The issues discussed by our reader are probably generally familiar to most of us, but let’s review a couple of definitions anyway.
A listing agreement is a contract between a yacht owner and a yacht broker, authorizing the broker to represent the owner in the sale of a yacht in exchange for the payment of a commission when and if the yacht is sold. California law requires all listing agreements to be in writing.
Listing agreements in California may be either “exclusive” or “open.”
An exclusive agreement grants the broker the sole right to sell the yacht, and the agreement usually requires the owner to pay a full commission, even if the yacht is sold without any involvement by the broker.
An open listing agreement allows the owner to sell the yacht through another broker or without any broker — and if the yacht is sold through someone else, no commission is owed to the broker holding the open listing.
Exclusive and open listings both usually provide that a commission is owed when and if the broker presents an offer from a buyer who is ready, willing and able to buy the yacht on terms that are satisfactory to the seller, even if the seller later backs out of the deal. Depending upon the language of the listing agreement, this provision may also kick in when a broker presents a full-price offer to a yacht owner who decides to reject the offer for some reason.
A contractual provision such as this may seem like a penalty assessed against the owner for changing his mind, but, in fact, it is simply compensation for services performed. A qualified broker will provide a lot of services to the seller of a yacht, but a broker is fundamentally being hired to bring someone to the seller who is able to buy the boat for the seller’s asking price.
So, with these concepts in mind, let’s take a look at our reader’s case. He has not received any cancellation notice from the yacht owner. Even if the phone call from the other broker was deemed to satisfy the notice requirement, that phone call would not have immediately terminated the open listing agreement, because the agreement required 30 days’ notice to be given for cancellation.
The open listing agreement was therefore still in effect when the offer was received by the prospective buyer.
The other broker’s agreement was also in effect when the offer was received by our reader. But, contrary to the demands made by that broker, the execution of an exclusive listing agreement does not automatically cancel an open listing agreement.
The yacht owner has the burden of notifying the other brokers when he enters into an exclusive agreement. But if he fails to send that notice, both agreements remain in force and both agreements are valid and enforceable.
I should note that an open listing agreement may occasionally include a provision that automatically terminates the agreement if the boat owner enters into an exclusive agreement, but that does not seem to be the case here. I should also note that a full-price offer that includes a contingency that would allow the buyer to back out of the deal is not necessarily subject to the contractual provision discussed here — but our reader said nothing about contingencies, so for the purposes of this discussion, we’ll assume it was an unconditional full-price offer.
So, in our reader’s case, both brokers have valid agreements that authorize them to represent the boat owner in the sale of the boat and to earn a commission when the boat is sold. On the surface, it therefore appears that the boat owner in this case will owe a full commission to each broker, if the boat is sold through our reader. However, legal purity and practical reality are often different.
The new broker did very little work in the few days that his agreement was in effect, and a full commission would be something of a windfall to him. One of my favorite legal axioms holds that it’s always better to avoid a lawsuit than to win one and, as such, I suspect that the parties will work out some sort of compromise in this case.