Number 481, October 2015
LIABILITY FOR COMMISSION
A recent BC Supreme Court decision confirms that the Multiple Listing Contract (MLC) creates an equitable assignment by irrevocably assigning to the listing brokerage its commission out of the sales proceeds, imposing a trust obligation on the seller.1 For the conveyancing lawyer or notary, this case and recent changes to the standard Contract of Purchase and Sale (CPS) raise the prospect that he or she may be personally liable for the commission, if they follow a client's instructions not to pay it.
In the CPS, a seller has the contractual right to the purchase price from the buyer. In the law of assignment, with some exceptions, the seller may, in advance, transfer to another person some or all of that contractual right, if certain requirements are met.
When a seller enters a MLC, the seller irrevocably assigns to the listing brokerage the right to collect its commission out of the sale proceeds.2 A third party who knowingly diverts those proceeds elsewhere may be personally liable for breach of trust.
In Coast Realty Group (Campbell River) Ltd. v. Neilson Island Holdings Inc., the property was an island near Tofino. The seller was a business corporation with two directors.
In 2012, the corporation entered into a MLC, co-listing the property with Coast Realty Group (Coast) and a RE/MAX office that had earlier listed the property without success. After Coast's listing REALTOR® introduced the buyer to the property, one of the corporation's directors intervened to directly negotiate the contract with the buyer.
Apparently, Coast did not hold any deposit in trust. At completion, the conveyancing lawyer or notary did not pay any commissions out of the sale proceeds.
Shortly after completion, Coast's listing Realtor learned about the sale. Coast wrote to the seller requesting its commission, including RE/MAX's portion of the commission.
The corporation refused to pay Coast's commission, groundlessly claiming that Coast breached its obligations. Using funds from another source, the same director paid an apparently arbitrary, partial sum to RE/MAX.
In the meantime, the same director caused the corporation to pay the entire sale proceeds to other creditors, leaving the corporation without any assets. Coast sued for its full commission, while RE/MAX apparently did not.
The court found that the seller owed the $74,900 gross commission to Coast. By irrevocably transferring to Coast the right to collect its commission out of the sale proceeds, the MLC created an equitable assignment. The corporation held the relevant portion of the sale proceeds in trust for Coast. When the seller paid those funds to other parties, the seller, as trustee, also breached its trust obligation.
By causing the corporation to pay the entire sale proceeds to others, the corporation's director knowingly assisted in that breach of trust. The director knew about the assignment and there was no principled basis to pay all the proceeds to others. The court also held the director personally liable to Coast for its commission.
To be personally liable for breach of trust by diverting sales proceeds elsewhere, one must know about the assignment. Until recently, the seller's irrevocable assignment of sale proceeds was found in the MLC, but not the CPS. This meant that, most of the time, the conveyancer did not receive notice of the assignment.
As a remedy, BCREA recently added a new clause — Clause 20 — to the residential CPS. In that clause, buyer and seller both acknowledge that the seller has previously, in the listing contract, equitably assigned to the listing brokerage sufficient sale proceeds to pay its commission. They also confirm that the CPS is notice of that assignment to anyone acting on behalf of the buyer or seller, such as a lawyer or notary. If a seller groundlessly directs a lawyer or notary to refrain from paying the brokerage's commission, the conveyancer who follows those instructions risks personal liability for knowingly participating in a breach of trust.
Realtors should always use the most current forms. When using the updated CPS, the listing brokerage may enhance the notice in Clause 20 by reminding the conveyancer, in writing, about the clause (e.g. in a cover letter). Finally, when listing with a corporation, a brokerage further improves its prospects for payment by obtaining a written guarantee from one or more of the corporation's principals. In a guarantee, the principal personally guarantees the corporation's performance of its obligation to pay commission.
| ||1. ||Coast Realty Group (Campbell River) Ltd. v. Neilson Island Holdings Inc, 2015 BCSC 187. |
| ||2. ||MLC, clause 6A. |
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