Some dentists call us because they’ve signed a listing agreement with a real estate salesperson (often called a “broker”), have a prospective buyer who has presented an offer (which they are negotiating or have accepted) but now want to back out of paying the typical 10% commissions (based on the sale price) to the real estate salesperson.
First, let me begin by saying that dentists are generally expected to be a smart group. They go to university for a long time, study, read a lot, etc. I would expect that they understand the terms and conditions of any agreement that they sign. If they don’t understand, they can and should always get independent legal advice from a dental lawyer or law firm.
Second, real estate salespeople require dentist sellers to sign a ‘listing agreement’ that gives them the exclusive right to sell their practice and collect commissions (typically 10% of the purchase price). Real estate salespeople invest a lot of time, money and effort upfront in marketing a practice. They need to recoup their investment. And the ‘listing agreement’ typically gives them a time frame (e.g. 6 months) to sell a practice and get their fees paid.
SO… with these things being said, where does that leave the dentist who suddenly has a change in heart and no longer wants to pay the 10% commissions? Well, there’s a lot of ‘it depends’ going on in here.
For starters, if the ‘listing agreement’ says that the 10% commissions are only payable if the practice is sold within a certain time frame and that time frame expires, then no commissions would be payable, right? So the selling dentist would just need to run out the clock. But what if the ‘listing agreement’ says that, even if the time runs out, if the real estate salesperson introduced the ultimate purchaser to the seller through their marketing efforts, then they would still get their commissions. So this comes down to: how did the purchaser come to know about the practice and get introduced to the seller? Finally, the ‘listing agreement’ may say that if ANYONE becomes aware of the practice during the time frame but actually buys it later, then the selling dentist is still on the hook for the commissions. So you see: it all comes down to what the ‘listing agreement’ actually says.
Now, what if the seller has accepted an offer during the period of time for which the listing period applies but then backs out to avoid paying the commission? Well, there was a case like this a few years back that went to court. In the 1991/1992 case of ROI Corp. v. Burnham, (1992), 1992 CarswellOnt 2562 (Ont. Gen. Div.), the selling dentist (Dr. William Lance Burnham of Aurora) refused to pay commissions sought by the real estate salesperson (Leroy Brown of ROI Corp.) in respect of the aborted sale of his practice.
Here are some key facts… During an initial conversation between Dr. Burnham and Mr. Brown, Dr. Burnham indicated that he wanted to sell because he did not like the administration involved in running his practice, that he wanted to be an associate, and that things would improve with his wife if he sold and moved out west. Mr. Brown appraised the practice for $211,670 and listed it for $250,000 (which Dr. Burnham had accepted as an acceptable sale figure). Dr. Burnham asked Mr. Brown what would happen if he withdrew his practice from the market; Mr. Brown responded that he would have to pay ROI Corp for its reasonable time and expenses as stated in the listing agreement (a sort of vague reply). Dr. Burnham and Mr. Brown then renegotiated the commission from 10% down to 9%. Dr. Burnham received an offer for $225,000; he decided to sign back the offer at $250,000, hoping that the prospective purchaser would reject the offer and that he would not be liable to pay ROI for an unspecified sum of money by taking his practice off the market. He generally hoped no one would buy the practice at the listed price, that the ‘listing agreement’ would expire and that he would retain his practice and not owe ROI Corp.
Unfortunately for him, the purchaser accepted his offer!
Dr. Burnham ultimately confessed that he didn’t want to complete the transaction, saying he felt very pressured, was having marital problems and seeing a psychologist. So the deal never materialized. Dr. Burnham apparently paid the purchaser for breaching the offer to purchase. When Mr. Brown found out, he and Dr. Burnham initially spoke on the phone and seemed to reach a compromise for all the inconvenience caused by listing the practice: half of the commission was to be paid to ROI Corp. But to no avail. Dr. Burnham subsequently told Mr. Brown that his counsel had advised him to offer no payment, and that was his position. Thereafter, Dr. Burnham stopped communicating with Mr. Brown, and Mr. Brown ultimately sued Dr. Burnham for the full $22,500 commission (9% of the purchase price for the failed transaction).
