September 26, 2008


Four years ago, during the week of 2004 Democratic Convention, I vacationed with my family in San Diego, California. One day I read a local newspaper and learned that the number of licensed real estate salespersons in San Diego County had skyrocketed to an all time high. The article was like the ringing of a bell, warning that the real estate market had reach a top.

A recently published California case arises from speculation during 2002 in the downtown San Diego condominium market and the slowing of that market. More importantly, it affirms that a buyer's broker will be protected under under an exclusive buyer-broker commission agreement when the buyer defaults. In Schaffter v. Creative Capital Leasing Group, LLC (2008) D047364, the Fourth Appellate District held that a buyer's broker is owed a commission if the buyer defaults after the broker locates residential property and the buyer signs a purchase agreement.

If Schaffter, the buyer tied up two new condominiums in lengthy escrows with the hope that they would significantly appreciate in value before the closing. (One of the buildings is pictured above.) When the condos did not appreciate enough to satisfy the buyer, it refused to close the escrows. The Court of Appeal found that the principal of the buyer, ". . . never intended to finalize the purchases if the market did not perform as he expected, or to pay commissions on units that did not close escrow."

The buyer's primary defense -- that it was not in default under the commission agreement because the developers decided not to sue for breach of contract -- was disingenuous. The buyer's principal apparently was successful in threatening and bullying the developers into accepting the buyer's cancellations. The Court of Appeal rejected this "defense" and affirmed the ruling of the trial court that: "'there are consequences when people cancel contracts' without valid reason. Here the consequence is CCLG's payment of commissions."

Buyer's brokers will be heartened by the holding in the Schaffter case and the Court's recognition that a commission agreement should be honored when a purchase is cancelled without justification.

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