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    The brokerage contract

    Practical and legal advice

    The brokerage contract is of significant importance in real estate practice and can prove to be a source of pitfalls for both the principal and the agent. It is the subject of abundant case law, mainly centered on the contours and limits of the broker’s compensation. At the conclusion of the contract, and then at the time of settlement of the accounts, several questions arise for the parties. It is therefore necessary to anticipate them as much as possible. Given the breadth of legislation and case law, this contribution is by no means intended to be exhaustive and aims to present some useful concepts in this area.

     

    What type of contract?

    The law defines a brokerage contract as one in which the broker is charged, for a fee, with pointing out to the other party the opportunity to enter into an agreement, or serving as an intermediary in negotiating a contract. Thus, the indicating broker is responsible for finding a partner with whom the principal (the seller) may enter into a contract and the negotiating broker for conducting the negotiation with the third party, on behalf of the principal.

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    The doctrine also distinguishes the introducing broker, whose activity brings a third party into a relationship with the principal, with a view to negotiating a contract. In practice, one of the first questions to be asked is whether the brokerage contract will be simple or exclusive. In the first case, the principal can mandate several brokers. In the second case, the broker has exclusive rights to the sale and the principal must refrain from mandating other brokers or concluding the sale himself during the entire term of the mandate. If he fails to do so, he may be liable, depending on what the contract provides, to pay damages or the broker’s remuneration as originally agreed.

    As for the broker bound by an exclusive brokerage contract, he has the obligation to do everything possible to find a business, since he is the only one who can do so. In the event of inactivity, he is exposed to the loss of his right to remuneration, as well as the payment of damages. As a rule, the brokerage contract is concluded for an initial period of several months and is then renewable. Since it is a special form of mandate, it can theoretically be terminated at any time. However, the party who terminates it early may be liable to pay compensation to the other party. Finally, unless otherwise agreed, the broker does not have the authority to enter into the contract itself on behalf of the principal.

     

    A written contract?

    The conclusion of a brokerage contract is not subject to any form and may be based on express expressions of will (oral or written) or result from conclusive acts. Whether the contract has been validly concluded by conclusive acts depends on the circumstances of each case. When this question is submitted to a judge in the context of a dispute, he or she will endeavour to determine the common and true intention of the parties, if necessary by applying the rules of good faith.

    In such a case, it is incumbent upon the broker claiming remuneration to prove circumstances from which the existence of an agreement between the parties can be ascertained. For remuneration to be due to him, the principal must at the very least have tolerated the broker’s activity, without expressly objecting to it. It is then up to the principal who does not intend to pay remuneration to prove his express refusal. It is therefore strongly recommended that a written contract be drawn up, so as to specify the will of the parties and the essential elements of the contractual relationship.

     

    What obligations do the parties have?

    In principle, the conclusion of a brokerage contract does not entail an obligation for the broker to render the expected service. This is only different if the contrary has been agreed in the contract or if it results from the nature of the business (cf. the exclusive brokerage contract, for example). The broker is obliged to exercise due care and diligence, looking after the best interests of the principal. The extent of these obligations depends on the circumstances. However, in general, the broker must seek out the best opportunities and provide all relevant information. The possibility of assuming a dual brokerage contract (i.e. acting for both the buyer and the seller) exists in the case of an indication or presentation brokerage, if any conflict of interest is ruled out.

    In real estate matters, dual brokerage of negotiations is excluded. Violation of the broker’s obligations exposes him to claims for damages from the principal and deprivation of his remuneration. The principal’s main obligation is to pay the agreed remuneration to the broker in the event of success. The contract may contain additional obligations for the principal (e.g. in the case of exclusive brokerage), which he is obliged to fulfil. The parties are well advised to consider the question of reimbursement of expenses incurred by the broker in the execution of the mandate, to which he is in principle legally entitled. It is, however, possible to contractually secure such an obligation or to derogate from it, or even to provide for specific terms.

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    What compensation for the broker?

    One of the peculiarities of the brokerage contract is that the broker’s compensation is generally due only if the deal closes, regardless of the effort expended. Under the law, the broker’s right to remuneration is subject to the fulfilment of three conditions, which the parties may in principle waive contractually:

    1. the actual conclusion of a contract in accordance with the principal’s expectations (1)
    2. a causal link between the broker’s activity and the conclusion of that contract (2)
    3. the absence of a cause for forfeiture of the right to remuneration (3)

    The question of causation has given rise to a wealth of case law, the broad outlines of which are as follows. It is sufficient that the conclusion of the main contract was even a remote and non-exclusive cause of the third party’s decision satisfying the principal’s purpose. A psychological link between the broker’s activity and the third party’s decision is sufficient. Therefore, the length of time between the end of the broker’s activity and the conclusion of the contract is irrelevant, even if a third party intervened in the meantime. The same applies to the termination of the contract, which will not necessarily remove the broker’s entitlement to commission, if the conclusion of the sale takes place at a later date.

    The broker’s claim to remuneration will generally fall only if his activity has not led to any result, the talks following his efforts have been definitively broken off and the deal is finally concluded, with the third party he had introduced, on a completely new basis. It should also be noted that the broker bears the burden of proof of the link between his activity and the conclusion of the contract. The introducing broker will have to prove not only that he was the first to designate the person who finally concluded the deal, but also that his indication led to the said conclusion. In the event that the retainer was given to multiple brokers and each proves to have played a role, the principal may be permitted to split the salary based on each’s contribution to the success.

    Note that another line of doctrine favors a solution whereby each broker who proves a connection between the activity performed and the conclusion of the principal contract is entitled to his or her full salary. In such a case, the principal would then have to pay the same commission several times. The amount of the remuneration can be fixed contractually or by the usual tariff in the branch concerned, or even by the customary salary. Failing that, the judge will set it according to the hypothetical will of the parties.

    In real estate matters, commissions are generally set on the basis of a percentage of the sale price obtained, regardless of the time and work expended by the broker. Finally, there is a possibility for the judge (upon request of the principal) to reduce a remuneration that he would consider excessive, based on his discretionary power. However, the salary must appear to be objectively disproportionate, taking into account all the circumstances and in particular the success achieved. The case law is replete with examples of accepted and rejected percentages and it is strongly advised to refer to them.

     

    What elements to include in the contract?

    Among the essential elements of the brokerage contract is the definition of the type of activity (i.e., it is a matter of indicating the activity that the broker will have to provide in order to fulfill the contract), it being specified that in case of doubt, the Federal Court retains the least extensive form of activity, i.e., that of the indicator broker. Only the principle of remuneration, which is the other essential element of the contract, must be mandatorily provided.

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    However, since the bulk of disputes are centered around the broker’s right to remuneration, it is advisable to provide further details on this subject in the contract. Other points that should be mentioned when drawing up a brokerage contract include (but are not limited to): identity of the parties; beginning and end of the contract; subject matter of the contract and any price limit; instructions or prescriptions for the execution of the mandate; agreement on the reimbursement of expenses; deadlines for the various services (commission, expenses, etc.); possible exclusivity and provisions relating to the conclusion of the contract with a third party not presented by the broker; competent courts.

     

    Conclusion

    Both the drafting and execution of a brokerage contract are tricky exercises. In real estate matters, the financial stakes can be high and both the broker and the principal benefit from the services of legal professionals.

     

    Sources: Me Jean-François Marti and Me Nina Sepe BM Avocats

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