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Lev Shetsen Commercial, LLC, v. Sharma

A-3271-03T5 (N.J. Super. App. Div. 2004) (Unpublished)

BROKERS; COMMISSIONS—Absent default by an owner, a contract of sale must be performed by a buyer before liability for a broker’s commission is imposed upon the owner.

A property owner entered into an exclusive listing agreement for the sale of an apartment. The agreement entitled the broker to a commission of five percent of the purchase price of the property in exchange for procuring a ready, willing, and able purchaser at the listed price. It also provided that if the broker presented a purchaser or tenant who agreed to the agreement’s listing terms, and the owners failed to proceed, the commission would still be due.

A standard form exclusive listing agreement was used, but the parties changed the exclusive listing period from twelve months to two months. It was to expire on August 1, 2002.

On May 31, 2002, the broker identified an interested buyer and secured a binder with a $5,000 deposit. The binder called for an anticipated closing date of August 1, 2002. On June 3, 2002, the buyer was issued a certificate of approval, pre-qualifying him for a mortgage loan at the prevailing interest rate. The broker’s salesperson signed the buyer’s pre-qualification and served as his mortgage consultant. The sellers received notice of the buyer’s pre-qualification for a mortgage on June 4, 2002. The owners then prepared a contract of sale, outlining their terms, and forwarded it to the buyer. The contract provided for an August 1, 2002 closing date, contained “time of the essence” language, and did not contain a mortgage contingency clause.

This draft contract was unacceptable to the buyer, and the parties went back and forth with changes until August 1, 2002. On August 1, the buyer forwarded a final amended contract to the owners. It included a September 30, 2002 estimated date for closing. The buyers refused to accept this proposal because they had no reason to sell the property at that point. They had lost their investment opportunity and a September 30 closing date was too late. On August 3, 2002, after the exclusive listing agreement expired, the buyers told the broker that they were taking the property off the market.

The broker then sued to recover the full commission, alleging that the buyers had engaged in “frustrating conduct,” thereby breached their implied covenant of good faith. The owners denied any wrongful conduct, arguing that the broker was not entitled to its commission because it had not procured a “ready, willing and able buyer” before the deadline in the exclusive listing agreement. The lower court disagreed, finding that the broker had produced a buyer ready, willing, and able to purchase on terms agreeable to the owners, that the parties had reached a meeting of the minds, and that the owners then wrongfully changed their minds, thus frustrating the sale after the broker had earned its fee.

The Appellate Division reversed. Absent default by an owner, a contract of sale must be performed by a buyer before liability for commission is imposed upon the owner. The Court held that the parties’ failure to consummate the sales transaction in this case was not the result of any wrongful conduct on the part of the property owners. The Court thought it was clear that the property owner wanted a rapid closing. Evan a contract binder that predated the listing agreement stipulated that the closing would occur on or about August 1, 2002. The listing agreement itself was effective for only a two-month period. The initial proposal contained a time of the essence provision. Despite being on notice to close quickly, the buyer nevertheless submitted a third proposal on August 2, 2002 with a September 30, 2002 closing date. By that time, the listing agreement had already expired and the broker had simply failed to produce a ready, willing, and able purchaser to perform in accordance with mutually agreed-upon terms, let alone those set by the owners. Despite the exchange of several drafts, the parties were never able to reach mutually acceptable terms and execute a final contract before the expiration of the broker’s exclusive listing agreement.

The Court also noted that the buyer had continually insisted upon including a mortgage contingency clause in the contract, and that it was clearly within the prerogative of the owners to reject even a full price offer based upon such a potential unacceptable term. The test in such a case is whether the potential purchaser was a ready, willing, and able buyer who had made an offer conforming with the owners’ reasonable requirements, including, in this case, accommodating the owners’ announced need for a speedy closing. In the Court’s view, nothing in the owners’ conduct was inconsistent with their obligation to both the buyer and the broker. The real estate transaction was aborted because of a failure to agree on essential terms rather than by reason of any wrongful conduct on the owners’ part. That is why the Appellate Division reversed the lower court’s judgment in favor of the broker.

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