How to Protect Yourself from Procuring Cause Claims

Overview

The law as to who is the “procuring cause” of a real estate sale is one of the most complicated and common legal issues impacting both real estate agents and their clients.  The purpose of procuring cause law is to reward an agent who initiated an uninterrupted chain of events that lead to a sale.  Of course, usually that is the agent who successfully negotiates an agreement to purchase a home.  However, sometimes a previous agent is entitled to the commission even where they did not close the sale.  This is where the law on procuring cause comes in.  This article will examine procuring cause law and how an agent can protect himself or herself from a procuring cause claim.

Under the procuring cause law, an agent who is not the agent listed on the final binding contract of sale, will nevertheless be entitled to all or part of the commission where three factors are met:

• (1) Broker/salesperson seeking the commission must be properly licensed. This is relatively simple, if the agent and/or responsible broker is not properly licensed they will not be entitled to a commission.
• (2) A valid and enforceable written commission agreement obligating either the buyer or seller to pay a commission or an Agreement with the listing broker to pay a commission. Typically, an MLS offer satisfies this requirement as any agent responding to an MLS listing which has a commission is usually considered to have an enforceable written commission agreement for the purposes of a procuring cause claim.
• (3) Prove by a preponderance of the evidence that he/she is the procuring cause of the sale.

Of course, factor three is where most of the litigation and confusion stems from, as the first two factors are readily ascertainable.

First, it is important to discuss what is meant by a preponderance of the evidence.  Preponderance of the evidence is a legal standard of proof that effectively means that the party claiming that they are the procuring cause must prove that it is more likely than not that they were responsible for procuring the buyer who bought a given property.  Effectively, this means that the party claiming they are the procuring cause need not prove that they were responsible, or that it was highly likely they were, but that there is a greater than 50% chance they were responsible for the sale.  Further, an inquiry into procuring cause depends on several sub-factors (discussed below) and no single factor or combination of factors, will automatically mean that an agent was or was not the procuring cause of the sale.

Adding to this uncertainty is the fact that the overwhelming majority of procuring cause cases (typically those where the commission in dispute is under $40,000, though this varies by region) are litigated before arbitration panels set up by regional real estate associations.  These associations provide for very limited discovery prior to a hearing, so unlike a court trial, you very often go into a binding arbitration with only a broad outline of what the agent claiming to be the procuring cause will argue and with little chance to find out what various witnesses will say.

Further, most procuring cause hearings in Southern California are composed of a panel of three real estate agents, who have broad power to make rulings based on fairness.  Anecdotally, this often means that the panels can tend to split the baby and award at least some commission to an agent claiming to be procuring cause where they can at least show some evidence that they were responsible for bringing the property to a buyer’s attention.  Because these rulings are binding and can only be appealed in highly limited circumstances, a lot of potential liability rests on a single hearing.

Thus, it is important to know which facts favor which agent.  Below is a non-exhaustive list of the most important factors to a determination of who was the procuring cause.  They are broken down into factors favoring the initial broker and factors favoring the closing broker (i.e. the one listed on the contract of sale).[1]  If an examination of one or more factors below leads you to believe there may be an issue, consider consulting your responsible broker, your client, and/or an attorney.  Note that merely because one or a combination of several factors are not in your favor does not mean that you will lose a procuring cause case.

Procuring Cause Checklist

• Factors in favor of finding Initial Agent/Broker was the Procuring Cause
  • Initial broker was the first to show or introduce the actual property that was eventually purchased by the buyer.
  • Closing broker never showed the property.
  • The initial broker drew up an offer on the property on behalf of the buyer that was close in price and other terms to an offer later written by closing broker.
  • The initial broker provided significant information about the property. Think everything from the neighborhood, schools, property features and downsides etc.
  • Closing broker asked about buyer’s relationship with other brokers late in the process. Brokers and agents have an affirmative duty to inquire as to prior relationships, a panel will not be sympathetic to a broker or agent who could have easily found out about a prior relationship but waited until the last minute to do so.  In this case, what you don’t know can hurt you.
  • The Initial broker was aware that the buyer would be going to open house or occasionally viewing houses without initial broker present and gave the buyer business cards and told buyer to inform others of the relationship.
  • Closing broker instructed the buyer to go utilize other brokers and then come back to him/her when ready to make an offer.
  • Closing broker does not belong to the MLS in which the property is listed and can point to no other commission arrangement. In other words, in this case the closing broker could not point to a written offer of commission (Because they would have had to view the MLS offer to be claiming it).
  • Closing broker is also the listing broker and offered an inducement if the buyer came directly to him/her, after knowing of the involvement of the initial broker. In other words, a broker wanting to get in on both sides of the transaction and offering a sweetener (usually in the form of a reduced commission or credit).
  • Initial broker has a buyer broker agreement exclusive agreement or other documentation (open house sign in sheets, emails etc.) that prove that initial broker looked at the house with client prior to closing broker’s involvement.

