Real Estate Broker Commission Agreements in Writing
Do Real Estate Broker Commission Agreements Have To Be In Writing?
And is there a difference if the commission agreement is between a broker and customer or two brokers?
Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
I. Arizona Law
Pursuant to A.R.S. § 44-101, Arizona’s Statute of Frauds:
No action shall be brought in any court in the following cases unless the promise or agreement upon which the action is brought, or some memorandum thereof, is in writing and signed by the party to be charged, or by some person by him thereunto lawfully authorized:
(7) Upon an agreement authorizing or employing an agent or broker to purchase or sell real property, or mines, for compensation or a commission.
Therefore, a commission agreement whereby an agent or broker arranges for the purchase or sale of real property must be in writing.
The requirement set forth in § 44-101(7) is “strictly enforced” by Arizona Courts. Nowell v. Andrew Wright Enters., 143 Ariz. 79, 81, 691 P.2d 1107, 1109 (Ct. App. 1984); see also McAlister v. Cooper, 91 Ariz. 191, 194, 370 P.2d 767, 769 (1962) (Arizona’s Statute of Frauds “is absolute in its requirement that no action can be brought for a commission unless the agreement is in writing signed by the party to be charged.”); Bishop v. Norell,
88 Ariz. 148, 353 P.2d 1022 (1960) (same). Even performance on the part of the agent or broker will not take the contract “out of the statute of frauds so as to authorize an action to be brought upon the contract if it be not in writing and signed.” McMurran v. Duncan, 17 Ariz. 552, 556, 155 P. 306, 308 (1916); see also Butterfield v. Mackenzie,
37 Ariz. 227, 229, 292 P. 1097, 1097-98 (1930) (“neither part performance nor complete performance will take an oral contract for brokerage commissions out of the statute of frauds.”). The law on this topic has been the same in Arizona since 1913. Watts v. Hogan, 111 Ariz. 536, 538, 534 P.2d 741, 743 (1975).
Further, an agreement between a broker or agent and a customer “must show both the fact of employment,” “the amount of the commission to be paid,” and “contain some descriptions of the property.” Nowell, 143 Ariz. at 81, 691 P.2d at 1109. However, Arizona courts have held that a “formal listing agreement is not required in order to satisfy the Statute of Frauds.” Gray v. Kohlhase, 18 Ariz. App. 368, 369, 502 P.2d 169, 170 (Ct. App. 1972).
Under Arizona law, however, a commission agreement whereby an agent or broker arranges for the lease of real property does not fall under Arizona’s Statute of Frauds. As the Arizona Court of Appeals explains:
A careful reading of subparagraph 7 [of A.R.S. § 44-101] reveals that it pertains to a compensation or commission agreement to employ or authorize an agent or broker “to purchase or sell
real property, or mines.” (Emphasis added). There is, however, no express reference therein to a compensation agreement employing or authorizing an agent or broker to lease real property. There is no language in subparagraph 7 or elsewhere in A.R.S. § 44-101 from which it can be inferred that a real estate commission for procuring a lease, as opposed to a sale, of real property is within the statute and therefore requires a writing. Moreover, the surrounding context clearly excludes any such inference: In subparagraph 6 [of Arizona’s Statute of Frauds], the legislature indicated that it was cognizant of the existence of leases and of sales of less than a fee simple interest in real estate in addition to being aware of sales of full fee simple interests; it therefore separately enumerated each of these three types of interest. Logically imputing awareness of these different interests to the legislature, had it intended that a writing be required to enforce an obligation for a commission for procuring a lessee, it would have included appropriate language in subparagraph 7 or elsewhere in A.R.S. § 44-101, but the legislature did not do so. Since there is neither express language nor an implication to the contrary therein, we hold that the statute of frauds is no bar to enforcing the right to a real estate commission based upon an oral listing or oral commission agreement when the underlying brokerage-fee-generating transaction is the leasing of real property rather than the sale of real property.
Coldwell Banker & Co. Real Estate Brokers v. Potthoff,
12 Ariz. App. 525, 526, 472 P.2d 948, 949 (Ct. App. 1970). However, at least one Arizona court has held that the sale of a leasehold interest, rather than a direct lease of real property, does fall under Arizona’s Statute of Frauds. Patton v. Paradise Hills Shopping Ctr., 4 Ariz. App. 11, 18, 417 P.2d 382, 389 (Ct. App. 1966).
