In Ash Park, LLC v. Re/Max Select, LLC, the Wisconsin Supreme Court upheld a ruling awarding a real estate company a broker’s commission of $378,000.00 even though the buyer procured by that company could not follow through and consummate the sale.
The basic facts of the case are fairly straightforward. Ash Park entered into a one-party listing contract with Re/Max relative to a parcel of vacant land. Re/Max would earn a six percent commission on the purchase price if Ash Park sold or accepted an offer which created an enforceable contract for the sale of all or any part of the property. Significantly, the parties used a standard listing contract prepared and approved by Wisconsin’s Real Estate Examining Board. A company called Alexander & Bishop (A&B) submitted an offer to purchase the property, which Ash Park accepted. There was no financing contingency, but the transaction fell through because A&B did not have the funds to proceed. Closing never took place and A&B never acquired the property.
Re/Max argued that an “enforceable contract” had been created between Ash Park and A&B and therefore it was entitled to a commission as called for by the listing agreement despite the fact that the land never changed hands. The Wisconsin Supreme Court agreed. Granted, it seems unusual that a company could earn a commission when the subject real estate is not sold or transferred. However, this result should not be that surprising. The listing contract called for a commission in the even an “enforceable contract” was procured, and it seems clear enough that an enforceable contract was formed between Ash Park and A&B. At a basic level this case serves as a reminder that it is the procurement of the contract, not necessarily the actual sale and closing of a transaction, which triggers the legal right to a commission in most cases.
Ash Park came up with two creative defenses to support its claim that no commission was due. First, no “enforceable contract” was created because, in a manner of speaking, the contract could not be enforced – A&B could not actually buy the property. Second, public policy considerations dictate that a seller should not owe a commission on a transaction where no funds or real estate was exchanged.
On the first point, the Court stuck with the plain and ordinary interpretation of what constitutes an “enforceable contract.” It observed that “[i]n everyday language, “enforceable” means capable of being enforced. A contract is “enforceable” if it can be enforced.” Further, “a reasonable person would consider a contract “enforceable” so long as a party to the contract can go to court and obtain a remedy for the contract’s breach.” Who would disagree with that? The analysis seems more like common sense than anything else. Think of the waste of time and money that went into getting the Wisconsin Supreme Court to address the issue.
The second “defense” raises more compelling issues. While the Court recognized the frustration no doubt felt by Ash Park it relied upon basic freedom of contract principles to reach its conclusion and enforce the commission award. That is, the Court refused, rightly it seems, to relieve “a party to a freely negotiated contract of the burdens of a provision which becomes more onerous than had originally been anticipated.”
Interestingly, the Court pointed out that Ash Park was overlooking the fact that it had the power to condition Re/Max’s right to receive a commission upon the consummation of the sale rather than the creation of an enforceable contract. As noted above, the parties used a standard form common to the industry. The lesson here for sellers of real estate is to proceed with caution. The use of standard forms is common, but it is critical to understand that they can and should be modified to fit the particulars of a transaction.
Those in the industry should call for standard real estate forms to be modified following this decision and result. There is little doubt that the intention of the parties here was that Re/Max receive a commission when the property was actually sold and title passed. It seems the default provision in standard forms should reflect that arrangement.
Justice Roggensack wrote a concurring opinion that brought another important issue to light. The transaction involving Ash Park, A&B and Re/Max concerned commercial property and thus, a commercial real estate transaction. A similar result might seem so unduly harsh as to compel a different outcome in the context of a residential real estate transaction. That is, Justice Roggensack was concerned that the ruling could unfairly “shift the burden to investigate the financial ability of a proposed purchaser from the broker to the unsophisticated seller” in the residential context. Her concern seems well founded. A rule that reasonably impacts a sophisticated seller of commercial real estate with experience engaging in multiple real estate transactions might not fit with residential transactions that might involve comparatively unsophisticated sellers engaging in a single transaction or transactions years apart.
Those involved in residential real estate transactions should therefore take note. The Ash Park ruling does not make a distinction between residential and commercial transactions. While there is some argument that the same rules should not or might not apply in both contexts, the law of Wisconsin as it presently stands in light of this opinion suggests that they do.
In conclusion, sellers should beware. Imagine the potentially devastating impact of owing a real estate broker a size-able commission even when a transaction fails to close and there is no money on hand to pay that commission. Exercise caution when it comes to standard industry approved forms to make sure they are designed to achieve the results you reasonably expect. If you have questions regarding real estate transactions – commercial or residential – please discuss with legal counsel who can help get the proper documentation in place. It is less expensive than you think and will save you in the long run.