• Factors in Favor of Finding Closing Broker Deserves the Commission
  • A significant amount of time elapsed between the time initial broker last showed a property and closing broker wrote an offer on the same property. At minimum you would want several weeks to have passed.  Though, there is no timeframe that will automatically be accepted by a panel as being enough time.  However, note that a substantially similar offer that comes within a couple weeks or less of a prior offer will be heavily weighted in favor initial broker.
  • Closing broker wrote and negotiated the offer and performed all services during escrow.
  • The initial broker does not keep in touch with buyer after an initial failure to find a house. For instance, if a bid is rejected and initial broker ceases contact and does not attempt to follow up with buyer, this will favor the closing broker.
  • Buyer is was not satisfied with initial broker’s performance. Obviously, the more documentation the better on this.  A buyer just saying that he/she wasn’t happy after the fact carries less weight than a buyer that can show through emails, text messages etc. that the initial broker was not getting the job done.
  • Closing broker asked about buyer’s relationship early on and made a determination that initial broker was not heavily involved or was terminated on account of buyer’s dissatisfaction. This goes to the reasonableness factor, a panel that learns that you made inquires early on and determined you could take on a buyer is likely to be more sympathetic to your cause.
  • Closing broker has some written agreement with the buyer. Exclusive is better but non-exclusive can also be helpful.
  • Initial broker failed to obtain a signed agency disclosure statement.

Application: How to Protect Yourself from Procuring Cause Claims

As the above checklist shows, there are no easy answers in predicting who will be found to be the procuring cause of a given sale.  That said, there are several ways to minimize the chances that you will lose a commission to a procuring cause dispute.  The best course of action of course is not to find yourself in such a dispute in the first place.  Below are some tips as to how to accomplish that.

• The first and most important factor in protecting yourself from procuring cause disputes is to speak with your clients. First, always make an inquiry into whether a prospective buyer has any other relationship prior to signing them up.
• Even after you sign a prospective buyer up as a client continue to inquire about potential past associations.
  • Common sense can be a big helper here.  For instance, if you have a client who had been looking for a while with other agents and has a very targeted area, how likely is it that he/she hasn’t seen a house in that area that has been listed on MLS for a substantial period of time?
  • This does not mean that you cannot or necessarily should not still go through with a sale but knowing these things can help you manage risk in advance.
• If you come across a situation where a prior agent was involved, review the checklist. If one or more factors are not on your side, consider consulting with your responsible broker and/or an attorney.  In many instances, even if an initial broker first showed a property you can still be entitled to all or part of the proceeds of the sale.  When in doubt, ask.
• If you become aware that a prior agent was working with a current client, but you do not feel that the prior agent should be compensated, consider contacting them to explain and if there is pushback, request any information from them as to why they think they should get all or a portion of a commission. Oftentimes, a little professional courtesy goes a long way in defusing these situations.  Contacting an initial broker also tends to be looked upon favorably by arbitration panels, even if your contact is merely to tell the initial broker that you don’t think they have a case.
• Conversely, if you become aware of a potential claim against yourself and are unsure if the facts are in your favor, do not admit fault right away, instead it is best to simply state that you will review and get back to the complaining party.

Stay tuned for more legal corner articles and how to protect yourself and your clients!

[1] For the purposes of the procuring cause checklist the term “broker” shall refer to both the closing responsible broker and any agent acting under the responsible broker.

JohnHart Real Estate

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