purchaser to the property and/or the vendor. The standard form agreements and model agreement both operate in this manner. In many other agreements, in order to earn commission, the realtor must “introduce” the purchaser to either the property or vendor. The word “introduce” has been judicially considered many times, and is given its ordinary, dictionary meaning of “first presentation”.24 The realtor need not take part in any negotiations between the transacting parties or serve as the efficient cause of the transaction.25

If the vendor wishes to put an expansive or unusual construction upon one of these terms, it should be done very clearly. For instance, the standard form agreements give the phrases “purchase” and “introduction” broad meanings. “Purchase” is defined in a manner to include option agreements, share transfers, and rights of first refusal. The word “introduction” is also defined to include related and affiliated corporations of those actually shown or introduced to the property.26

Equally, where the realtor wishes to collect commission despite the transaction’s failure (default by the purchaser or vendor), this should be made clear.27 The standard form agreements allow the realtor to collect in circumstances of vendor default or neglect.

d) Claims for Commission after the Expiry of the Listing Agreement: Holdover Clauses

Most listing agreements allow the realtor to collect commission after the expiry of the listing agreement, where the purchaser was introduced to the property during the currency of the agreement (commonly “holdover” or “overhold” clauses).

Listing agreements must contain a clearly stipulated date of expiry.28 Given how strictly the Ontario courts have construed this requirement, it is reasonable to assume that the expiry of the

deep division in the court should provide an incentive to attach appropriate adjectives to the words “purchase” and “sale”.

24 e.g. Terry Martel Real Estate Ltd. v. Lovette Investments Ltd. et al. (1981), 32 O.R. (2d) 790 (C.A.); Capital Real Estate Services Inc. v. Evangelisto, [2002] O.J. No. 255 (Sup. Ct.); Woodman Realty Ltd. v. Kudlac, [1998] O.J. No. 3165 (Gen. Div.). For a judicial interpretation of an alternate phrase, “sale generated”, see Skyline Marina Ltd. v. Jackman, [2000] O.J. No. 3310 (Sup. Ct.).

25 Capital Real Estate Services Inc. v. Evangelisto, [2002] O.J. No. 255 (Sup. Ct.).

26 Situations where the nature of the ultimate transaction threatened to fall outside descriptions of conventional purchases and sales were considered in Helsberg v. Allison, [2002] O.J. No. 1529 (C.A.) (right of first refusal triggering deal with different party than that introduced by the realtor); and Skyline Marina Ltd. v. Jackman, [2000] O.J. No. 3310 (Sup. Ct.) (listing agreement designed to elicit sale generating lease with option to purchase that did not qualify as “exchange”).

27 The court in Luxor (Eastbourne) Ltd. v. Cooper, [1941] A.C. 108 (H.L.) and the strong dissenting minority in H.W. Liebig, supra, expressed the view that such arrangements are contrary to the expectations of the vendor so should be made clear and unequivocal.

28 REBBA, s.35(2)

12

holdover term must also be clearly indicated.29 A 90-day holdover period from the expiry of the listing agreement is common.

Again, the event required to trigger commission during this holdover period should be clear. The event is usually the same one required to determine whether commission would have been payable during the term of the listing agreement—a “valid offer” or “completed sale”. Unfortunately, courts have sometimes approached the question of when the sale is “completed” differently from the question of whether a sale has been completed. In one recent case, signing of the Agreement of Purchase and Sale occurred during the holdover period, but the closing did not. This was found sufficient to generate liability for commission as a “completed sale” within the holdover period.30 Again, the specific language in the model agreement regarding a completed sale should assist vendors with respect to this issue.

The condition precedent to commission during the holdover period is typically an “introduction” to the purchaser or property. The standard form agreements allow the realtor to capitalize on prospects that it did not generate during the listing term, allowing introductions “from any source whatsoever”. The model agreement requires the realtor to have “introduced” or “conducted negotiations” with the prospect to claim commission during this period.

As noted above, the phrase “introduction” has a well-understood meaning of “first presentation”. It is the factual determination of whether an introduction has been made that is challenging. Where the realtor responded to inquiries or showed the property without introducing the prospective buyer to the vendor, the “introduction” may not be obvious to the latter. In order to allow the vendor to properly govern its affairs, it has become customary to include a contractual requirement that the realtor provide a list of all prospects before the expiry of the listing agreement. The model agreement contains such a term, but the standard form agreements do not. Inclusion of such a term is highly recommended, for the courts require the realtor to strictly adhere to its notification obligations. Even participation by the vendor in an “introduction” with a prospect has been held to not constitute proper registration of the prospect for holdover purposes.31

The model agreement prohibits the realtor from registering more than five prospects obtained during the currency of the listing agreement. This provides the vendor with an effective ranking of the prospects at the termination of the listing agreement, and prevents the realtor from claiming a long list of prospects to whom it did little marketing.

