Coop and Real Estate Commissions

Attorney opinion

By: Fred Feinstein, McDermott, Will and Emery

Hypothetical facts presented for consideration:

A seller enters into a listing agreement with a broker for the sale of a residence. The broker is the procuring cause of the sale of seller’s residence. The broker is the procuring cause of the sale of seller’s residence. The seller now claims that the commission due the broker is to be computed on the basis of the purchase price minus the amount of the mortgage assumed by the buyer relating to the residence. Is the seller correct?

Unfortunately, it appears that Illinois has not addressed this question directly. However several states, including Florida (see case below), Georgia (see case below), Kansas (Fuller v. Preston, 191 P.493 (Kan. 1920)), Tennessee (Gilbert v. Smith, (Tenn, Ct App. 1932)) and Texas (Peters vs. Coleman, 263 S. W. 2d 639) (Tex Civ. App. 1953)) have addressed the question, and unanimously, the courts have held that in the absence of a specific agreement to the contrary, the commission must be based on the entire price or whole value of the property without regard to the existence of or assumption of existing encumbrances.

For example, in Kraft v. Rowland & Rowland, 128 S.E. 812 (Ga App. Ct. 1925), the question was whether the jury, determining the amount of commissions to be awarded to a broker, could take into account the price of the entire property, when part of the price stipulated was to be paid in cash, and represented then price of the owner’s equity, and the remainder of which was to be satisfied by the purchasers assuming an outstanding indebtedness for a loan upon the property, previously incurred by the owner.

The appellate court held that the jury need not be confined to a consideration the price of the owner’s equity, but may take into consideration the price of the entire property. The court explained that the assumption of the loan had as much bearing upon the magnitude of the transaction as if the seller had stipulated for the payment of the same in cash.

As between a seller and purchaser, a seller not only receives a certain portion of a purchase price in cash. But is also relieved of a debt. “So that, in determining the amount of the commissions justly earner, it was clearly the right, if not the duty of the jury to consider the transaction as involving property of the value of (the entire purchase price).” Id. At 815. It would appear that the court would have reached the same conclusion even if the property were sold “subject to” the existing mortgage whether or not the Seller was released from liability for the debt. Moreover, even when an existing encumbrance is no assumed by a buyer, the rule remains that the amount of the encumbrance is to be regarded as a part of the consideration in estimating the selling agent’s commission, unless it is excluded under the terms of the contract between the owner and the agent.

In Robert E. Lee & Co., Inc. Andriakos, 206 So 2d 414 (Fl. App. Ct. 1968), the broker who had negotiated three contracts allowing the seller to improve submerged lands and to sell the improved lands, brought a suit against the seller for an accounting. By two separate agreements, the seller had agreed to pay the broker a percentage of the profits made on the sale of each tract of land. The seller received as it proceeds from the sale $100,000 cash, a purchase money mortgage for $913,967, and promissory notes and totaling $125,000. The question was whether the commissions should be computed on the proceeds of the sale including the mortgage and the promissory notes should be included when computing the broker’s commissions