Put Commission Splits in Writing

Splitting commissions is a common occurrence in real estate transactions.  Our Court of Appeals recently addressed a case involving a split commission.  In doing so, the Court restated some of the rules on the payments of commissions in general.  I have reviewed the case here because it can provide you some helpful hints and insights.  The case involved the sale of two nursing homes and related property and is known as Professionals 100 v. Prestige Realty, 80 Wn. App. 833 (1996).

In Prestige, a Profession 100 (Pro 100) agent contacted the Nursing Home about selling.  The Nursing Home referred the Pro 100 agent to a Board Member, who was also a broker for Prestige Realty.  Prestige said yes, the Nursing Home wants to sell.   Prestige obtained an exclusive listing to sell the property.  Prestige then notified the Pro 100 agent and said Prestige would “share the commissions paid on the closing of any transaction whereby you provide a buyer on a 50/50 basis.”  Prestige also agreed to refer all inquiries to Pro 100.

After receiving the letter, Pro 100 aggressively followed up leads.  One of these leads developed into a potential buyer, Franciscan Eldercare Corporation, who contacted Prestige.  Prestige referred Franciscan to Pro 100.  Franciscan and Pro 100 worked directly with one another in removing a number of obstacles to the sale.  Meanwhile, Prestige continued to work with a different Franciscan representative.  Prestige was unaware of Pro 100’s level of effort.

Franciscan decided to purchase the property.  At closing, Prestige received a $160,000 commission.  Pro 100 did not receive its promised 50% of the commission and filed a lawsuit.

The trial court awarded Pro 100 its 50% of the commission, plus pre-judgment interest, costs, and attorney’s fees.  The Court of Appeals affirmed this decision.

One of the first questions the Court had to grapple with was which of the legal rules applied to the commission split.  These rules were (a) the Procuring Cause of Sale Rule, or (b) the Rules (terms) set forth in the parties’ written contract.  Prestige’s letter regarding the commission split contained elements of both.

The Procuring Cause of Sale Rule is usually applied to real estate transactions “involving oral agreements between brokers and sellers with a subsequent writing between sellers and buyers “(Prestige at page 837).  Under this Rule, when a broker is hired to provide a buyer, and the buyer then purchases the property, the broker is entitled to a commission regardless of who makes the sale.

The other Rule consists of reviewing the contract terms.  When there is a written contract for payment of commissions, the “terms of the contract will control unless the contract is ineffective due to illegality, lack of capacity, or otherwise.’ (Prestige at page 837)

On our facts, the Court seemed to blend both Rules together by saying the letter agreement between Pro 100 and Prestige clearly set out the amount of the commission split.  It also likened the phrase “provide a buyer” to being consistent with being the “Procuring Cause of Sale”.

The Court of Appeals then reviewed the facts carefully and found that Pro 100’s efforts did set in motion a series of events that caused the sale.  Thus, Pro 100 “provided a buyer” within the meaning of the letter agreement and thus was entitled to its 50% of the sales’ commission.

The moral of the story is straightforward.  Make sure your agreements to split commissions are in writing, and clearly state the terms of your agreement.  Also, make sure you keep your colleague informed of your progress.  This will avoid the impression you are not doing anything to earn your commission.  These tips may seem to be plain common sense, but common sense is sometimes easy to overlook when working on a complex transaction.

Published June 1996

This article contains information of general interest, and is not intended to be, nor should it be relied upon as a substitute for specific legal advice.