There are at least three types of listing agreements that can be used in commercial real estate transactions.
The first, and most common form, is the Exclusive Right to Sell Agreement. In this type of listing agreement, the listing broker is entitled to receive a commission even if the owner sells the property without the listing broker being involved. The Exclusive Right to Sell Agreement protects the broker’s commission by providing that the seller must pay the broker even if the property is sold through the efforts of the seller or the efforts of another broker without the participation of the listing broker. Gudim Realty, Inc. v. Hughes, 284 Minn. 39, 42, 169 N.W.2d 216, 218 (Minn. 1969); Dostal v. Fore-M, LLC, 2006 WL 1320501 at *2 (Minn. Ct. App. 2006).
The second type of listing agreement is the Net Listing Agreement. In this type of listing agreement, a broker’s commission is the amount, if any, by which the actual purchase price for the property exceeds the price specified in the listing agreement. The Net Listing Agreement implies that the broker is entitled to the commission when the sale is consummated, regardless of whether the buyer pays the full purchase price to the seller. Stromberg v. Smith, 423 N.W.2d 107, 109 (Minn. Ct. App. 1988). This type of listing agreement is not commonly used as there are potential conflicts of interest between the seller and the broker. For example, if the fair market value of the property is included in the listing agreement, the broker does not have an incentive to accept an offer in this amount since the broker will not receive any commission.
The third type of listing agreement is known as the Open Listing Agreement or Non-Exclusive Listing Agreement. In this type of listing agreement, the owner may simultaneously list the property with more than one broker. The first broker to secure a sale earns the commission but no commission is earned if the seller procures the buyer. This type of listing agreement is not often used since brokers are reluctant to expend the time and resources to market the property without an assurance of compensation. The Non-Exclusive Listing Agreement is also a minefield for litigation over which broker was the procuring cause of the sale. See Rees-Thomson-Scroggins, Inc. v. Nelson, 276 Minn. 453, 150 N.W.2d 568 (Minn. 1967).
There are certain statutory requirements that must be met for a listing agreement between the owner of real property and the broker to be valid. The first, and most important step, is to have the parties enter into a written listing agreement. Aside from the practical benefit to both parties of memorializing an agreement in a written document, a broker must have a written listing agreement in order to commence an action to recover an unpaid commission. Minn. Stat. §82.85, Subd. 2.
In addition, brokers are required to obtain a signed listing agreement (or other signed authorization from the owner of the property or a person authorized to offer the property for sale or lease) before advertising to public that the property is available for sale or lease. Minn. Stat. §82.66, Subd. 1(a).
The next steps necessary for a valid and enforceable listing agreement are set forth in Minn. Stat. §82.66, Subdivision 1(b) which requires that the written listing agreement include, among other things:
The Minnesota Supreme Court has determined that substantial compliance with the statutory requirements is sufficient. Rosenberg v. Heritage Renovations, LLC, 685 N.W.2d 320, 325 (Minn. 2004); Reuben v. Gibbs, 297 Minn. 321, 323, 210 N.W.2d 857, 858 (Minn. 1973).
However, please note that a broker cannot recover compensation under quasi-contract or implied-in-fact contract theories in light of the statutory requirement of a written agreement to recover compensation. Krogness v. Best Buy Co. Inc., 524 N.W.2d 282, 286-7 (Minn. Ct. App. 1994); Cambridge Commercial Realty, Inc. v. Brooklyn Hotel Partners, LLC, 2014 WL 1272451 at *4 (Minn. Ct. App. 2014).
The key here for everyone involved is to be sure there is a written and signed listing agreement.
It is important for the attorney to understand and advise clients on override clauses. An override clause is a provision in the listing agreement allowing the broker to receive a commission when, after the listing agreement has expired, the property is sold to a person with whom broker or salesperson had negotiated or shown the property prior to the expiration of the listing agreement. Minn. Stat. §82.66, Subd. 1(d)-(e).
An override clause cannot extend beyond six months after the expiration of the listing agreement. Minn. Stat. §82.66, Subd. 1(c). A broker shall not seek to enforce an override clause unless a protective list has been furnished to the seller within 72 hours after the expiration of the listing agreement. Minn. Stat. §82.66, Subd. 1(d)(1). A protective list is the written list of names and addresses of prospective purchasers with whom a broker has negotiated the sale or lease of the property or to whom the broker had shown the property prior to the expiration of the listing agreement. Minn. Stat. §82.55, Subd. 16; §82.66, Subd. 1(e).
The Minnesota Court of Appeals has held that a broker has the right to a commission when the broker has been the procuring cause of the sale, even when the sale is completed after the listing agreement has terminated, provided the broker complies with the override clause and protective list requirements. Douglas v. Schuette, 607 N.W.2d 142, 145-6 (Minn. Ct. App. 2000); Lynn Beechler Realty Co. v. Warnygora, 396 N.W.2d 717, 719-20 (Minn. Ct. App. 1986).
Thus, take the time to work through the override clause and protective list requirements with your client to be sure everyone is on the same page with the obligation to pay a commission post-expiration or post-termination of the listing agreement.
A quick word about termination of the listing agreement. The general rule is that a listing agreement that includes a definite expiration date as required by Minn. Stat. §82.66, Subd. 1(b)(1) will expire by its terms. Of course, the parties may also mutually agree to terminate the listing agreement before it expires. A listing agreement that fails to provide a definite expiration date but is otherwise in substantial compliance with the statutory requirements is terminable at will. Rosenberg v. Heritage Renovations, LLC, 685 N.W.2d 320, 326 (Minn. 2004). Again, work through the listing agreement to arrive a mutually agreeable expiration date.
Regardless as to which type of listing agreement is used in a commercial real estate transaction, your clients need to be advised of the rights and obligations arising out of the listing agreement. This is true even if you are counseling the commercial real estate broker or salesperson, as their right to obtain compensation for their hard work will depend on the validity of the listing agreement. The listing agreement is not a boilerplate document; rather, it is a document which requires careful consideration, review, negotiation and drafting.
Author’s Note: This article incorporates material found in the Minnesota Real Estate Purchase and Sale Deskbook, Vol. 1, 2nd Ed. (2015) at §§2.4 and 2.8 written by Marvin Liszt, Esq.
Mitchel Chargo and Marvin Liszt are shareholders at Bernick Lifson, PA, a full-service business law firm in Minneapolis. Mitch and Marvin have over 65 years of combined experience in commercial real estate law. They represent clients in all aspects of commercial real estate transactions, with significant expertise in the areas of financing, acquisition, development, leasing, sale transactions, and property tax appeals. Their clients include lenders, borrowers, owners, purchasers, developers, property managers, lessors, and lessees of commercial properties.