In the recent case of Westside
Estate Agency, Inc. v. Randall, the court of appeal recognized that caveat sectorem (broker beware) is a
less renowned cousin of the phrase "caveat emptor" (buyer
beware). California's statute of frauds
declares invalid any "agreement authorizing or employing an agent, broker,
or any other person to purchase or sell real estate" unless that agreement
is in writing and signed by the broker's client. (Civil Code §
1624(a)(4).
In that case, the broker lost a commission of $925,000
because he agreed to help a friend buy a $5 million Bel Air estate, but the
deal was closed by another broker on different terms. When the first broker sued his friend for the
commission, the trial court dismissed the lawsuit for noncompliance with the
statute of frauds because he did not have an agreement in writing, and the
court of appeal affirmed.
The statute of frauds emphasizes the important of written
agreements by declaring several types of agreements "invalid" unless
"they, or some note or memorandum thereof, are in writing and subscribed
[i.e., executed] by the party to be charged or by the party's agent."
In these types of situations, the court is presented with
two issues:
1. Does the
statute apply to the contract at issue; and if so,
2. Are the
statute's requirements of a properly subscribed writing met
The statute of frauds applicable to this situation can apply
to licensed brokers and anyone else who aids and assists them, or who otherwise
engages in acts covered by the statute.
However, the statute only reaches agreements for "compensation or a
commission" owing because of the "purchase or [sale of] real estate"
or "procur[ing], introduc[ing], or find[ing] a purchaser or seller of real
estate."
It does not reach contracts employing persons, even brokers,
merely to provide information about real estate or to search for suitable
locations to purchase, except when those functions are "incidental"
to one of the purposes otherwise covered by the statute of frauds.
If the statute applies, its bar against relief is absolute,
and applies no matter how the unhappy broker styles his claim to recover compensation
or a commission, and generally no recovery will be allowed on a theory of quantum meruit, unjust enrichment, or
equitable estoppel.
However, the statute does not apply to all actions involving
brokers, including:
1. An action
to recover for a broker's performance of services other than and not incidental
to the sale or purchase of real estate or procuring, introducing or finding a
purchaser or seller of real estate;
2. An action by
a principal against his broker to disgorge a commission already paid on the
ground that the broker breached his fiduciary duty and obtained a secret
profit; and
3. An action
between brokers to divide a jointly earned commission.
There are three narrow exceptions in which the statute will
not be deemed a bar to a broker's action to recover compensation or a
commission if there is no written agreement:
First, a broker has a limited right to estop his principal
from asserting the statute to "prevent either unconscionable injury or
unjust enrichment", and a broker offering to buy or sell real estate may
assert estoppel only if the principal has engaged in "actual fraud".
"Actual
fraud" is defined as when (1) the principal has told the agent that their
agreement for a commission was in writing when it was not, or (2) the principal
has told the agent to cancel an otherwise valid written contract for exchange
of the property while concurrently making an oral promise to the agent to still
pay the commission, but then reneges on that promise.
Second, the broker's principal and the other party have
executed a written and binding agreement for the purchase of real estate, the
written agreement specifies that the broker will receive a commission, and the
broker's principal cancels the written agreement. In this case, the broker may sue because
either (a) the principal breached an implied promise to complete the
transaction so the broker could recover the commission, or (b) the broker is a
third party beneficiary of the written agreement between the principal and the
third party to the transaction.
Third, the principal subsequently ratifies the agreement,
presumably an alleged oral one, in a writing.
Lessons:
1. If an
agreement relates to money, get it in writing, and
2. If you do
not follow Lesson 1, and the principal refuses to pay a commission, consult an
attorney to see if you can fashion a winning argument that supports an award of
the commission or compensation despite the statute of frauds.
