Those individuals fortunate enough to have purchased their home can probably agree that the closing of the home was one of the most stressful events in their life. So much could go wrong. The bank could lose the wire. The seller could refuse to provide occupancy at the last second. Your moving truck is no longer available. To add to this stress, there are some severe, not broadly known consequences where a buyer under a standard agreement of purchase and sale[1] fails to close the transaction. One of these often disregarded consequences is having to pay your real estate agent their commission even where a transaction does not close.
On the Hook for Commission?
Most likely, if you were to hire a real estate agent to represent you, that real estate agent will have you sign a standard Buyer Representation Agreement (the “BRA”).[2] While real estate agents are lovely individuals, they do not work for free. Rather, depending on your relationship with your real estate agent, they may expect to get paid an agreed-upon percentage of the purchase price irrespective of whether or not the transaction closes. In fact, they have a legal right to be paid under the BRA. Namely, Article 2 of the standard form BRA contains the following provision:
The Buyer agrees to pay directly to the Brokerage any deficiency between this [percentage agreed upon] and the amount, if any, to be paid to the Brokerage by a listing brokerage or by the seller. The Buyer understands that if the Brokerage is not to be paid any commission by a listing brokerage or by the seller, the Buyer will pay the Brokerage the full amount of commission indicated above.
….
The Buyer agrees to pay such commission as described above even if a transaction contemplated by an agreement to purchase or lease agreed to or accepted by the Buyer or anyone on the Buyer’s behalf is not completed, if such non-completion is owing or attributable to the Buyer’s default or neglect.
Although, this clause mandates payment only where the “non-completion is owing or attributable to the Buyer’s default or neglect”, establishing liability is not clear cut from the outset. In some cases, buyers will have to finish their litigation with the seller before they could definitively say whether or not the non-completion was owing or attributable to their default or neglect.
The Courts’ Interpretation of this Clause
Not surprisingly, while this clause exists in the BRA, Courts are not particularly strict or eager to enforce it.
In the Sutton Group v. Taborovska[3] and the Century 21 People’s Choice Realty Inc. v. Saleem[4] cases, the Court was faced with similar scenarios where buyers were partially at fault for the non-completion of the transactions. However, at Trial/Motion, the Judges in these cases established that the consequences of the BRA were not fully explained to the buyers or, alternatively, the buyers did not understand the extent of consequences brought by the BRA. In these cases, the Court found that, where the real estate agent fails to describe the contents of the BRA entirely or creates a scenario where buyers are unable to comprehend or appreciate the contents of the BRA, they may get away with not paying commission.
Conversely, in the First Contact Realty v. Prime Real Estate[5] case, the Court was tasked to determine whether a real estate agent was entitled to payment from a client where the buyer indirectly purchased a property that was initially discovered by the agent. Namely, the agent assisted the buyer with preparing a transaction that fell through due to issues faced by the seller. However, after this transaction fell through, the buyer contacted the mortgagee selling the same property and purchased the property directly through power of sale without any involvement of the agent.
The agent sued the buyer as the transaction mirrored the initial sale which was procured through the agents’ assistance. The Court held that the agent was entitled to their representation fee as the final transaction that took place was largely “piggy-backed” off of the original transaction prepared by the efforts of the agent.
Finally, in Green v. Shamash,[6] the Court was tasked with determining whether a commission was payable despite non-completion of the transaction. The agent’s argument in this case was that, irrespective of whether or not the transaction took place, he was entitled to receive payment based on the work and effort he committed throughout the course of the transaction.
In determining this case, the Court looked towards the strict wording of the BRA, namely that payment for non-completion was only owing in a situation where the non-completion arose as a result of the buyer’s default or neglect. Accordingly, the Court held that, in order for this clause to take effect, there is a prerequisite to establish a fault element on behalf of the buyer. If the agent cannot prove that the non-completion occurred as a result of any fault of the buyer, the agent is not entitled to any payment.
Accordingly, it is apparent that the Courts will generally look to the context of the matter at hand and either approach this clause with either a similar approach to standard form contracts (where specific clauses need to be explained before they’re relied upon) or with strict contractual interpretation relating to fault.
Moral of the Story
Prior to signing a BRA, make sure you have a good relationship with your real estate agent so that, if this circumstance ever does come up, you don’t find yourself fighting with the individual otherwise tasked with representing you (on top of probably litigating with the seller and others). For tips and advice on how to avoid these traps, feel free to contact me at dan@fridmar.com.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
[1] Namely, Agreements of Purchase and Sale as prepared by the Ontario Real Estate Association.
[2] A standard form agreement can be found at the following link for reference: https://realvaluehome.ca/wp-content/uploads/2021/01/6-Toronto-Buyer-Representation-Buye-Agency-Agreement.pdf
[3] ONSC 2021 2837.
[4] 2016 CanLII 30103 (Ont. Small Claims Ct.).
[5] 2015 ONSC 5511.
[6] 2018 ONSC 1810.
