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Quality Control: Physician Heal Thyself

By: James Hochman

We all work so hard to perform our contractual obligations. We sell our services, we pitch listings, and we strive to prepare outstanding marketing materials. We work on our own communication and negotiation skills, all in an effort to be the best brokers we can be. We earn commissions for ourselves while meeting our various clients’ real estate transactional needs, whether in sales, leasing, or even just provide good counsel in the world of real estate. But we must ask ourselves the question:

‘Am I doing everything I can do to take care of my own business? Am I paying attention to details, to the terms and conditions of my own contracts, or does that duty slide to the bottom of my priorities?’

One of my clients distinguished herself by selling an outdated block of office condominium space in this truly challenging office market. Yes, she found a buyer for a condominium space, and this was no small task. The client was “one of those” who bombarded the broker with questions, constantly asking for updates and reports on other transactions in the market, wondering why “his little jewel” had not been sold, etc. My client patiently endured the barrage of emails and questions, trudged ahead with good old-fashioned marketing, and located that one buyer who found interest in an outdated space on the second and third floors in a building with no elevator, all while investors were either running from office to something else, or just sitting on the sidelines. She had, as closing approached, truly earned the gratitude of her client.

Experience is the best teacher, but alas, the tuition is often far too high.

Yet, as closing approached, the hard-to-please client calculated the sale proceeds, and his own investors were disappointed with the projected outcome of this all but a “miracle” sale. Out came the chisel, yes, that hated tool that clients will wield when they look at a commission amount and try to think how to chip it down a few notches. Commission dollars saved enhance sellers’ proceeds, we all know how that works. Again, think of the hard work the broker spent rising to the challenge, finding that investor (albeit represented by a broker outside of her own firm), working the deal to contract and then through the due diligence period. The client, chisel in hand, objected to the commission rate, the so-called override provision that increased the gross commission amount by a few points if the buyer was represented by an outside broker. And here is where the pain increased: our hardworking broker, an equity partner in a small but growing firm, yes, growing even during the current down market, had delegated the drafting of the exclusive sale listing agreement to a newer broker that her firm had hired and whom she was training.

It turns out that the rookie had taken the company’s form listing agreement, drafted carefully and lovingly by yours truly, and did a “cut and paste” job, bringing in special terms from other existing listing agreements, and composing a document which had internal inconsistencies, and some language which was obviously wrong. But no one, not the rookie, not the hard-working equity partner, not the managing broker, no, no one else in the entire team noticed the following error. The override clause for this sale listing was lifted from a leasing listing, so it read that “…in the even the tenant was represented by a broker not affiliated with listing broker’s firm, the commission rate was increased by 2% of the gross sale price, to be divided between the listing and tenant’s broker.” The broker’s invoice triggered an angry response from the owner, out came that chisel again, and the owner protested the override fee.

Yes, there is a cause of action for reformation of a contract where a mutual mistake was clearly made, as a court will reform the agreement to meet the parties’ clear intentions. In a sale listing there was no reason to address lease commissions or a tenant being represented by a broker. I likely could have won that lawsuit, over a period of years, no doubt, and thousands of dollars in legal fees incurred by both owner and broker. The owner, chisel at the ready, opposed the override fee, claiming it applied to a lease commission only, insisting on a lower fee without the override. The listing broker was caught between her outside broker’s expectations, her own firm’s desire for a larger fee as well, and the fact that her own listing agreement contained a costly error, or at best, an ambiguity. I received her call, sharpened my broker lien skills, and drafted the notice of lien, fondly recalling the lawsuit I had won a mere 41 years ago on similar facts, and waded into the fray.

As happens so often, a compromise was reached, liens have that effect. Combined with the broker’s embarrassment and both parties’ fear of the great unknown: i.e., attorney fees, the broker received less than she should have, the owner paid more than he expected or wanted to pay (so he said), the parties licked their wounds, and the deal closed. But could this entire unfortunate saga have been avoided? Of course. How about quality control? How about an internal review process requiring someone skilled and experienced to review all commission and listing agreements, whether drafted from an existing form or otherwise, just to make sure that the final document is correct and expresses the terms the broker believed applies?. Had there been such an internal review, the commission would have been larger, and the broker would have been spared that final negotiation.

So here are the takeaways: First, have an internal review process for all listing and commission agreements before execution. Next, have a checklist of terms to be reviewed in that process, don’t leave it to chance for the in-house reviewer to remember all key terms. I created that checklist for my client’s future use. Make sure that all busy brokers, working so hard at their own craft, are not burdened with legal or contract review. Assign such tasks to someone else (a team member, a managing broker, even the broker’s counsel in some cases). This saves time, saves money, and reduces stress and aggravation that come with commission negotiations (especially with a flawed document), and everyone goes home happy.

A friend and mentor of mine often said “Experience is the best teacher, but alas, the tuition is often far too high.”

It’s a matter of quality control and professionalism. Documents that “go out the door,” need careful review, especially when busy selling brokers delegate their documents to others.


Media Contact
Alexis Fermanis SIOR Director of Communications
James Hochman
James Hochman
Schain Banks Kenny & Schwartz

Jim Hochman is a partner at Schain Banks Kenny & Schwartz law firm and freelance writer. Contact him at jhochman@schainbanks.com.