Broker Beware?

While oral contracts are often enforceable, certain categories of contracts must be documented in a signed writing or an action for breach of the contract will be barred by the statute of frauds.  See A.R.S. 44-101 for Arizona’s statute of frauds.  The statute of frauds plays an important role in real estate transactions, as agreements for the sale of an interest in real property and for leases longer than one year fall within the statute, as do most real estate broker or agent agreements.  A less obvious category that may affect a real estate agent or broker’s ability to collect commissions is an agreement which is not to be performed within one year from the date the agreement is made.

In Rudinsky v. Harris, et al, the Arizona Court of Appeals affirmed that an oral agreement for a brokerage company to pay referral commissions to a real estate agent indefinitely is unenforceable. 648 Ariz. Adv. Rep. 50 (2012). Green Light Real Estate LLC was a brokerage company with a referral program – the “Investor Ring” – where agents earned commissions if they brought a buyer who closed a deal with Green Light’s developers. 

Rudinsky, a real estate agent and former member of the Investor Ring, claimed that she and Green Light had an oral contract where Green Light promised (1) never to deal directly with buyers who Rudinsky introduced to Green Light (i.e. not to cut her out of a commission), (2) to pay Rudinsky commissions even after she left the Investor Ring, and (3) to pay Rudinsky commissions on “second-generation” buyers who were referred to Green Light by the buyers Rudinsky initially procured.  In her breach of contract action, Rudinsky claimed that several months after her departure from the Investor Ring, Green Light contacted one of her previous buyers and did not pay commissions for second-generation purchasers.

The court granted summary judgment on the oral contract claim, holding it was barred by the statute of frauds because the agreement could not be performed within one year. The pertinent question was whether a contract is capable of being performed within one year from the date the agreement is made; if so, the statute does not apply.  An oral contract that creates a permanent arrangement where the defendant’s liability necessarily lasts more than one year without any termination provision is incapable of being performed within one year.

Because Green Light was allegedly supposed to pay Rudinsky commissions indefinitely, Rudinsky alleged a permanent relationship with Green Light. And even though it was possible that no transactions would occur beyond a year, Green Light’s alleged obligation continued indefinitely without a termination provision.  Thus, it fell within the statute of frauds, rendering the contract unenforceable.

 Real estate agent/broker reminders after Rudinsky:

• Obtain written agreements if you seek compensation or commission for acting as a real estate agent or broker.
• Make sure you have a clear understanding of when and under what circumstances you are entitled to commissions.  
• For referral agreements where you expect to obtain commissions more than one year after the agreement is made, make sure you have a written agreement signed by the party obligated to pay the commissions.