The Legal Corner
Real estate commission – Changing a property sale to a share sale - A successful “end run”?
Property Biz Canada - The Legal Corner
Tue Nov 06 2012
This article has been contributed by Darrell Gold LLB with Robins Appleby & Taub LLP
Imagine you are a commercial broker. Your client retains you to sell one of its office buildings. You find a buyer for the property who enters into a purchase agreement with your client. However, your client and the buyer change the deal from an asset purchase to a share purchase and, instead your client’s shareholder sells its shares in your client to the buyer. Your client refuses to pay you a $400,000.00 commission arguing that the “”property” was not sold. You take your client (now former client) to court. Will you be successful?
Those facts arose in a very recent case . Briefly, Brookfield as agent entered into an exclusive listing with X to sell X’s office building for a 1.6% fee on “successful completion of the sale of the Property”. The listing expired June 1, 2011 but had a 120 day hold-over period. Brookfield found out in July 2011 that A was selling the Property to P with a closing of August 17, 2011 and claimed that it introduced P to the property and sent a commission invoice to A prior to closing. X said Brookfield was not entitled to commission.
Brookfield sued X. X subsequently advised Brookfield that the sale agreement with P had been terminated and P was buying the shares of X owned by X. Holdings (a related company to X) so no sale of the property occurred and no commission was payable.
Brookfield brought a motion to amend its Claim as follows: to add X Holdings and P as defendants, and to claim that: (i) the share sale was an indirect sale giving rise to the commission; (ii) it was a creditor of X and was “oppressed and unfairly prejudiced” under s.248 of the Business Corporations Act, Ontario (the “OBCA”) (see my October 24, 2011 Legal Corner article); (iii) X breached an implied duty to act in ”good faith”; and (iv) “unjust enrichment” by X for achieving a “sale” while trying to avoid commission.
A opposed the motion to amend the Claim. The Court held in favour of Brookfield that the Claim could be amended as requested since the new points raised by Brookfield were reasonable to be heard when the Claim is litigated, including:
1. Whether the “indirect sale” of the Property triggered Brookfield’s commission, notwithstanding the language of the listing agreement stated it was payable on a “sale of the Property”;
2. Whether there was an implied term in the listing agreement on X to perform its obligations in “good faith so as not to frustrate Brookfield’s right to commission;
3. Whether Brookfield as a “creditor” of X due to the commission obligation, was a “complainant” under s.248 of the OBCA and that re-structuring of the property sale to a share sale effected a result that was under s.248: “oppressive, unfairly prejudicial to or unfairly disregarded the interests of” Brookfield as a creditor;
4. The lack of a definitive legal principle that the existence of a contract between parties (e.g. a listing agreement) prevents a s.248 oppression claim; and
5. Whether X would be “unjustly enriched’ by not having to pay Brookfield commission by restructuring the property sale to a share sale (although X argued that it did nothing to breach the strict wording of the listing agreement and its shareholder - X Holdings - owed no contractual obligation to Brookfield);
A was unable to prove that Brookfield’s amended arguments “stood no change of success”. As a result, Brookfield’s claim could be amended for the trial of its entitlement to commission.
The Lesson: 1. While this case was merely a motion to amend Brookfield’s claim to be heard at a future time, it is promising for an agent whose client tries to do an “end run” around the commission obligations; 2. The facts of each case are critical to determining if a duty of “good faith” exists; 3. As a broker/agent, contact both the owner and the prospective buyer to make your connection and inform both in writing; 4. Consider revising your listing agreements to expressly include both a duty to “act in good faith” to each other as well as a definition of “sale of the property” to cover indirect sales like a share sale, mergers, amalgamations etc. that may not result in a “deed” or “transfer”;
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
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