When is a Broker Entitled or Not Entitled to Commission?

 

I recently encountered a seller who claimed he was being ripped off by a broker asking for a commission he didn’t feel was earned. The story went like this: The seller and the broker had agreed on a commission for the sale of a plot of land on Hoima Road. The broker brought a buyer who offered less than the seller wanted, so the seller turned them down.

A year passed, and while the seller was out of the country, the same buyer returned with a revised offer. He only managed to reach the seller's wife who assisted in negotiations, and the seller accepted the offer and received the cash. The broker returned to claim his commission, and was told to wait until the seller came back. However, when the seller returned a month later, he denied the broker's commission. The question is: He asked me, does the broker deserve to get paid?

In the real estate industry, understanding when a broker is entitled to commission is crucial for both brokers and their clients. Here's a breakdown of when commissions are typically earned and when they are not.

When a Broker is Entitled to Commission:

1. Completion:
   Brokers earn their commission once a sale or lease is successfully completed and the transaction is closed. This occurs when the cash transfers from buyer to seller, and the title transfers from seller to buyer.
2. Contractual Fulfillment:
   If the broker has fulfilled all contractual obligations outlined in the brokerage agreement, they are entitled to commission. For example, if the terms specify that the broker only needs to introduce a prospective buyer (not necessarily complete the sale), commission is due.
3. Acceptance:
   Once the buyer and seller have signed a legally binding purchase agreement, the broker can claim their commission. This signed agreement serves as proof that the transaction took place.
4. Exclusive Agreements:
   In an exclusive right-to-sell agreement, brokers earn their commission regardless of who finds the buyer, provided the sale occurs during the contract period.

When a Broker is Not Entitled to Commission:

1. Non-Completion:
   If the transaction falls through and the sale is not completed, the broker typically does not earn a commission.
2. Contractual Breach:
   If the broker fails to meet the obligations set forth in the brokerage agreement, they forfeit their commission.
3. Seller's Sale:
   In non-exclusive listing agreements, the broker is not entitled to a commission if the property is sold by the owner or another broker.
4. Inability to Close:
   If the buyer introduced by the broker cannot close the deal due to financing issues or other reasons, the broker is generally not entitled to commission.

Another interesting debate is whether leasing brokers should be paid their one-month commission for a long-term tenant upfront before the tenant pays rent. Should the broker receive the full amount if the tenant pays rent quarterly or in cases where the landlord does not get the full payment at once?

Let us know your thoughts on these scenarios. Was the broker in the first example right to claim commission, and why? Also, when do you think is the appropriate time for brokers to receive their payment?

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