Another situation that falls outside Arizona’s Statute of Frauds is an agreement between brokers to split, share or divide a real estate commission. In Nutter v. Bechtel, the Court held that a commission-sharing agreement between brokers was not violative of Arizona’s Statute of Frauds, as the statute “was only designed to protect owners of real estate against unfounded claims of brokers. It does not extend to agreements between brokers to cooperate in making sales for a share of the commissions.” 6 Ariz. App. 501, 433 P.2d 993 (Ct. App. 1967) (quoting Bush v. Mattingly, 62 Ariz. 483, 487, 158 P.2d 665, 667 (1945)); see also Roseberry v. Heckler, 84 Ariz. 247, 249, 326 P.2d 365, 366 (1958) (“We have ruled that the only purpose of [the statute of frauds] is to protect the property owner against unfounded claims of brokers.”).
II. California Law
Pursuant to Cal. Civ. Code 1624(a)(4), California’s Statute of Frauds:
(a) The following contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party’s agent: (4) An agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser or seller of real estate or a lessee or lessor of real estate where the lease is for a longer period than one year, for compensation or a commission.
See also Wm. E. Doud & Co., Inc. v. Smith, 64 Cal. Rptr. 222 (Cal. Ct. App. 1967) (recovery of real estate commissions on an oral contract barred by the statute of frauds; “[a] real estate broker as a professional man, is presumed to know that contracts for real estate commissions are unenforceable unless in writing. He assumes the risk of relying on oral promises and has no reason to complain if his efforts are unrewarded”) (internal citations omitted); Jaffe v. Albertson Co., 53 Cal. Rptr. 25, 33 (Cal. Ct. App. 1966) (“Our courts have consistently applied the foregoing code provisions in refusing to allow a real estate broker to recover his commission where a signed written memorandum or contract, clearly complying with the statute, did not exist.”). Therefore, a commission agreement whereby an agent or broker arranges for the purchase or sale of real property must be in writing, generally like Arizona. However, unlike Arizona, commission agreements for leases longer than one year must also be in writing.
Further, under California to comply with the statute of frauds “[t]he writing must unequivocally show on its face the fact of employment of the broker seeing to recover a real estate commission.” Phillippe v. Shapell Indus., 743 P.2d 1279, 1283 (Cal. 1987). California law also requires a showing that the commission agreement contain a property description. Glazer v. Hanson,
276 P. 607, 611 (Cal. Ct. App. 1929) (“In a contract authorizing or employing an agent or broker to sell real estate for a commission, there must not only be an instrument in writing signed by the parties to be charged, but the instrument must contain a description of the land sufficient in itself, or by reference, to identify the same without the aid of parol evidence.”). However, unlike Arizona, in California “neither the amount of the commission nor a specific promise to pay the same need be expressed in the memorandum.” Beazell v. Schrader,
381 P.2d 390, 392 (1963).
California law, again similar to Arizona law, does not bring oral contracts for commissions between brokers under the Statute of Frauds. See Wilson v. Anderson,
25 Cal. Rptr. 105, 106-107 (Cal. Ct. App. 1962) (“There is no doubt that real estate brokers may make valid and enforceable oral contracts for the division of commissions between themselves and that the provisions of Civil Code, section 1624, subdivisions 4 and 5, and Code of Civil Procedure, section 1973, subdivision 5, requiring agreements authorizing or employing an agent or broker to sell real estate to be reduced to writing, are for the protection of real estate owners against unfounded claims of brokers; and were never intended to be applied to contracts between brokers agreeing to share commissions.”); see also Goossen v. Adair, 8 Cal. Rptr. 855, 861(Cal. Ct. App. 1960) (“There is no doubt that real estate brokers may make valid and enforceable oral contracts for the division of commissions between themselves . . . .”); Holland v. Morgan & Peacock Props. Co., 335 P.2d 769, 772 (Cal. Ct. App. 1959) (“the rule is clear that the statute [of frauds] does not apply to a contract between brokers for the sharing of commissions”).
III. Conclusion
In conclusion, both Arizona and California require real estate broker commission agreements to be in writing for the purchase or sale of real property. Additionally, both Arizona and California allow brokers to make oral contracts to share commissions generated from real estate transactions. Where Arizona and California differ is that in Arizona, real estate broker commission agreements for leases can be oral and do not fall under the Statute of Frauds, whereas in California, such commission agreements relating to leases for longer than one year do fall under the Statute of Frauds and must be in writing.
Other legal theories may apply in certain cases, which may change the above analysis. Those theories are outside the scope of this article, and, as always, for questions on an individual matter, an attorney should be consulted. Further, the scope of this article is limited to Arizona and California law; laws vary state by state and other states’ laws on this topic may be different.