Anyone involved or interested in commercial real estate should be aware of the relatively recent decision of the Supreme Court of Canada (SCC) in Société en commandite Place Mullins v Services immobiliers Diane Bisson inc, mentioned briefly in two prior blog posts, here and here. Although the Supreme Court reviewed a decision of the Quebec Court of Appeal involving a standard brokerage agreement in Quebec, the decision may arguably have wider application, including in Alberta.
In a unanimous decision authored by Wagner J. the Court explains well what constitutes an “agreement to sell” in the context of a conditional real estate deal and some of the circumstances in which a brokerage will be entitled to be paid its commission.
Wagner J. began his decision by aptly adopting a comparison made by La Forest J. in a prior case, likening brokers to hunters and brokerage contracts to a hunting licences due to the uncertain nature of a real estate broker’s compensation despite the time and effort put in. In essence, like the hunter who only gets to eat if he manages to kill his prey, the broker only gets to eat when a sale is completed (subject to wrongdoing on the part of the seller).
Brief Background & Decisions of the Lower Courts
The subject of the exclusive brokerage contract that was signed between the parties in this case was a $3.42M property. The contract was drawn up in the standard form and set out the typical circumstances that would trigger the sellers’ obligation to pay the broker’s commission, including: (a) an agreement to sell is concluded during the term of the contract (whether through the broker or not), or (b) the seller voluntarily prevents the free performance of the contract.
Subsequently, the sellers received and accepted a promise to purchase, which was subject to due diligence by the buyer, including by conduct of an environmental assessment of the property. The environmental assessment revealed soil contamination which would cost over $75,000 to clean up. While unhappy about the contamination, the seller renewed his promise to purchase the property, but on condition that the sellers decontaminate the soil at their own expense. The sellers refused, were unable to work out any compromise and the sale of the property did not go through.
Nonetheless, the brokerage claimed is commission was due (~$184,000, which was 5% of the accepted sale price) and brought an action against the sellers. The brokerage argued that its commission became payable because either an agreement to sell had been concluded or the sellers, by their inaction, had prevented conclusion of the sale.
The Superior Court dismissed the action but the Court of Appeal, in a split decision, allowed the appeal. In the Superior Court and Court of Appeal the focus was on the first circumstance in which a commission would be payable (when an agreement to sell is concluded). However, at the SCC, the brokerage conceded that no agreement to sell had actually been concluded. Despite this, the SCC considered both arguments, concluding that the arguments of the brokerage must fail and the appeal must be allowed. The SCC also, helpfully, clarified some of the circumstances in which a brokerage commission will be payable and when it won’t.
SCC: In a Conditional Real Estate Deal, an “Agreement to Sell” is Only Concluded (Making the Brokerage Commission Payable) When it Becomes Unconditional
The SCC held that, while an “agreement to sell” may be concluded by way of a promise to purchase accepted by the seller, the obligations which flow from such a promise must also become certain, i.e., unconditional. This means that, in a conditional real estate deal, there is only a concluded agreement to sell (triggering payment of the commission to the brokerage) when the agreement becomes unconditional. So long as the promise to purchase is not unconditionally binding on the buyer and seller, then it is not yet possible for one of them to bring an action to compel transfer of the title, so there is no “agreement to sell” within the meaning of the brokerage agreement. Wagner J. held that an interpretation in which the broker became entitled to be paid its commission as soon as a promise to purchase is accepted, despite there being conditions, would be inconsistent with the intention of the parties to the brokerage contract.
In this case, the buyer was entitled to rely on the results of the environmental assessment to end the deal. However, the buyer did not simply end the deal. Instead, he reiterated his promise to buy the property; although, he also added a further condition that the sellers had to decontaminate the property at their own expense. The majority of the Court of Appeal had found the buyer had expressly waived his right to withdraw from the agreement, since he renewed his intention to buy it. However, the SCC clarified that any conclusion that the buyer had waived his right to withdraw from the deal is inconsistent with the fact that he clearly gave notice that he was dissatisfied with the condition of the property (as revealed by his due diligence). As soon as that notice was given, the seller repudiated the initial promise to purchase and that initial agreement never became unconditional. Then, the buyer provided a new conditional offer to purchase which was never accepted. Therefore, no “agreement to sell” was ever concluded within the meaning of the brokerage contract.
SCC: To Find a Seller Voluntarily Prevented Completion of a Sale (Making the Brokerage Commission Payable) Requires Proof of Fault or Bad Faith by the Seller
A commission will also become due where there is some fault that can be shown on the part of the seller to prevent the free performance of the brokerage contract. In this respect, the SCC held that such fault may result either from a failure by the seller to do something it had an obligation to do or from doing something it had an obligation not to do. For example, a seller who knowingly prevents or impedes the buyer or its agent from doing its due diligence would be considered at fault. To determine fault in a given case, it is first necessary to establish what obligations the seller had under both the promise to purchase and the brokerage contract.
In this case, the SCC held that it could not be concluded that the sellers had wrongfully prevented the completion of the sale. Here, the sellers did not have any obligation to either decontaminate their property or to renegotiate the terms of the initial promise to purchase. They did not do anything that would have precluded the conclusion of an agreement with the buyer; rather, they cooperated with him and did everything they could to ensure the sale would be completed. Both lower courts found that the sellers acted in good faith and did not know about the contamination when the brokerage contract was entered into.
Further, while the brokerage contract provided certain “Obligations of the Seller”, including that the property was “in accordance with environmental protection laws and regulations”, the SCC held that such a clause cannot on its own serve as a basis for arguing that the seller voluntarily prevented the performance of the contract, absent proof of bad faith. Here, there was no wrongful act or bad faith and such a declaration from the seller is not a legal warranty. No legal warranties could apply because here no sale had been concluded. In any event, the SCC held that the refusal to decontaminate did not amount to a fault, nor was it an act by which the seller voluntarily prevented the free performance of the brokerage contract.
Wider Application of the Decision
Although the brokerage agreement examined in this case was the standard form in Quebec, standard brokerage contracts in other provinces, while providing slightly different wording, may include essentially the same general terms. Therefore, the decision may well be applied in provinces outside of Quebec.
For example, the standard brokerage contract in Alberta provides that the brokerage fee must be paid: (i) if the seller enters into “a legally binding contract to sell the property”, and (ii) the seller does not complete the sale without a legal reason for not completing it. While Alberta case law appears to be sparse on this issue, a legally binding contract would, necessarily, exclude conditional offers or agreements and not completing a sale without a legal reason is arguably another way of saying the seller does not voluntarily prevent the free performance of the contract or does not knowingly and wrongfully prevent completion of a sale. There are legislative provisions and some case law in Alberta which provide for a similar result in the case where no written brokerage agreement is executed, as they make it clear that no commission is recoverable unless the broker effected a sale of land entitling the buyer to possession. However, given the apparent lack of case law in Alberta in regards to standard form brokerage agreements, the SCC decision here may bring some welcome clarification.
Société en commandite Place Mullins v Services immobiliers Diane Bisson inc, 2015 SCC 36
SCC Docket: 35461
Date of Decision: June 25, 2015