Property Seller Liability to Broker Agent Lawsuit: Principal’s Breach of Duty of Good Faith and Fair Dealing Law Elements Defense Lawyer
Definition.
In a sale of real property, the seller has a duty toward his or her broker to act in good faith and to not act arbitrarily or in bad faith to discourage, hinder, or prevent the completion of the purchase. A breach of this duty, which is based on the implied covenant of good faith and fair dealing, obligates the principal to pay a commission to the broker if the broker finds a prospective buyer who is ready, able and willing to purchase the property, and the purchaser and seller agree upon the terms and conditions of the sale, but the sale is not consummated because of the seller’s breach. (RC Royal Development & Realty Corp. v. Standard Pacific Corp. (2009) 177 Cal.App.4th 1410, 1418.)
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Element 1: Contract
The obligation to act in good faith requires the existence of a contract between the parties. (Golden Eagle Land Investment, L.P. v. Rancho Santa Fe Assn. (2018) 19 Cal.App.5th 399, 426, citing Racine & Laramie, Ltd. v. California Dep’t of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1032.)
Listing agreements are typically entered into by brokers to protect the right to a commission; however, a listing agreement is not required, and the broker’s right to a commission may also be contained in the purchase contract between buyer and seller or the escrow instructions. (Torelli v. J.P. Enters., Inc. (1997) 52 Cal.App.4th 1250, 1254, 1257 [provision for commission contained in counteroffer signed by seller, which expired prior to buyer’s acceptance, obligated seller to act in good faith; broker was entitled to commission when seller thereafter entered into contract with same buyer on substantially same terms as in counteroffer]; see also Collins v. Vickter Manor, Inc. (1957) 47 Cal.2d 875, 881 [broker’s right to commission contained in deposit receipt contract].)
Element 2: Duty of Good Faith and Fair Dealing
The covenant imposes a duty to refrain from doing anything that could make performance of the contract impossible and to do everything that the contract presupposes that each party will do to accomplish its purpose. (Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089.)
Concentrating on what is prohibited by the duty of good faith and fair dealing is easier than defining what is consistent with the duty. (Carma Developers (Cal.), Inc. v. Marathon Dev., Inc. (1992) 2 Cal.4th 342, 372.)
Where nothing in the record showed evidence of community standards, norms or customs regarding fair dealing in similar transactions, the court used its own sensibilities and normative judgments embedded in case law to determine what constituted good faith and fair dealing. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1602 [abandoning contract and avoiding liability for broker’s commission because principal reevaluated wisdom or attractiveness of the purchase was clearly not good faith and fair dealing].)
Element 3: Duty Owed by Principal to Broker
The duty is owed by the party contracting with the real estate broker for the sale of the property. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1602.) This is usually the seller; however, the duty also applies when the principal is a buyer. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1601.)
A broker was entitled to a commission under an agreement to acquire property for defendant buyer when the transaction was not consummated due to buyer’s breach of duty of good faith and fair dealing. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1601.)
Element 4: Ready, Willing and Able Buyer
To be entitled to a commission due to breach of the duty of good faith and fair dealing, the broker must procure a ready, willing and able buyer. (Turner v. Waldron Realty (1962) 209 Cal.App.2d 376, 384-85.)
The execution of a contract between buyer and seller is conclusive proof that the owner is satisfied as to the qualifications of the buyer and his ability to perform. (Turner v. Waldron Realty (1962) 209 Cal.App.2d 376, 383.)
The fact that a broker never arranged for the owner to meet the buyer personally did not constitute a failure to produce a ready, willing and able buyer. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1601.)
Element 5: Breach of Duty
A principal breaches the duty by impeding or preventing the sale by his or her action or inaction that is arbitrary or in bad faith. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1601.)
Sale to Buyer Procured by Broker:
The seller breached the duty of good faith and fair dealing where the broker procured a buyer who made an offer to purchase, the seller made a counteroffer in which he agreed to pay the broker’s commission upon recordation of the deed, the buyer did not accept the counteroffer by the expiration date, and thirteen days later, the seller sold the same property to the same buyer for the same purchase price as in the counteroffer, less the $35,000 broker’s commission. (Torelli v. J.P. Enters., Inc. (1997) 52 Cal.App.4th 1250, 1257 [“a broker may recover when a sale is consummated because the buyer and seller, having been brought together by the broker, entered into direct negotiations. Indeed, . . . it is hard to imagine a more blatant example of an attempt to cheat a broker out of a commission than the case before us.”].)
Sale to Another Buyer:
A seller breached the duty of good faith and fair dealing by selling the property to another buyer. (Green v. Linn (1962) 210 Cal.App.2d 762, 767-68.) A broker was entitled to his commission when the owner repudiated the listing agreement by contracting to sell to another purchaser, after the broker had procured a ready, willing and able buyer. (Coulter v. Howard (1927) 203 Cal. 17, 23-24.)
