REAL ESTATE BROKERS -- DUTIES OF -- COMMISSION OF -- WHEN EARNED -- DEFINITION OF 'CLOSED' TRANSACTION

REAL ESTATE BROKERS -- DUTIES OF -- COMMISSION OF -- WHEN EARNED -- DEFINITION OF "CLOSED" TRANSACTION

A. A real estate broker's commission is earned upon his supplying a purchaser ready, willing and able to buy according to seller's terms, and upon completing duties called for in the earnest money agreement, or his agreement with his principal.

B. The broker's commission may be earned prior to final closing of a transaction, but the broker may not deduct it until he has completed all his duties and has accounted to his principal for sums coming into his hands.

C. A transaction is not "closed" until the buyer has been supplied with evidence of title called for in the earnest money receipt; delivery of deed; accounting to the seller of consideration coming to him, together with delivery of possession of the premises to the buyer, if required by said earnest money receipt.

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                                                                 January 25, 1950

Honorable Robert L. Smith
Director
Department of Licenses
Olympia, Washington                                                                                                              Cite as:  AGO 49-51 No. 207

Dear Sir:

            We acknowledge receipt of your letter of September 22, 1949, and of the accompanying document entitled "Earnest Money Receipt and Agreement," which you ask that we study and interpret in light of the following questions:

            A. At what time during the transaction is the broker's commission considered as earned?

            B. If the opinion of the Attorney General is that the commission is considered as earned prior to the final closing of the transaction, is it legally permissible for a broker to deduct his commission from  [[Orig. Op. Page 2]] the earnest money prior to the closing date and convert same to his own use?

            C. What conditions must exist to properly consider the transaction "closed"?

            Our conclusions may be stated as follows:

            The real estate broker has earned his commission as provided in the commission agreement for his services upon securing a purchaser of the premises described, who is ready, willing and able to buy according to the terms of said earnest money receipt; but until he has completed all of his duties called for in the earnest money receipt and agreement he may not deduct his commission from the earnest money.

            The real estate transaction set forth in the earnest money receipt and agreement may not be considered properly "closed" until a purchaser's policy of title insurance has been issued to the buyer and he has accepted the same, the full consideration for the transaction has been supplied, all charges against the property paid off, and warranty deed free of encumbrances and possession of the premises delivered.

                                                                     ANALYSIS

            The relation between seller and broker connotes a fiduciary relationship in which the broker, or agent, acts as trustee for his principal.  The commission agreement at the bottom of the earnest money receipt provides no definition of the agent's services which he must perform before being entitled to the commission specifically set forth, nor does it provide for time of payment thereof.  Ordinarily, a real estate broker is entitled to his commission where a real estate transaction is brought about as the result of his efforts and he has secured a purchaser ready, willing and able to buy the premises according to the terms required by the seller, whether the sale is finally consummated or not.  SeeBloom v. Christensen, 18 Wn. (2d) 137, 138 P. (2d) 655; also,Spencer v. Houtt, 29 Wn. (2d) 252, 186 P. (2d) 613.  The earnest money receipt and agreement must therefore be studied to determine whether anything is required of the agent after securing a qualified buyer; and the commission agreement in this instance provides that in the event earnest money is forfeited, it shall be apportioned between the seller and agent equally, provided the amount to the broker does not exceed the agreed commission.

            It would therefore appear that the broker is entitled to his full commission in the event the transaction is completed (and it would therefore be to his interests to assist in its completion).  Since the earnest  [[Orig. Op. Page 3]] money was paid to the agent he would be required to hold the same until the transaction went through or was declared forfeited, and could not devote any of it to his own uses until it was determined whether said transaction would be completed or not.

            Since the agreement provides him with such authority, the broker or agent is further required to apply for a purchaser's title insurance policy, during the pendency of the transaction.

            We therefore advise that, under the terms of the commission agreement, even though it does not set forth any duties of the agent other than that provided by law generally, namely, to secure a qualified purchaser, he may not use any of the earnest money deposited with him for his own uses until it is determined whether the transaction will be completed or earnest money forfeited by the purchaser.  While the transaction is pending, he is expected to order a purchaser's policy of title insurance; and if the seller cannot convey good title, he must return the commission and he then has a right of action against the seller for payment of his services equal to the amount set forth in the commission agreement.

            In other words, the broker may not touch the earnest money, since he holds it in trust pending completion of the transaction.  If the transaction is completed he may deduct his commission therefrom, although he is not required to do anything more than secure a qualified purchaser and order the policy of title insurance above referred to.

            A "closed transaction" or "date of closing" are terms of the trade, and generally speaking mean completion of the transaction in all details, at which time the real estate broker shall account for all moneys coming into his hands to his principal and is entitled to deduction of his commission.  SeeAmalgamated Royalty Oil Corp. v. Henne, (Okla.) 282 Fed. 750,Henderson v. Plymouth Oil Co., (Del.) 136 Atl. 140, andMain v. Creech, (Ky.) 241 S.W. 349.

            The earnest money receipt calls for possession upon closing and states that the sale shall be closed at the office of the agent.  It provides for payment of total purchase price of $8,000, payable "all cash on closing."  It would therefore appear that before the transaction set forth may be considered "closed" it is necessary that the purchaser make his deposit for the  [[Orig. Op. Page 4]] total purchase price, and that he be supplied with his title insurance policy, a warranty deed free of encumbrances, together with delivery of possession to the premises sold.

Very truly yours,

SMITH TROY
Attorney General

PHILIP W. RICHARDSON
Assistant Attorney General