Black-letter propositions
- 01
A person who, for compensation or in expectation of it, sells, offers to sell, solicits listings or prospective buyers or tenants, negotiates the purchase, sale or lease of real property, or collects rents is a real estate broker, and acting as one without a license is unlawful; California also bars an unlicensed person from suing to collect a commission.
- 02
A broker's payment of compensation to an unlicensed person for acts requiring a license is unlawful, and a salesperson may accept compensation for such acts only from the broker under whom he or she is licensed.
- 03
A statute of frauds such as California Civil Code section 1624(a)(4) makes invalid an agreement authorizing or employing an agent or broker to sell or purchase real estate, or to find a buyer or seller, for compensation, unless it is in writing and signed by the party to be charged.
- 04
Under the traditional rule, a broker engaged to find a buyer earns the commission on producing a buyer ready, willing and able to buy on the terms fixed by the owner, and the owner's signing a contract with that buyer completes the broker's task.
- 05
Under the stricter rule of Ellsworth Dobbs, Inc. v. Johnson, the broker earns the commission only when the buyer is ready, willing and able, enters a binding contract, and closes; if the deal fails for the buyer's default there is no commission, but if it fails through the seller's wrongful act or interference the broker is paid.
- 06
A broker representing a seller of residential property has an affirmative duty to conduct a reasonably competent and diligent inspection of the property and to disclose to prospective purchasers all facts materially affecting its value or desirability that such an investigation would reveal (Easton v. Strassburger; California Civil Code section 2079).
- 07
A broker's contractual right to a commission, the license requirement, and the duties owed to buyers are separate questions, and the exam will usually signal which one is tested.
Use this attack sequence under time
Frame the issue
Decide whether the person acted as a broker and, if so, whether the person was licensed when the claim arose.
Resolve the next checkpoint
Check whether the listing or commission agreement is in a signed writing that satisfies the statute of frauds.
Resolve the next checkpoint
Determine when the commission was earned under the jurisdiction's rule, and whether the seller wrongfully caused any failure to close.
Finish the conclusion
For a buyer's claim, ask whether the broker inspected and disclosed what a diligent visual inspection would have revealed.
Common wrong turns
- An unlicensed person who negotiates a sale for pay cannot recover the commission in court, whatever the merits.
- Under the stricter closing rule, a buyer's default defeats the commission, but a seller's wrongful refusal to close does not.
- The broker's duty to inspect is limited to what a reasonably competent and diligent visual inspection would reveal, and it does not extend to hidden conditions.
Worked example
A person with no real estate license introduces a buyer to a seller for a promised fee of $10,000, and the seller and buyer sign a contract and close. The seller refuses to pay the fee.
Because the person acted as a broker for compensation without a license, the person cannot bring an action to collect the commission under a statute like California's. The result does not depend on the merits of the claim or on the seller's having benefited.
Practice this topic
Licensing and writing requirements
California Business and Professions Code section 10131 defines a real estate broker as a person who, for compensation or in expectation of compensation, does or negotiates to do acts such as selling or offering to sell, soliciting prospective sellers or buyers, soliciting or obtaining listings, negotiating the purchase, sale or exchange of real property, or leasing, renting, or soliciting prospective tenants. Section 10130 makes it unlawful to act as a broker or salesperson without a license. Section 10136 says a person acting as a broker or salesperson may not bring or maintain an action for the collection of compensation without alleging and proving that he or she was duly licensed when the cause of action arose. Section 10137 makes it unlawful for a licensed broker to compensate an unlicensed person for acts within the licensing chapter, and bars a salesperson from accepting compensation from anyone other than the broker under whom he or she is licensed.
California Civil Code section 1624(a)(4) makes invalid an agreement authorizing or employing an agent, broker or other person to purchase or sell real estate, or to procure or find a purchaser or seller, for compensation or commission, unless the agreement or a note or memorandum of it is in writing and signed by the party to be charged.
When the commission is earned
Ellsworth Dobbs, Inc. v. Johnson describes and rejects an older New Jersey rule under which the broker satisfied its obligation by tendering a purchaser physically and mentally capable of agreeing to buy on satisfactory terms, so long as the owner entered a sale contract with that purchaser. The court held that when a broker is engaged to find a purchaser, the broker earns the commission when the broker produces a purchaser ready, willing and able to buy on the terms fixed by the owner, the purchaser enters a binding contract, and the purchaser closes the title in accordance with the contract.
The court added that if the contract is not consummated because of the buyer's lack of financial ability or other default, there is no right to a commission against the seller, but if the failure results from the wrongful act or interference of the seller, the broker's claim is valid and must be paid. The exam may signal which rule governs, and the older rule favors the broker.
Duties to buyers
In Easton v. Strassburger, the California Court of Appeal held that the duty of a real estate broker who represents the seller to disclose facts includes the affirmative duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting its value or desirability that such an investigation would reveal. The court reasoned that the duty is implicit in earlier decisions that speak to facts known to the broker and to facts accessible only to the broker and the seller.
California Civil Code section 2079 states a statutory version. A licensed broker or salesperson has a duty to a prospective buyer of residential property with one to four dwelling units to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose all facts materially affecting its value or desirability that an investigation would reveal, if the broker has a written contract with the seller to find a buyer or acts in cooperation with such a broker.
Frequently asked questions
What is the controlling rule for real estate brokerage: licensing, listing agreements, commissions, and broker duties?+
Say whether the person needed a license and had one, whether a writing supports the commission, when the commission was earned, and what duties the broker owed the buyer.
Who needs a real estate license in California?+
Anyone who, for compensation, sells, solicits listings or buyers, negotiates a sale or lease of real property, or performs the other acts in Business and Professions Code section 10131.
Can an unlicensed person sue for a commission?+
No. Section 10136 bars an action to collect compensation without alleging and proving licensure when the cause of action arose.
Must a listing agreement be in writing?+
Under Civil Code section 1624(a)(4), an agreement employing a broker to sell or find a buyer for real estate for compensation must be in a signed writing.
When does a broker earn a commission under Ellsworth Dobbs?+
When a ready, willing and able buyer enters a binding contract and closes, unless the seller wrongfully prevents closing.
What must a seller's broker do before disclosing defects to a buyer?+
Conduct a reasonably competent and diligent inspection and disclose facts materially affecting value that it would reveal, under Easton v. Strassburger and Civil Code section 2079.