29 See e.g. Rhodes & Rhodes Realty Lt. et al. v. Pagani Investments Ltd. et al. (1982), 35 O.R. (2d) 77 (C.A.), where the Court of Appeal considered the term of the listing agreement, a period from the time the houses were “ready for showing”, to be too uncertain. There appear to be no reported cases on the required certainty of holdover periods.

30 Royal LePage Real Estate Services Ltd. v. McArter, [2000] O.J. No. 349 (Sup. Ct.).

31 C.B. Richard Ellis Ltd. v. Swedcan Lumican Plastics Inc. (2002), 60 O.R. (3d) 551 (Sup. Ct.).

13

5. HOW DOES THE LISTING AGREEMENT ESTABLISH DUTIES AND ALLOCATE RISK?

a) Contractual Duties of Realtors

General agency agreements, that is to say, non-exclusive listing agreements, are treated as unilateral contracts. Some authorities describe such contracts more colourfully as “hunting licenses”. The realtor is under no contractual obligation to perform any particular task for the vendor, and the commission-triggering event represents acceptance of the vendor’s offer and provision of consideration. Professor Foster makes a strong case that most exclusive listing agreements are also unilateral contracts: realtors do not generally commit to particular marketing activities or expenditures.32 REBBA does not impose general listing obligations upon realtors.33

A glance at a standard form listing agreement will confirm Foster’s understanding. The standard form agreements reviewed for the purposes of this paper contain no specific undertakings of the realtor. The agreements merely confirm that the realtor is acting as agent for the vendor and assuming responsibility for “listing” the property. Where obligations might otherwise be described, the realtor is given powers and the authority to advertise the property, verify information provided by the vendor, and collect, use and disclose personal information.34 The realtor is also expressly entitled to act for both purchaser and vendor.35 In keeping with the exclusive nature of the agreement, the vendor also undertakes to notify the realtor of any offers and inquiries reaching it from other sources.36

The model agreement contains a detailed list of duties of the realtor, including marketing, conducting negotiations, receiving offers and vendor instructions, preparing legal materials and financial records, and assisting in closing. The contract also requires the realtor to provide written weekly progress reports.

32 William F. Foster, Real Estate Agency Law in Canada, 2nd ed. (Scarborough: Thomson Canada Ltd., 1994) at 191-3.

33 The current and future statutes only introduce prohibitions, not prescriptions: REBBA, s. 47, REBBA 2002, ss. 34, 35, 37 (false and misleading advertising); REBBA s. 31, REBBA 2002, s. 32 (prohibition on fiduciaries self-dealing codified); and REBBA, ss. 29, 30, REBBA 2002, s. 31(2) (prohibition against acting for another brokerage house to reduce conflict of interest and increase transparency).

34 These grants may be regarded as concessions by the vendor without any attendant obligations upon the realtor. Even in circumstances where the vendor undertakes to pay 50% of advertising expenses, this may be more properly regarded as its concession, rather than an undertaking to advertise by the realtor which would constitute consideration: see William F. Foster, Real Estate Agency Law in Canada, 2nd ed. (Scarborough: Thomson Canada Ltd., 1994) at 191; Murdoch, “The Nature of Estate Agency” (1975), 91 L.Q. Rev. 357 at 364.

35 Duties are imposed upon the realtor in such a dual agency situation; however, such duties are limited to simply satisfying some fiduciary obligations, such as notification of a potential conflict of interest and inability to retain the confidences of the parties.

36 Under the standard form contracts, it is now unacceptable for the vendor to simply refer the prospect to the realtor. The vendor must contact the realtor and advise it of the inquiry. Such is not the case where the listing agreement only requires the vendor to communicate “offers” to the realtor: Tri-Tal Realty Ltd. v. de Groot, [1993] O.J. No. 1307 (C.A.).

14

Where the vendor has specific expectations of the realtor, it is recommended that the vendor consider enumerating such expectations in a manner similar to the model agreement.

