BARRISTER'S BRIEFING: Contractual Agreements: Binding Parties and Termination

Real estate transactions begin and end with contracts. Lots and lots of contracts. This month, I’m going to address some issues related to these contracts.

Executing a Contract

While an agent is the party who meets with the client (buyer or seller), negotiates all the terms, and does all the “heavy lifting,” it’s the broker who is the party to the contract. In many cases, an agent can be authorized to sign a contract on behalf of the brokerage; therefore, it is a best practice for the brokerage to establish the terms upon which an agent can execute an agreement. Additionally, it’s important that the agent ensures that all the necessary terms are set forth in the contract in clear language.

Make sure the beginning and end dates of the agreement are there. Make sure the commissions or any monetary amounts are established. Make sure any agreed upon conditions, duties and obligations are in plain language. Ensure provisions regarding what happens if the contract expires while a deal is pending are filled out. If using a standardized form, make sure that nothing is left out and a line is drawn through things that are to be left blank/omitted. Most importantly, make sure the date the contract is being executed is included and all the necessary parties sign the contract (If there are multiple sellers, all will need to sign the listing, or a document authorizing a seller to sign on behalf of all should be produced). A contract should always be dated on the date it is executed. Without it, you may not have a valid contract and/or a party could try to intervene and claim that there was a pre-existing contract that supersedes your contract.

And remember: Always provide a copy of the contract to the client. It’s a Code of Ethics requirement.

Modifying or Terminating a Contract

First, changes to or termination of a contract requires the approval of both parties. If an agent is authorized to execute a contract on behalf of a brokerage, they are similarly authorized to modify or terminate a contract on behalf of a brokerage, so it is important for a brokerage to establish the terms upon which an agent can modify or terminate an agreement. It is also important for an agent to remember that, as a licensee, they have a fiduciary duty to their broker to act in the broker’s best interest. This means that an agent should think twice and discuss modifying or canceling any contract with their broker before taking any action. Failure to do so could open the agent up to a lawsuit for damages such as lost commissions, as well as possible Deptarment of State action.

Quite often, a modification to a contract might become necessary during the life of the contract. A change in start dates, commission amounts, showing instructions and other smaller issues may be required. Also, sometimes due to a monetary dispute, it may be necessary for an agent to reduce a commission at the closing table by an agreed-to amount. The need to make changes to a contract are endless and, so long as the parties agree to the changes (best practice is for the agent to discuss any major changes with his/her broker), the contract can be easily modified.

Terminating a contract can be a little trickier. Again remember, both parties must agree to the contract termination. Members of the public may be under the false impression that they can terminate an agreement because they have a right to select their own representation. These two things are separate. While a member of the public does have the right to select his/her own representative, they cannot terminate the agreement without the consent of the brokerage. This means that the person can end the relationship, find another brokerage, and that new brokerage might bring about the sale of their property or that brokerage may be the procuring cause of a transaction; however, the former client may still owe the first brokerage a commission pursuant to the underlying contract with that brokerage if that contract has not expired.

Often, if the desire of both parties is to go their separate ways, there are several options available to the brokerage to terminate the contract. One possible solution is to give the client a full and immediate release. Another possibility is to enter into what is called an “accord and satisfaction.” This is a legal term that means that the parties enter into a contract for the release of the underlying obligations/contract. In exchange for the release, the brokerage can ask for a wide variety of things such as their current costs incurred working with the client, a flat fee, a referral fee for the term of the underlying contract (with the client being required to notify the new brokerage of the agreement). They sky is the limit. Another possibility is that the brokerage refuses to terminate the contract and keeps both parties bound to it for its full term. Keep in mind that, in this situation, the brokerage must still act in the best interests of the client (Code of Ethics). This may mean that, if asked, they will have to take the property off the market, stop showing it, stop marketing it, etc. Additionally, the brokerage will still need to communicate with the client, conduct showings, and even present offers if they are made.

Conversely, a brokerage cannot terminate a contract without the consent of the client. Once again, both parties have to agree to terminate the contract. Further, while a client can terminate the relationship and move on to another brokerage, a licensee has a higher fiduciary duty to the client and they cannot terminate the relationship unless there is some illegal or criminal act begin performed by the client. In short, the brokerage is bound to continue to work with the client until both parties agree to terminate the contract and the relationship. Short of that, the licensee must continue to act in the best interests of the client, even if the client is behaving poorly.

Conclusion

The use of contracts establishes duties and obligations between two parties that are legally binding. Neither party alone can break those bonds. The contract provides guarantees and safety to both, so ensure that they are clear and executed properly, that modifications are approved and in plain language, and that terminations are joint decisions.

*Disclaimer: The thoughts presented in this article are only a sampling of the options available to licensees regarding the creation or termination of a contract and are provided for illustrative purposes only. The author is not providing a legal opinion as to the rights and obligations of a licensee under a contract. A licensee should consult with his/her attorney regarding the options and actions they should take relating to the creation, modification, or termination of a contract. In no way is this article an attempt to establish a standardized policy or procedure in the effectuation, modification, or termination of contracts in contravention of antitrust laws.