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The Type of Contract You Have Dictates Your Options

May 19, 2013

Real estate contracts generally fall into one if two categories. They are usually either land contracts or service contracts. This can be important if you need to go to court over a contract because the type of contract you have can limit the relief you may seek in court. For example, land contracts have strict requirements with very few exceptions. If your contract does not land within the requirements it may case regardless if who is at fault. Contracts that fall under the category of service contracts, however, have much more leeway.

Take for example, the case of Cochran v. Ellsworth. In this case, James Cochran (Cochran) is suing Earle Ellsworth (Ellsworth) for breach of contract because Ellsworth did not pay Cochran his commission for selling Ellsworth's property. Ellsworth was selling property located in Arizona but used real estate brokers located in California. Cochran learned about the property for sale and located a buyer for the property with Ellsworth's permission. Cochran found a buyer for the property, Dr. Fitzgerald, and with some negotiation, escrow instructions were written up. Ellsworth also had his attorney write up his agreement with Cochran which stated that Cochran would receive his commission in two parts upon the consummation of the sale of the property.

The parties concede that the escrow instructions constituted a binding contract of purchase and sale of the property. Dr. Fitzgerald deposited in the escrow a deed to his Long Beach home, ten thousand dollars in cash and his promissory note secured by a deed of trust on the Arizona property. He also paid the sum of four thousand dollars in cash outside of escrow for the stock of goods in the store located on the property. For this he received a bill of sale from Ellsworth. Dr. Fitzgerald took possession of the Arizona property, then, at some time undisclosed by the record, Ellsworth met all conditions required of him by the escrow.

The escrow was never closed because Dr. Fitzgerald served a notice of rescission upon Ellsworth, claiming fraudulent misrepresentations concerning the property had been made to him. Dr. Fitzgerald and Ellsworth handled their disagreement in a separate matter, ultimately settling. Cochran, however, was never paid his commission, which caused him to bring this case.

The main question the court had to answer is, under the given evidence, was the sale of the real property involved "consummated," so as to entitle the broker to his commission under a contract which called for payment of commission upon "consummation" of sale. Generally, a broker who has rendered all required services is not to be denied compensation due to the whims of a defaulting vendor or purchaser who arbitrarily refuses to perform under a sales contract. But Ellsworth and Cochran's agreement was not a standard agreement. Their agreement, specially prepared after negotiation, provided "in the event of consummation of the sale" a commission was to be paid, the first payment to be "at the close of escrow." Therefore two events had to occur before payment could be completed.

The first requirement, the close of escrow, did not occur because Dr. Fitzgerald chose to end the contract before escrow closed. Therefore, Cochran is not owed the first payment. Regarding the second requirement, previous California cases clearly hold that "consummation of the sale" means completion of the transaction, and where real property is involved, payment of the purchase price and conveyance of title. Where a broker has seen fit to allow payment of his compensation to be based on the performance of a contract between parties other than himself, he cannot complain if, through the nonperformance of that contract, his own rights are lost.

The sale could have been completed only upon payment of the purchase price, delivery of deeds conveying title and close of escrow. Those events did not transpire and therefore the sale was not consummated within the provisions of the agreement. Therefore Cochran had no right to commission payment and lost this case.

Having an attorney to review contracts with you before you sign them can be helpful. An attorney can let you know your options under the contract and alternatives in case you would like to negotiate the terms. If you have a contract or real este issue in the Sacramento area, please contact our office.

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