SHAKING UP THE LISTING AGREEMENT

July 05, 2017

The haste inspired by a hot market leaves little time for investors to fully consider the implications of their listing agreements.
 
It seems extraordinary to me that over the last 20 years, commission fees for real estate agents have hovered around 5%, even as house prices have soared, supply has shriveled, sales occur in less than a week, and years of enticing commissions have attracted a swarm of newly minted, often under-trained, Realtors who are now vying for clients. In other words, the vendor is king, yet sellers continue to sign listing agreements with agents that have sub-optimal terms.     
 
The question is why? Despite having significant financial and legal implications, the standardized Ontario Real Estate Association [OREA] listing agreement is often signed with haste and with little negotiation of the terms. Let’s take a look at what the standard OREA listing agreement says about when commission is owed to your Realtor and discuss alternative terms you might wish to negotiate into your contract.
 
PROBLEMATIC TERMS
 
Pursuant to the OREA listing agreement, commission is earned by a Realtor upon receipt of a valid offer. If you receive a valid offer during the term of your listing agreement, your Realtor has earned the right to claim his commission, whether you accept that offer or not. The only qualification is that the offer presented must meet or exceed the minimum acceptable price and include any superfluous terms or conditions added to your listing agreement.
 
Although commission is earned immediately upon receipt of a satisfactory offer, it is not payable until the completion of the transaction. If the purchase transaction does not close as a result of the seller’s default, misrepresentation or negligence, commission is still owed. If the transaction does not close due to the fault of the buyer, the seller’s liability to pay commission is more uncertain and fact-dependent.
 
A listing agreement typically provides the Realtor with an “exclusive and irrevocable right to act as the seller’s agent.” The Realtor’s right to exclusivity means that he will be entitled to the commission regardless of how or by whom the purchaser was introduced to your property. A seller should consider the benefits of an exclusive agency relationship while perhaps also considering retaining multiple Realtors who will only be eligible to earn commission if they are directly involved in introducing the eventual buyer.
 
The irrevocable nature of the listing agreement means that the Realtor’s agency relationship and resulting entitlements are binding on the seller for a defined period, referred to as the ‘term’ of the listing agreement. But that irrevocable nature is bothersome. What if circumstances change and you no longer wish to sell your property? What if your relationship with your Realtor sours and you wish to work with another agent? The fact is that the OREA listing agreement is a legally binding contract with no option for early termination and no incentive for a Realtor to release you from the contract before the expiry date as originally agreed (although some agents certainly will). It’s a good idea to work in a mutual termination provision, or at the very least, clearly set out your expectations as to what your agent will do, when those things will get done and the consequences if the Realtor fails to fulfil those obligations.
 
The OREA listing agreement also includes a ‘holdover’ clause that entitles a Realtor to collect commission even after the agreement expires if the property is later sold to someone who was introduced to the property during the term of the listing agreement. The purpose of the holdover clause is to protect an industrious agent in the event that the seller attempts to save costs by either dealing directly with a purchaser or hiring another agent who agrees to a reduced commission – mostly because he hasn’t done any of the work.
 
The issue is that the generic holdover clause stipulates that commission is payable to the Realtor regardless of the source of the introduction, be it another agent, word-of-mouth, MLS, signage or a private deal. With Realtor.ca and other similar sites, when properties are exposed on MLS, thousands of people see the listing without the Realtor’s active efforts, and all of these people are potentially covered by the holdover clause. For that reason, sellers should consider limiting the term of the holdover period and limiting the Realtor’s entitlement to include only purchasers whom the Realtor personally introduced to the property.
 
WHERE TO NEGOTIATE

Hopefully the above discussion will encourage you to ask yourself these questions before signing a listing agreement:
 
     Why am I signing an exclusive listing agreement? What services is the Realtor committed to provide? Is the Realtor required to hold open houses, print brochures, attend every viewing, stage the property, send weekly reporting letters, etc.?
  • When is commission earned?
  • Who profits if my Realtor represents both the seller and the buyer? Will commissions be reduced?
  • How is commission calculated? What is the rate or fee, and what services am I getting in return?
  • Should the amount of commission relate to the price earned above my minimum acceptable price or to the money spent by the Realtor?
  • How long is the holdover period?
  • What is the triggering event during the holdover period?
  • Can I terminate the contract early, and under what terms?
 
Although we encourage sellers to seek alternatives to the standard-form OREA agreement, it is important to remember that a non-exclusive, terminable relationship with real estate agents does not preclude an earnest Realtor from claiming commission if he or she facilitates a deal. In the case of non-exclusive listing agreements or cases where there are no listing agreements at all, sellers will still be protected by the principle of unjust enrichment a phrase rarely encountered by savvy investors who take the time to properly (and critically) valuate their listing agreements.
 
“It’s a good idea to work in a mutual termination provision, or at the very least, clearly set out your expectations”

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