Actions in contract for breaches of duties by vendors against their realtor under a standard form agreement are rare for good reason. There tends to be few if any duties.

b) Standards of Care: Realtor’s Liability vis-à-vis the Vendor

The standard form agreement does not establish a standard according to which the realtor is to fulfill its duties. Instead, it specifically limits liability, where it relates to damage to the Property, to wilful acts and gross negligence. As the agreement contemplates physical damage, the language is probably insufficiently broad to limit the realtor’s liability in negligence for unprofessional behaviour that compromises a sale. Realtors are subject to myriad obligations to professional bodies that discipline such conduct.

The model agreement contains a clause that embodies the professional standard of care, requiring the realtor to act in a “competent and professional manner”. Where the realtor’s duties are enumerated in a listing agreement, it may be prudent to include such a clause.

c) Realtor’s and Vendor’s Liability to Third Parties

After a completed sale, any of the vendor, its solicitors, or the realtor can be held liable for misrepresentations with respect to the property. Even where a realtor merely relays innocent misrepresentations of the vendor without verifying the information, the realtor can be found contributorily negligent.37 Accordingly, most listing agreements contain a mechanism for allocation of risk and indemnification. There is no reason why a listing agreement should be without one.

The standard form agreement provides the realtor with protection against the most common and open-ended forms of liability: defects in title and environmental liability. The standard form agreement requires the vendor to warrant that it has communicated all known encumbrances and legal impediments to the transaction. A breach of this warranty entitles the realtor to claim indemnification from the realtor. The standard form agreement also requires the vendor to indemnify and hold harmless the realtor against any claim due to environmental liability.

In contrast, the model agreement attempts to shield the vendor from the realtor’s possible temptation to oversell the property. The model agreement contains an ‘anti-indemnification’ clause, requiring the realtor to acknowledge that its representations may generate liability towards third parties. The agreement also gives the vendor a cause of action against a realtor that binds the vendor in warranties to the purchaser that it did not intend to give. The agreement also requires the realtor to acknowledge that the property is being sold on an “as-is” basis. Since the tendency today is for the purchaser to rely on its own due diligence as opposed to relying upon the vendor’s representations and warranties with respect to the condition of the property, the “as is” clause should often provide consistency between the listing agreement and the Agreement of Purchase and Sale. In turn, the consistent treatment of the “as is” nature of the sale of the

37 e.g. Komarinski v Marien (1979), 100 D.L.R. (3d) 81 (Sask. Q.B.).

15

property should further serve to limit liability on the part of the vendor. The model agreement also specifically imposes liability on the Realtor when it fails to carry out its activities in a competent manner.

6. HOW CAN THE REALTOR ENFORCE ITS CLAIM FOR COMMISSION?

The realtor will want to ensure it is paid its due commission whether the deal is completed, the deal is abandoned, or the vendor breaches the listing agreement.

The most effective means of accomplishing these objectives is by having the realtor hold the deposit for the transaction, then apply a portion of the deposit to commission costs (or have another trustee directed to so apply the deposit). The standard form listing agreements require that “where the transaction has been completed [the deposit] shall be first applied to reduce the commission payable”. Similarly, where the purchaser abandons the transaction, fifty percent of any deposit received is to be automatically applied to the commission (up to the amount payable had the sale been completed). The latter clause is clearly inappropriate when commission is only due on a completed sale. The former clause may also be undesirable where the realtor has been assigned specific obligations under the listing agreement and has not fulfilled them.

The standard form agreements also ensure that the exclusivity of the listing agreement is not breached in order to circumvent commission payments. Should the vendor close a deal with another realtor or to the exclusion of the listing realtor, the listing realtor is entitled to the commission that would otherwise be payable.38 Such a clause is necessary not only to enforce the realtor’s claim for commission, but also to prevent difficulty in quantification of damages. In the absence of such a clause, a realtor would only be entitled to damages based upon the commission structure, adjusted downwards for the possibility of it not closing the same deal.39

Since the model agreement is premised on commission being payable only on the successful completion of the sale of the property, the model agreement provides fewer opportunities for the realtor to enforce its claim for commission. When there is a dispute over whether the commission is payable, it should be easier to resolve the issue in instances where deposits are held in trust by the vendor’s solicitors as opposed to the realtor.40 The model agreement provides that the deposits shall, to the extent possible, be held by the vendor’s solicitors in trust.

38 REBBA prohibits realtors from claiming commission on a transaction that would be covered by another unexpired exclusive listing agreement, but only where the second realtor knows of the first listing agreement: REBBA, s.32(2) and REBBA 2002, s. 33(3).

