Why Your Commission isn’t Protected

Imagine this scenario: you and your client diligently review your listing agreement. You add in an expiration date of 6 months and no over-hold. A few days later your realize that the 6 month expiration date was a mistake; you both agreed via email that the expiration date would be 7 months after the date of execution. You ignore this discrepancy, as you believe your client will act in good faith and honour the 7 month expiration date. Now here’s where it gets problematic: the property doesn’t sell after 6 months. Upset with the result, your client decides to sell the property on his own. The property sells in the 7th month. Are you entitled to your commission?

The Answer…..

It’ll be very difficult for you to argue that the listing agreement is valid and enforceable and, therefore, that you’re owed the commission. This is because the principle of certainty underpins the laws requiring agents to accurately draft and record all agreements related to a transaction – from buyer representation agreements to agreements of purchase of sale. If something is unclear, left blank or conflicts with what you agreed to and what you recorded, the contract may not be valid and your commission is at risk. This is particularly true of expiry dates. As Mr. Justice Morden put it in Rhodes and Rhodes Realty Ltd. et al. v. R. Pagani Investments Ltd. et al. (1981), 35 O.R. (2d) 77 (Ont. C.A.):

“if an agreement does not contain a provision which, in one way or another, at the time of the agreement, identifies the expiry date with certainty, then the requirements of the provision have not been met.”

Courts have interpreted the statutory provision requiring a listing agreement to contain an expiry date as seeking “to introduce a high degree of certainty into listing agreements, and to place the onus of ensuring such certainty exists on the broker”. As such, it is imperative to be accurate in your dates, names and pricing. But, that’s not all…

In ReMax Realton Realty Inc. v Seider [1993], the agent provided a listing agreement that included an expiry date. The agent then also provided a Professional Marketing Plan and Warranty that contained a provision allowing the seller to terminate the contract by providing 7 days notice. The seller ended up selling the property privately, despite the listing agreement still being in force.

The seller argued that he was able to sell the property and didn’t owe the agent any commission because the listing agreement is not valid. He argued that the termination provision in the Professional Marketing Plan and Warranty conflicted with the expiry date in the listing agreement. Such conflict raised uncertainty and, therefore, rendered the listing agreement unenforceable.

Thankfully, the judge found that the listing agreement complied with the legislation and was not rendered uncertain by the termination provision in the warranty. This is because the warranty did not alter that expiry date. Rather, the warranty was an entirely separate document:

The fact that the parties to the contract could agree to cancel it if the vendor became dissatisfied with the services of the plaintiff does not detract from the certainty of the expiry date of October 31st, 1989 in both listing agreements.

Despite this positive outcome, this case contains important judicial comments that may be used to invalidate your listing agreement. Ensure that you’ve not only accurately filled in the expiry date of the agreement, but that you also don’t create any accidental side agreements – such as agreements to amend listing agreements via email exchanges and marketing materials. If you confuse the terms of the listing agreement, you may be risking your rights to collect.

Thinking like a Lawyer but Acting like a Leasing Guru

Should You Waive Goodbye to this Right or Sign a Release?

Most leases require a tenant to obtain insurance that is consistent with the lease terms before it can enter a premises.  Despite this fundamental prerequisite to enter, most tenants fail to meet the lease’s insurance provision. This failure can cause delays in construction, occupancy and the “grand opening”, not to mention tack on “surprise” premium increases. In order to avoid this disaster, a prudent agent will advise her client to have the insurer review the lease and the insurance clause; she will also have a general understanding of some critical insurance terms.

The Right of Subrogation and Releases 

What is the Right of Subrogation?

The right of subrogation is one of the most misunderstood and overlooked rights related to the insurance clause. This right is not the landlord or tenant’s to exercise. Rather, it’s the right of subrogation is the insurer’s right to sue the party responsible for causing a loss or damage. This right arises where the insurer pays insurance proceeds to the injured party to reimburse the insured for its losses due to damage or injury caused by another party. Once the insurer compensates the insured, the insurer then gets a right to “step into the shoes” of the insured and sue the party that caused the loss.  This right makes the insurer “whole” as it recoups its payment to the insured by suing the party that caused the damage.  For example, let’s say that the tenant burns down the building. The landlord’s insurer will reimburse the landlord for its loss of the building. The insurer then gets the right to “step into the landlord’s shoes” and sue the tenant for the money it had to pay out to the landlord due to the loss.

Is this Fair and What Can You Do? 

I believe that right of subrogation is unfair because it allows the insurer to be paid twice; once by the insured and then a second time by exercising its right to subrogation. This outcome, as well as the fact that no one likes getting sued, is why you want to ensure that the parties to a lease both obtain a waiver of subrogation. A waiver of subrogation provision will require the tenant and landlord to get, in writing, their insurers to agree to not sue the party that caused the damage.

Tenants should be particularly vocal about getting a waiver of subrogation if the tenant pays for the landlord’s insurance, as operating costs usually include landlord’s insurance. This is because without a waiver, the landlord’s insurer can sue the tenant despite the fact that the tenant just was the one paying for the insurance!

Do waivers affect insurance costs? 

Most insurers will agree to execute a waiver of subrogation without any penalty or increase in the insurance premium. While tenants are typically required to obtain a waiver, landlords will only agree to “use their best efforts” to obtain a waiver of subrogation from its insurer. This loose language gives the landlord leeway in case it cannot obtain the waiver.

Can a release be signed instead of a waiver? 

A release can be signed instead of a waiver, which simplifies the process of requesting waivers of subrogation from third parties. In fact, most balanced leases have a mutual release clause. This clause releases the landlord and tenant from claims they have against one another, but only to the point that they are insured or are required to be insured under the terms of the lease. In other words, both parties agree to not sue each other if they have insurance that covers the loss they suffered due to the other party’s action.

Releases have the same effect as waivers of subrogation because the insurer’s rights exist only if the insured has the right. If the tenant gives up a right by way of mutual release, then the insurer automatically loses this right as well. Consider a scenario where a tenant signs a mutual release and a few months later the landlord accidentally destroys the tenant’s premises. The tenant may want to sue the landlord, but, if the tenant’s insurance covers the loss, the tenant and insurer cannot sue the landlord. Rather, the tenant’s insurer will have to pay the tenant for the losses, but it can’t exercise its subrogation rights and step into the tenant’s shoes because the tenant has no shoes!

Cautionary Note

Failure to obtain waivers or insurance may be a breach of the lease, which puts an unadvised tenant in a tough position. What is more, many insurers are now refusing to insure tenants who are required to sign a release. Accordingly, it’s not only prudent to ensure that your tenant and has a full understanding of the insurance provisions, but it’s also prudent to ensure that insurer reviews the entire lease and approves all terms before the tenant is bound.