Real Estate NewsCourt Rules Against Lender"s Attempt to Cut out Commission During a Short Sale
One reason that many real estate agents are less than enthusiastic about short sales is that, too often, a commissionectomy may be involved. By demanding a certain amount of net proceeds, the lender effectively cuts the commission that had been stipulated in the listing agreement. (To be sure, since March 1, 2009 Fannie Mae has prohibited its servicers from cutting short-sale commissions below 6%; and, as of August 20, Freddie Mac announced the same policy. But not all loans are held by those agencies.) Brokers and agents should be pleased, then, to learn of a recent court case that awarded a broker"s commission when a lender sought to cut it just before closing.
Thanks to the legal department of the National Association of Realtors® (NAR) for bringing to our attention the Iowa appellate court case of Stewart v. All States Quality Foods. In that case, All States" lender, Highland Crusader Offshore Partners (Highland), was calling the shots on the short sale.
Broker Larry Stewart and Iowa Realty Commercial had a joint listing agreement of a property owned by All States. The listing began in August of 2001, and was extended a number of times thereafter. At some point Larry Stewart Realty became the sole listing agent. The agreement called for a commission of 10% of the first $500,000 of gross sales price.
In January of 2003, Stewart found a tenant for the property. The tenant took a five-year lease on the property and also obtained a right of first refusal in the event All States received an acceptable offer during the lease term.
By May of 2006, All States" financial difficulties became such that its secured lender, Highland, sent a representative, Harold Kessler, to wind down the business of All States. Shortly thereafter Stewart, who still had a listing, received an offer of $120,000. Under the direction of Kessler, the All States manager signed a counteroffer of $140,000 which was accepted. Stewart prepared a net sheet showing proceeds to the seller of $105,982. On August 1 the tenant exercised its right of first refusal and agreed to purchase the property for $140,000.
On August 24, Stewart informed the seller and the lender that the tenant was ready to close. At that time, Highland, the lender, indicated for the first time that it would not accept net proceeds of less than $130,000. Even though Stewart offered to cut his commission by 10%, the lender would not budge. The sale fell through.
Stewart filed suit alleging breach of contract and intentional interference with contract. He claimed he was owed a commission because he had provided a ready, willing, and able buyer. The trial court agreed. Highlander filed an appeal.
The appellate court affirmed the award. Highlander knew of the listing contract and the commission amount. It certainly had the right to ask Stuart to cut his commission, the appellate court confirmed, but not after the fact of the counteroffer. At the point of counteroffer Highland should have disclosed that they would not release the lien for less than $130,000. By not disclosing that, they misled Stewart into continuing to work on the transaction. The court found that “Kessler and Highland Crusader were engaged in a "two-step process" of first securing a purchase price and then squeezing out as much net proceeds as possible…”
Now, this case doesn"t mirror the facts of every short-sale commission squeeze, nor does it have authority outside of Iowa. Nonetheless, it presents a commission-reduction scenario that is similar to many short sale situations. Moreover, it may suggest a strategy that will be found useful by attorneys representing brokers and agents who have had the squeeze put on them.