The Ontario Court of Justice reviewed the legal jurisprudence concerning ‘listing agreements’ and when commissions become payable. The Court held that, where the purchaser is ready, able and willing to comply with the offer, the compensation to which a broker is entitled is the amount of the agreed fee. The Court wrote the following in paragraph 38:
38 Pursuant to the terms of the listing agreement, it is clear that Burnham is liable for the commission in that he agreed to accept an offer made by a purchaser ready, willing and able to purchase. He further agreed to complete the transaction and, failing this, agreed to pay Roi the commission in full.
The Court also referenced a seminal Supreme Court of Canada case on the matter (Leading Investments Ltd. v. New Forest Investments Ltd.,  38 R.P.R. 202) concerning commissions and ‘listing agreements’. In that case, the Supreme Court held that where a commission is payable on a completed sale, and the sale is not completed, to collect their commission, the real estate agent must show that it was not through their fault or that of the purchaser that the sale was not completed.
Ultimately, in the case at bar, the Court found that ROI Corp. was entitled to a judgment of $21,775 together with pre-judgment interest.
But that wasn’t the end of that case.
In 1995, that case went to the Ontario Court of Appeal [the citing reference is (1995), 1995 CarswellOnt 3189 (Ont. C.A.)]. The Court of Appeal (the highest court in Ontario) had to determine whether the trial judge had made a mistake. The Court of Appeal noted that it was the actions of Dr. Burnham that caused the transaction to fail and that he had never (at any material time) told ROI Corp. that he changed his mind and didn’t want to sell his practice. Bottom line: the Vendor just got cold feet and didn’t want to sell and took the position that no commission was payable because the sale was not completed.
The Ontario Court of Appeal agreed with the trial judge and held that Dr. Burnham “could not rely upon his own default as a basis for repudiating his obligation to the respondent broker who brought him a bona fide purchaser. Since that purchaser was ready, willing and able to close the transaction, the respondent broker was entitled to its commissions”. So the trial judge’s decision was upheld.
Now that was a long time ago… but this could still be the law today… In the more recent Alberta provincial court case of 4th Street Holdings Ltd. v. Lannon, 2009 ABPC 387, the Ontario trial decision and Ontario Court of Appeal decision involving ROI Corp. and Dr. Burnham was cited with approval. In that case, the Alberta provincial court cited the following principles to help courts determine whether a commission was payable in light of those cases and faced with a failed sale:
31 One may be able to infer some general principles from these decisions governing real estate brokers’ entitlement to commission where there had been no sale of the property listed for sale.
• The listing or commission agreement must provide for a commission even though there has been no sale; and such provisions must be clear, unequivocal, and brought to the attention of the vendor because, ordinarily, real estate commissions are payable only upon a completed sale.
• The event or contingency which triggers the commission must have taken place, which often means there must have been a binding purchase contract and a prospective purchaser ready, willing and able to complete the sale.
• Essential terms of the aborted sale agreement (e.g., price, possession, etc.) must either accord with the terms of the listing agreement or have been agreed to by the vendor.
• The agent must show that it was not through his fault or that of the purchaser that the sale was not completed.
32 If all of the above obtain, then the compensation the agent is entitled to is the amount of the agreed fee, whether the action is based in contract, as this one was, or in quantum meruit.
If you are a selling dentist looking to get out of paying commissions to a real estate salesperson, your best bet is to have a lawyer read your listing agreement and advise you on your obligations. And of course, BEFORE YOU SIGN a listing agreement, it is imperative to have a lawyer review and advise you on your obligations.
At DMC, we are happy to answer any questions you have about selling your practice. And when you’re ready, we have fixed legal and marketing pricing based on your specific requirements. There’s no hourly billing and no commissions. Send us an email any time or call one of our lawyers at 1-844-443-9280 today.