I was asked recently to comment on some questions by a newly-licensed Realtor on two things he did not know: what happens on purchase if the buyer does not provide the deposit on time, and what happens if the cooperating commission is less than the commission agreed with your client? Leaving aside for a moment that these are issues on which one would expect a licensed Realtor to be fully informed, though it seems that those who think they have the answer are wrong more often than right, these struck me as questions with more nuance than might be apparent, and ones on which they is apparently quite a lot of misconception. I will address each in turn.
What happens if the Buyer does not provide the deposit in time?
The standard Realtor refrain here is that ‘the deal is dead.’ This is painfully reductive reasoning, and doesn’t even come close to being true. The clause in the contract which requires that the deposit be provided by a particular time forms a part of the whole, which, like any other, can be broken. The consequences of breaching the contract are determined by the nature of the clause broken, and the seriousness of the breach. Meaning, perhaps obviously, everything is contextual.
There are two things to consider when thinking about breaches to a contract: First, was the breach a material breach? Second, what is the appropriate remedy? A material breach is one which ‘goes to the heart of the contract’, meaning that if such a term is breached it deprives the innocent party of the value of the contract. For example, since we are discussing timing, imagine a contract to deliver a shipment of bolts (for example) to a pier, to be loaded aboard a ship. The buyer has purchased space in a container to go on a particular ship, and the seller knows that the shipment must be delivered in time to go onto the ship before it sails. If the seller, providing the bolts, is late delivering them, the container and ship are already gone, so the buyer cannot load them as intended. The buyer could still receive the bolts at the pier, but cannot carry out the original intent at the ship’s destination because the seller breached by being late. This would be a fundamental breach, one where something is late makes it worthless.
The next thing to consider is what happens when a breach occurs, and the remedy. In the case of our bolt shipment, when the time for delivery passed without delivery, the innocent party must communicate to the other party that the contract has been breached, and indicate what they plan to do. In cases of fundamental breach there are two options: rescission and damages, or just damages. Rescission is a remedy which seeks to put the parties back in their original positions, as if the contract had never occurred. It is only available in cases of fundamental breach, and then only in some circumstances. Certain situations makes rescission impractical, such as returning a piece of land when work on it has already begun. Damages are a penalty paid by the party in breach for the harm caused by the breach. In cases of fundamental breach the innocent party may choose to unwind the contract and claim damages for the harm caused, or allow the contract to continue, but still claim damages.
Having now considered the law as regards to breach and fundamental breach, we can come back to considering the situation of a real estate contract on a standard OREA form, and what happens when a deposit is late. To get to our answer we will have to look at the term in the contract and the facts and consider:
The term requiring the payment of a deposit is a standard part of the OREA form, not something negotiated out specifically by the buyer and seller. In fact, since the deposit is held in most cases by the seller’s brokerage, and is typically retained to pay the commission, it is far more important to the seller’s agent and broker than it is to the seller. A contract with a deposit payment, where the buyer is fully aware the seller needs the deposit in order to make certain payments, like a deposit on an order of bolts which the manufacturer needs to keep operating, is very different from one which is simply going to sit in a trust account until the closing day. The main purpose of a deposit in this context is for the seller to have a pot of money against which it can claim, and which it controls, in the event that the buyer breaches the contract. Unless there is an explicit understanding that it is absolutely essential that the deposit be delivered by a particular time because the seller will suffer a consequence if it is not, there is no reasonable expectation that the timing for the deposit could be considered important enough to give rise to fundamental breach. Failing to pay on time is still a breach, but breaches give rise to damages, not complete termination, so let us consider that next.
Since we are now considering a real estate contract where the buyer has failed to deliver the deposit on time, we can look at how and why that happened, because when considering damages, that will come into account. It is fairly easy to imagine that breaches can happen for reasons which are entirely innocent, and for reasons which are more culpable. For example, if the agreement called for the deposit to be made in 24 hours, but the buyer used a bank which could not process a payment of that size fast enough, the buyer will breach the contract, even if the payment was ordered as soon as the agreement was made. Such a breach is made innocently, and should the situation come before a judge, damage awards against those breaching contracts despite their best efforts are less than those who do so because of laziness, inattention or deliberately.
Now we can consider the consequences of the breach, meaning the harm which occurs because the buyer failed to pay on time. The harm in a typically real estate transaction for a deposit being late is exactly nothing. The money was just going to sit around in the brokerage trust account, so no bills go unpaid because it was not provided on time, exactly no harm occurs. This makes even claiming damages for a late deposit difficult, because damages are supposed to put the innocent party into the position in which it would have been had the breach not occurred, but if the breach caused no harm, the damages would be nominal. This is not to say that this would ALWAYS be the case for a late deposit. If the parties specifically agreed to a deposit being provided on a particular day, and the buyer knew that there was a reason for this, and the seller would suffer financial harm if the deposit were late, then there would be real damages for being late, because the seller suffered real harm. As stated earlier, it is contextual: the circumstances of the parties, and the nature of the contract they make together determines the consequences for its breach.
Flowing from the consequences of the breach are the magnitude of the breach. Since damages are dependant on the amount of harm, the amount of harm can vary depending on the nature of the breach, which in turn depends on the situation. In our bolt-delivery example, being an hour late was the same as being a year late; once the ship sailed it didn’t matter when the bolts were delivered. If the intended purpose of the deposit was to pay off a loan, however, the consequences of being late are just additional interest, so the damage is easily calculated, and varies based on how late, or how short the payment. If a buyer cannot come up with the full deposit in time (withdrawing money from investments, let’s say) but provides half of the deposit in time, the damages would be limited to what occurs because only half the deposit was present until the rest of it was provided. If this was simply interest and penalties levied on the seller because of late loan payment, the buyer would be liable for those penalties, but they would be less than if the entire payment had been provided late.
Thus, far from instantly causing the failure of an agreement of purchase and sale, the failure to provide the deposit on time, though definitely constituting a breach of the agreement, is one which in most circumstances will only give rise to damages, and then more then likely very minor ones. As with any issue of contract or contractual breach, you should consult a lawyer experienced in matters of real estate and contract if you find yourself in such a situation.
What happens if the cooperating commission paid by the listing brokerage is less than the amount your client agreed to pay you in the buyer’s representation agreement?
This is actually a very straightforward question. The buyer’s representation agreement (BRA) states very simply what the buyer is required to pay the agent when a contract is agreed. (Not when a transaction completes, having a completed contract is enough to trigger the fee) There is also a term which states that anything paid by the listing brokerage will be counted against the fee for which the buyer is liable, meaning that the buyer is liable for any shortfall. If the agent told the buyer that the buyer’s services would be free because the seller would pay the buyer’s agent then the could have some difficulty recovering the difference from the client, since such a statement would constitute a representation inducing the buyer to form the BRA. That said, BRAs typically contain an ‘entire agreement’ cause which excludes any statements made outside the contract from forming part of the agreement. A situation like this would therefore get messy, and clients could very well refuse to pay, leading to a lawsuit to recover the unpaid portion of the fees, professional complaints and other similar consequences. Whether or not the buyer will ultimately be required to pay the remaining portion of the fee will come down to what representations were made, and whether they can be proven by either side. Should you find yourself in a dispute like this you should immediately consult with a real estate litigation lawyer.
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