Arbitrary or Unreasonable Acts:
The covenant of good faith and fair dealing can be breached for objectively unreasonable conduct, regardless of the actor’s motive. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1601 [principal breached duty of good faith and fair dealing even though he may have honestly believed he was entitled to avoid payment of commission by restructuring transaction].)
A lessor’s failure to inform the broker of requested changes in a lease was a breach of the duty of good faith and fair dealing. (Colwell Co. v. Hubert (1967) 248 Cal.App.2d 567, 576.)
No Bad Faith Conduct:
An owner of property was not liable for the broker’s commission on a trust deed loan because he acted diligently and in good faith to secure leases which were a condition to payment of the commission, and his failure to secure them was not induced by any of his own actions. (Keystone Mortgage Co. v. MacDonald (1967) 254 Cal.App.2d 808, 815.)
An owner did not breach his duty of good faith owed to a broker by orally changing the terms of sale, where the parties agreed that no one would be bound until all parties approved and executed sale documents and where, without such oral change in the terms of the sale, the owner would be deprived of the full use of his neighboring property as a duck hunting club. (Stromer v. Browning (1966) 65 Cal.2d 421, 427-28.)
Where the parties did not use a standard form brokerage contract, but specifically negotiated a brokerage contract which conditioned the commission upon the consummation of the sale, the broker was not entitled to a commission when the buyer rescinded prior to the close of escrow by his own choice and not due to any bad faith conduct of the seller. (Cochran v. Ellsworth (1954) 126 Cal.App.2d 429, 440-41.)
Breach Excuses Condition to Payment of Commission:
Breach of the duty of good faith and fair dealing in a real estate contract excuses the occurrence of a condition to pay the broker’s commission (such as consummation of the sale), if the condition was prevented or hindered because of the breach. (R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589, 1601 [consummation of purchase as a condition to pay broker’s commission was excused where principal assigned his right to purchase the property to another party to avoid paying commission].)
Court approval of a sale as a condition to the payment of the broker’s commission was excused due to the seller’s breach of the duty of good faith and fair dealing by selling the property to another buyer. (Green v. Linn (1962) 210 Cal.App.2d 762, 767-68.)
A lessor’s failure to inform the broker of requested changes in a lease excused the broker’s performance. (Coulter v. Howard (1927) 203 Cal. 17, 23-24.)
Remedies
Compensatory Damages
Broker entitled to recover commission pursuant to brokerage agreement. (RC Royal Development & Realty Corp. v. Standard Pacific Corp. (2009) 177 Cal.App.4th 1410, 1418.) Broker entitled to recover commission pursuant to schedule of commissions. (Ibid.)
Tort Damages Generally Not Available
Absent a special relationship, breaching party is not liable for all damages resulting from breach of duty of good faith and fair dealing. (Quigley v. Pet, Inc. (1984) 162 Cal.App.3d 877, 887-88.) No tort recovery for non-insurance contract breach absent a violation of “an independent duty arising from principles of tort law . . .” (Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 102; Applied Equip. Corp v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515.)
Punitive Damages Not Available
Damages for breach of implied covenant of good faith and fair dealing are limited to contract damages and exclude punitive damages, pain and suffering, and/or medical damages. (Quigley v. Pet, Inc. (1984) 162 Cal.App.3d 877, 887-88.)
Statute of Limitations
The statute of limitations is four years for a written instrument. The limitations period generally commences when the listing agent produces a ready, willing and able buyer for the property. (Cal. Civ. Proc. Code, § 337(1).) For claims based on an oral agreement, the limitations period is two years. (Cal. Civ. Proc. Code, § 339(1).)
Affirmative Defenses
Failure to Comply with License Requirements
No person engaged in the business or acting in the capacity of a real estate broker or a real estate salesperson within this state shall bring or maintain any action in the courts of this state for the collection of compensation for the performance of any of the acts mentioned in this article without alleging and proving that he or she was a duly licensed real estate broker or real estate salesperson at the time the alleged cause of action arose. (Cal. Bus. & Prof. Code, § 10136.)
Failure to Disclose Dual Agency
Listing agreement was voidable at seller’s option due to agent/broker’s failure to provide statutorily required disclosure form. (Huijers v. DeMarrais (1992) 11 Cal.App.4th 676, 685-86.)
Statute of Frauds
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 is invalid, unless it, or some not or memorandum thereof, is in writing and subscribed by the party to be charged or by the party’s agent. (Cal. Civ. Code, § 1624, subd. (a)(4).)