39 Coldwell Banker Canada Inc. v. Remac Builders Hardware Inc. (1991), 18 R.P.R. (2d) 137 (Ont. Gen. Div.).

40 However, both the new and old statutes carefully regulate the use of trust funds held by realtors, in a manner not unlike the requirements to which lawyers are subject: REBBA, s. 19, REBBA 2002, s. 51(1)(8) (record-keeping requirements); REBBA, s. 20(1), REBBA 2002, s. 27(1) (institutions at which trust monies must be held); REBBA, s. 20(2)-(3), REBBA 2002, s. 27(4)-(8), (11-15) (disposal of unclaimed monies); and REBBA 2002, s. 27(3), (9), (10) (use of interest earned by trust monies).

16

7. CONCLUSION

Lord Russell of Killowen, in one of the leading cases, remarked that

Commission contracts are subject to no peculiar rules or principles of their own…. In each case the [rights of the agent or the liability of the principal] must depend upon the exact terms of the contract in question41

Hopefully the above discussion illustrates that the simplicity of Lord Russell’s formulation is deceiving. The unique juncture of statutory, agency, contract and property law must be considered when interpreting listing agreements. Adherence to Lord Russell’s formulation has not resolved the swirling legal uncertainty.42 Space does not permit the delineation of all these issues, but the paper will have served its purpose and your clients if it encourages scrutiny of listing agreements in the context of the unique juncture. Attention to identified clauses should generate returns for your client. Contractual clarity should magnify these returns.

41 Luxor (Eastbourne) Ltd. v. Cooper, [1941] A.C. 108 (H.L.).

42 As proof of this contention, consider that Luxor (Eastbourne) was cited with approval by each of the three-judge groups, and the solitary-judge concurring with each of the three-judge groups, in the other leading case of H.W. Liebig & Co. Ltd. v. Leading Investments Ltd. (1986), 25 D.L.R. (4th) 161 (S.C.C.).

17

APPENDIX 1: Model Listing Agreement

THIS AGREEMENT effective as of the day of April, 2004,

B E T W E E N:

VENDOR INC.

(hereinafter called the “Vendor”)

OF THE FIRST PART;

- and -

BROKER INC.

(hereinafter called the “Broker”)

OF THE SECOND PART.

WHEREAS the Vendor is the registered owner of a freehold estate in the lands and premises in the City of Toronto, Province of Ontario, described in Schedule “A” attached hereto and commonly known as “The Centre” (such freehold interest being hereinafter referred to as the “Property”);

AND WHEREAS the Vendor wishes to retain the Broker to market the Property for sale and to assist the Vendor in disposing of the same on the terms hereinafter set forth.

NOW THEREFORE WITNESSETH that in consideration of the sum of Ten Dollars ($10.00) paid by each party to the other, and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by the parties), the parties hereto acknowledge, covenant and agree as follows:

1. Engagement

The Vendor hereby retains the Broker from and after July 1, 2004 (the “Commencement Date”) to and including September 30, 2004 (the “Term”) to:

18

a) assist the Vendor in preparing marketing and due diligence materials for delivery to potential purchasers;

b) diligently market and use its best efforts to sell the Property in accordance with the terms of this Agreement and the written instructions of the Vendor;

c) receive all offers to purchase for the Property, to provide to the Vendor a written report as to the terms of such offers together with the Broker’s written recommendation as to whether the Vendor and/or the Broker should commence negotiations with such purchaser;

d) subject to the written instructions of the Vendor, to assist in negotiating binding agreements of purchase and sale with those parties identified by the Vendor based on the recommendations made by the Broker in accordance with subparagraph 1.c) above; and

e) continue to assist the Vendor in connection with the sale of the Property after the execution of a binding agreement of purchase and sale (“Agreement of Purchase and Sale”) with respect to the same until such sale has been concluded.

2. Exclusive Engagement

Subject to the terms of this Agreement, the Vendor hereby agrees that the Broker shall have the exclusive right to market the Property for sale during the Term.

3. Deposits

Any deposits to be made by a purchaser of the Property (a “Deposit”), to the extent possible, shall be made payable to the Vendor’s solicitors, in trust, to be invested by such solicitors in an interest bearing trust account or as the purchaser and the Vendor may otherwise agree in the Agreement of Purchase and Sale with respect thereto.

4. Instructions

The Broker shall receive instructions from John Smith or Jane Doe or such other individual as may be designated by the Vendor from time to time in writing.

