By Jones Osborn II

It doesn't matter what you call it--a finder's fee, a success fee, a performance bonus, or just a plain commission, it can involve big dollars and sometimes leads to serious misunderstandings. For that reason, it is important to understand the governing principles before proceeding with any transaction that might result in a claim for a commission.

Types of Listings. There are three basic types of commission agreements: (a) exclusive, (b) exclusive agency, and (c) open. Under an exclusive listing, which is the most common kind, a commission is payable if a buyer is found, regardless of who is responsible, even if it's the owner himself. Under an exclusive agency agreement, a commission is payable regardless of who finds the buyer, except that no commission is payable if the owner finds the buyer. Finally, under an open listing, a commission is payable only if the broker with the listing finds the buyer. Another kind of open listing, the single party listing, is sometimes used where the owner agrees to pay the broker a commission only if a certain specified party is the purchaser.

When Is It Earned? The general rule for any kind of a commission, real estate or otherwise, is that it is earned when the broker produces a ready, willing and able purchaser at the designated price. Notice that the transaction does not have to close--it is enough if a qualified and willing buyer is produced. Therefore, if the seller changes his mind at the last minute, or raises the price, or refuses to close after signing the contract, he is still liable for the commission. From the broker's perspective, this is a reasonable outcome--after all, he has done what he was hired to do and should be paid. However, this principle leads to many disputes and makes some sellers uncomfortable, and therefore it is not uncommon for a seller to insist on a provision in the listing that a commission is earned only when the transaction actually closes.

Another fact that every owner should be aware of is that most listing agreements and escrow instructions provide that the broker is entitled to half of any earnest money deposit forfeited by the buyer, so long as this amount does not exceed the amount of the full commission which would have been earned if the sale had closed. There is nothing inherently wrong with this provision; however, it often comes as a surprise to the owner when he has to give up half of a forfeited deposit. If he doesn't like it, he should negotiate with the broker to have it deleted from the listing agreement and escrow instructions before he signs them.

Real Estate. If the property being sold involves an interest in real property, including a leasehold estate, any claim for a commission will be governed by the statutes and regulations which regulate the real estate brokerage industry. In Arizona, these regulations are promulgated and enforced by the Arizona Department of Real Estate. However, they may also be enforced by private parties in the course of litigation where they often have a decisive role in determining the outcome. For example, if a party is not properly licensed, he may lose his lawsuit to collect a commission.

Who Must Be Licensed? In general, anyone receiving compensation for selling or leasing, or offering to sell or lease, an interest in real estate must be licensed. This also includes a business broker who is selling a business if the buyer will be purchasing or assuming the lease of the business premises, even if it's only incidental to the larger transaction. It does not include the officers of a corporation or the partners of a partnership who are selling corporate or partnership property, so long as they don't receive any special compensation or bonus for the successful completion of the transaction.

In addition, it is not necessary to have an Arizona license to sell Arizona real estate, as long as the sale is not made in Arizona. Although the law is not totally clear on the point, if the primary sales activities are carried out elsewhere, and the sales (not listing) contract is not executed in Arizona, normally the broker is not required to be licensed in Arizona. It may, however, be necessary to be licensed in the state where the sales activities are being carried out or where the contract is entered into.

Requirements. Under Arizona law, certain specific requirements must be satisfied in order to have a valid listing for real estate. They are (a) the broker must be licensed, (b) the listing must be in writing and must be signed by the parties, (c) the listing must contain all the material terms, such as the names of the owner and broker, etc., (d) the listing must have a specific commencement and expiration date and cannot be automatically renewable without action by the owner, and (e) the listing must have a specific price at which the property will be sold or leased. If the listing agreement does not meet each one of these requirements, the broker cannot recover a commission, even if he procures a purchaser, and even if the transaction closes. The law is strict on this point, and there are no exceptions. Even though every broker is taught these rules in real estate school, it is not uncommon for commission claims to fail because the listing does not meet one or more of these requirements.

Conclusion. Brokers provide a valuable service and have every right to be paid for the services they provide. If you are an owner, be sure you understand the ground rules governing the payment of commissions, and be sure you read the listing agreement carefully. If you don't like something in the listing, try to negotiate a different provision before you sign. If you are a broker, be sure you check your listing agreement each and every time to make sure it contains all of the required information so you don't find yourself trying to enforce an invalid listing.