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Dr. Volker and Eva Brandt ("Owners") owned adjacent oceanfront lots. When the property was condemned due to erosion, the Owners decided to find another property. The Owners met with real estate salesperson Charles Rocknak ("Salesperson") of Resort Realty ("Brokerage") to discuss finding a replacement property.
In September 1997, the Owners and the Salesperson entered into a six-month listing agreement with a listing price of $450,000. The agreement contained a sixty day "protection period", which allowed the Brokerage to recover a commission if a party whom they introduced to the property purchased the property within this time period. The agreement also stated that it was "subject to a 1031 Tax Free Exchange". Under Internal Revenue Code §1031, if an individual exchanges business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized. A taxpayer is allowed to postpone the recognition of gain on the sale of qualifying property by the acquisition of replacement real property that will be later identified and purchased within a specific period of time. To learn more about 1031 exchanges, click here.
The Salesperson tried to find a suitable replacement property to help the Owners complete a 1031 exchange. Meanwhile, the Salesperson was also marketing the oceanfront property for sale. Many offers were submitted for the property, including a full price offer by James M. Rose, Jr. ("Buyer"). The Owners did not accept any of the offers, telling the Salesperson they could not accept any offers because they had not identified a suitable replacement property. The Buyer tried to negotiate directly with the Owners, but the Owners told the Buyer that he had to work through the Salesperson. The Buyer then withdrew his offer.
A week before the listing agreement expired, the Salesperson faxed to the Owners another full price offer. The Owners never responded to the Offer, later claiming that the fax was illegible. Upon expiration of the listing agreement, the Salesperson provided the Owners a list of individuals whom he had introduced to the Owners' property during the course of the listing agreement. The Salesperson also demanded a commission payment from the Owners, claiming that he had fulfilled his duties under the listing agreement.
The protection period ended in May 1998 and in July 1998 the Buyer purchased the property for $425,000. The replacement property used to complete the 1031 exchange was held by a corporation that had owned the property during the entire listing period and one of the Owners was the sole shareholder of this corporation. The Brokerage brought a lawsuit seeking payment of the commission, and the trial court determined that the Owners had conspired with the Buyer to avoid payment of the commission and so awarded the Brokerage its full commission. The Owners appealed.
The Court of Appeals of North Carolina affirmed the ruling of the trial court. The first issue considered by the court was whether the Brokerage had produced a ready, willing, and able buyer, despite the agreement's requirement of a 1031 exchange. Under North Carolina law, a broker is entitled to a commission when the broker procures a purchaser who is ready, willing, and able to buy the property at the terms set forth in the listing agreement. Since the Buyer was obviously "ready, willing, and able" to purchase the property, the court determined that the Brokerage had satisfied this requirement.
The next question became whether the 1031 language in the listing agreement established a duty upon the Salesperson to find a replacement property to allow the Owners to complete the exchange. The court found that the 1031 language in the listing agreement merely put the Brokerage on notice that a buyer could be rejected if a suitable replacement property could not be identified. The court dismissed the argument that the 1031 language in the listing agreement imposed any sort of a duty upon the Salesperson, and instead stated that the language required the Owners to employ good faith in identifying a replacement property.
Next, the court considered whether the evidence supported the trial court's ruling that the Buyer and Owners had conspired to deprive the Brokerage of a commission. The court found that a conspiracy requires a showing of an agreement between two or more parties, and there was no evidence of such agreement here. However, the court ruled that the evidence still supported the commission award to the Brokerage. The evidence showed that the Buyer and Owners had many discussions prior to the expiration of the listing agreement, and also that the replacement property used to complete the 1031 exchange had been under the control of the Owners since the early 1990s. The sale agreement between the Buyer and the Owners also contained an indemnity clause that the Buyer would be responsible for all fees, costs, and commissions over $10,000 if the Brokerage tried to collect a commission. Further, the Owners had failed to respond to a full price offer received prior to the expiration of the listing agreement. All of this led the court to conclude that the Owners had acted in bad faith to prevent the identification of a replacement property identified in the listing agreement so as to avoid paying a commission. Thus, the court found that the Brokerage had fulfilled the terms of the listing agreement and so was entitled to recover its commission.
Finally, the court considered whether the Brokerage was the procuring cause of the sale. In North Carolina, a broker is a procuring cause if the broker sets in motion "a series of events which, without break in their continuity, result in the…sale or exchange of the principal's property." The Brokerage introduced the Buyer to the property after the Buyer had noticed the "for sale" sign on the property. This led to the chain of events which ultimately resulted in the Buyer purchasing the property. The court ruled that the Brokerage was the procuring cause of the sale, and so affirmed this ruling by the trial court as well.
Resort Realty of the Outer Banks, Inc., v. Brandt, 593 S.E.2d 404 (N.C. Ct. App. 2004).
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