5. Fees and Commissions

In consideration for the performance by the Broker of its duties and obligations hereunder, the Vendor agrees to pay to the Broker the following fees and commissions:

19

a) Commissions - Commission at the rates set out below, plus GST, will be payable by the Vendor to the Broker on the successful completion of the sale of the Property effected during the Term from any source whatsoever, or on the successful completion of the sale of the Property effected within three (3) months after the expiry of the Term of this Agreement with any party (up to a maximum of five (5) parties) with whom the Broker had conducted negotiations or made introductions during the Term of this Agreement, provided the Broker has notified the Vendor in writing within ten (10) days of the expiry of the Term of this Agreement of the name of such party or parties which the Broker or co-operating brokers have introduced to the Property. The commission rates will be payable out of the proceeds of a sale at the following rates:

(i) Direct Prospects - if the sale is to a direct prospect purchaser, a commission equal to three per cent (3.0%) of the cash portion of the sale price of the Property (the “Sale Price”), and

(ii) Co-operating Brokers - an additional one percent (1.0%) of the Sale Price shall be payable to the Broker on account of commissions and 50% of the total commission (less 50% of the Broker’s reasonable marketing expenses) shall be paid by the Broker to any co-operating broker, as sub-agent, bringing in a successful purchaser. For greater certainty, if a sub-agent brings in a successful purchaser, the total commission payable on the successful completion of the sale of the Property would be four percent (4.0%) of that portion of the Sale Price of which the co-operating broker would receive one-half of the total commission less the aforesaid deductions.

For the purposes of the Agreement, “successful completion of the sale of the Property” means the transfer of registered title from the Vendor to the purchaser and the exchange of all documents and monies required under the Agreement of Purchase and Sale between the Vendor and the purchaser with all necessary escrow conditions having been satisfied or waived.

6. Cooperation

The Broker agrees that it shall cooperate with all other licensed real estate brokers which agree to act as sub-agents of the Broker in connection with its engagement hereunder. The Broker hereby acknowledges and agrees that there shall be no commissions or other fees or expenses payable by the Vendor to any sub-agent. The Broker covenants and agrees to make the payment to the sub-agent contemplated in subparagraph 5(ii) on a timely basis.

7. Continuity

The Broker will endeavour to ensure that there is continuity in the assignment of individual staff members and partners to the work performed by the Broker under the terms of this engagement. In particular, the Broker agrees to ensure that individual staff members originally assigned to perform work in connection with the Broker’s engagement will be available and will devote the time required to undertake the assignment contemplated herein.

20

8. Acknowledgments

The Broker acknowledges that the Property is to be marketed and sold on an “as is, where is” basis and, accordingly, any Agreement of Purchase and Sale shall, unless otherwise agreed to by the Vendor in writing, provide for an acknowledgment by such Purchaser that the Property is being sold by the Vendor on an “as is, where is” basis, and that no representations or warranties have been made by the Vendor, or anyone acting on its behalf, to such purchaser as to the condition of the Property or any buildings located thereon. Such purchaser shall, to the extent possible, further acknowledge that such “as is, where is” basis shall extend to all outstanding work orders, deficiency notices, compliance requests, development fees, imposts, lot levies, sewer charges, zoning and building code violations and any outstanding requirements which have been or may be issued by any governmental authority having jurisdiction over the Property and no representation, warranty or condition is expressed or can be implied as to title, description, fitness for purpose, quantity, condition or quality thereof or in respect of any other thing whatsoever.

9. Records

The Broker shall submit its accounts in a form approved by the Vendor. In support thereof, the Broker shall keep proper accounts and records of its costs and all expenditures or commitments made by the Broker pursuant to the terms of this Agreement including invoices, receipts and vouchers. All such accounts and records shall at reasonable times be open to audit and inspection by the authorized representatives of the Vendor who may make copies and take extracts therefrom.

10. Goods and Services Tax

Goods and Services Tax shall be payable by the Vendor on all commissions payable hereunder and the Broker’s Goods and Services Tax registration number will be shown separately on all invoices. The Broker agrees to remit any Goods and Services Tax paid to it under this Agreement to Revenue Canada.

11. Indemnity

The Broker, as a consultant, confirms that it owes an obligation to the Vendor, its officers, employees and agents (the “Indemnified Parties”) to carry out its activities in a competent and professional manner. As such, the Broker confirms that it owes an obligation to the Indemnified Parties with respect to claims made by third parties against the Indemnified Parties arising out of work performed by the Broker.

