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Brokers Must Carefully Word Conditions of Contract or Risk Losing Commission

September 12, 2006 Articles Litigation

If a condition precedent to performance does not occur there is not a binding contract, therefore no commission is due the broker.

The Fifth District affirmed the trial court’s decision in Grant Mitchell and Mitchell Realty, Inc. v. W. Frank DiMare and K.S. Toney, 31 Fla. L. Weekly D2238d, holding that when the rejection of the right of first refusal was a condition precedent to the formation of the contract between seller and prospective purchaser there was never a binding contract therefore no commission was due to the broker. In this case, Mitchell (a licensed real estate broker) procured a contract from AY Ventures, Inc. for the purchase of a parcel of real property owned by K.S. Toney. The property was subject to a right of first refusal in favor of Frank DiMare. When DiMare received notice regarding the AY Ventures contract, DiMare exercised his right of first refusal and closed on the property. Mitchell filed suit seeking a commission.

Mitchell had executed a listing agreement with Toney and the listing agreement provided that a right of first refusal existed on the property. The contract that was executed with AY Ventures provided as follows: “parties acknowledge that there is a 1st right of refusal currently on the property by another purchaser… Effective Date will be when 1st right of refusal is rejected.” The brokerage agreement provided that a commission is due “in the event the property is sold, optioned, or contracted to be sold to a prospect procured by Mitchell”. Mitchell claims that he procured a contract with AY Ventures. However, the trial court and Fifth District disagreed. They stated that a contract was never formed between Toney and AY Ventures. The Fifth Circuit attacked Mitchell’s argument on the premises that it overlooked the fact that the AY Ventures contract became effective “only when, and if, DiMare’s right of first refusal was rejected.” A condition may be either a condition precedent to the formation of a contract or a condition precedent to performance under the contract. In this particular case, the Court held that this was a condition precedent to the formation of the contract. If a contract was not formed, a commission was not due to Mitchell.

Obviously, this case illustrates the need to carefully word conditions to a contract. It has been my experience that the condition in question normally would have been stated as a condition precedent to the seller’s obligation to perform under the contract. If the provision was stated in that context, the seller would not have to perform the contract but would most likely be liable to the broker for the commission under the listing agreement.