12. Limitation of Authority

Notwithstanding anything contained in this Agreement to the contrary, it is understood and agreed that only the Vendor shall have authority to accept offers and that the Broker shall not have any authority whatsoever to enter into any sale, financing or other contract on behalf of the Vendor, or to otherwise bind the Vendor in any manner whatsoever.

21

13. Progress Reports

a) The Broker shall provide, from and after the commencement of the marketing period, to the Vendor throughout the Term a weekly written progress report (the “Progress Report”) with respect to the marketing of the Property and the sale thereof. The Progress Reports will be in the form and shall contain such information reasonably required by the Vendor in order to determine and assess the value and marketability of the Property and the marketing strategies presently being employed and to be employed with respect thereto. The Progress Report shall contain but shall not be limited to:

(i) a listing of all persons who have been contacted or have been shown the Property or who have made inquiries with respect to the sale of the Property since the last Progress Report;

(ii) the status and effectiveness of any marketing plan being implemented by the Broker and approved by the Vendor, as well as any recommendations as to changes required to be made to such plan which changes for greater certainty will require the prior written approval of the Vendor;

(iii) a listing of all persons appearing to have a high level of interest in the Property;

(iv) information as to the reaction of prospective purchasers of the Property with respect to the condition of the Property and other matters related to the Property; and

(v) advice as to any significant changes in market conditions.

14. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada in force therein.

15. Entire Agreement

This Agreement shall enure to the benefit of and shall be binding upon the parties hereto and their respective administrators, successors and assigns.

16. Counterparts

This Agreement may be executed in one or more counterparts each of which shall be deemed to be an original instrument, but all such counterparts together shall constitute but one and the same agreement. It is understood and agreed by the parties hereto that a copy of the executed signature page(s) herein may be delivered to the other parties hereto by the signatory by any electronic telecommunication which affords receipt of an exact reproduction thereof by the recipient and, when so delivered, shall be deemed for all purposes to be as effective as though the original thereof had been delivered by the signatory thereof to the other parties hereto.

17. Notice

Any notice or other document required or permitted to be given to any party hereunder shall be validly given if delivered personally, or if mailed by prepaid registered mail, to such party at the

22

following address, or if transmitted by facsimile transmission to such party at the following number; and such notice or document shall be deemed to have been received at the time of personal delivery, or 48 hours after the time at which it was mailed by prepaid registered mail, or upon transmission if transmitted by facsimile transmission:

the Vendor: Vendor Inc. 100 Main Street 10th Floor Toronto, Ontario M5M 5M5

Attention: John Smith Vice-President Fax No.: (416) 555-5555

the Broker: Broker Inc. 100 Park Avenue Suite 1000 Toronto, Ontario M1M 1M1 Attention: Mary Smart Vice-President Fax No.: (416) 555-1234

18. Confidentiality

The Broker shall treat and shall cause its agents to treat as confidential and shall not disclose, during as well as after the rendering of the service contracted herein, any confidential information, records or documents to which the Broker becomes privy as a result of its performance of this Agreement and shall take all necessary steps to ensure the confidentiality of information in the Broker’s possession or control, subject to the order of any court of competent jurisdiction or proceedings in which any officer, employee or agent of the Broker is a compellable witness and provides any such information pursuant to such compulsion in good faith, and except for disclosure that may be required for the reasonable performance by the Broker of its responsibilities.

19. Currency

All references to sums of money made in this Agreement refer to lawful money of Canada.

20. Assignment

This Agreement shall not be assigned in whole or in part by the Broker without the prior written consent of the Vendor and any assignment made without that consent is void and of no effect.

23

21. Survival

The terms and conditions of this Agreement, including the indemnities provided for in Section 11 hereof, shall survive the completion of the services rendered by the Broker hereunder and the termination or purported termination of the engagement and shall be in addition to any liability which any party may have to any other party at law or in equity.

22. Severability

If any covenant, obligation or agreement contained in this Agreement, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or the application of such covenant, obligation or agreement to persons or circumstance other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each covenant, obligation and agreement contained in this Agreement shall be separately valid and enforceable to the fullest extent permitted by law.

IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date and year first above written

VENDOR INC.

Per: Name: Title:

Per: Name: Title:

BROKER INC.

Per: Name: Title:

Per: Name: Title:

24

Schedule “A”

[Insert legal description of Property]