Must All Commission Agreements be in Writing?

The Michigan Court of Appeals recently considered the issue of whether an agreement to pay a real estate commission must be in writing. While the case held that the
broker could maintain a claim based on an oral promise, a recent amendment to
Michigan’s Statute of Frauds may forever bar such an action.

Facts

In 2018, Mr. Manju hired ICONIC Real Estate (“ICONIC”) to assist in
purchasing real estate. ICONIC introduced Manju to the sellers of property in
Ferndale. The parties executed a purchase agreement (the “2018 Agreement”).
The 2018 Agreement stated that Manju would pay ICONIC a six percent (6%)
commission at closing. The 2018 Agreement was subsequently canceled. One
year later an affiliate of Manju executed a second purchase agreement for the purchase of the same property, this time under land contract, with one of the same sellers (the “2019 Agreement”). The 2019 Agreement expressly stated that the parties did not use the services of a real estate broker. The transaction closed and Manju did not pay ICONIC a commission. ICONIC sued, alleging breach of contract and promissory estoppel, based on an oral commission agreement between ICONIC and Manju. Manju countered that ICONIC’s claims were barred by Michigan’s Statute of Frauds.

Legal Analysis

Michigan’s Statute of Frauds states, in part, that an agreement, promise, or contract to pay a commission for or upon the sale of an interest in real estate is void unless it is in writing and signed by the party to be charged. MCL 566.132 (1)(e). The 2018 Agreement would have satisfied the Statute of Frauds, having stated that Manju would pay ICONIC’s six percent (6%) broker commission upon closing. However, the sale never closed, and the 2018 Agreement was rendered null and void. Since there was no longer a signed writing requiring payment of a broker commission, Manja’s promise to pay ICONIC did not comply with the Statute of Frauds.

ICONIC first argued that it was entitled to payment of a commission pursuant to the procuring cause doctrine. The procuring cause doctrine provides that an agent is entitled to recover his or her commission whether or not they personally concluded and completed the sale, it being sufficient that his or her efforts were the procuring cause of the sale. The doctrine protects sales representatives who are terminated by their employers and cut out of future commissions for sales they procured for the company. The doctrine applies where the parties have a signed contract governing the payment of sales commissions, but the contract is silent regarding the payment of commissions post-termination. The procuring cause doctrine requires a valid, signed contract that is simply missing some elements, i.e. payment of post-termination commissions. Therefore, the procuring cause doctrine did not apply.

ICONIC next claimed to be entitled to payment under the theory of promissory estoppel. Promissory estoppel is a judicially created, equitable exception to the legislative Statute of Frauds. The elements of promissory estoppel are: (1) A promise; (2) the party making the promise reasonably should have expected another person to rely on the promise, to act in a definite and substantial manner; (3) that person did, in fact, rely on the promise by acting in accordance with its terms; and (4) the promise must be enforced to avoid injustice.

In other words, even though a contract for payment of a commission is not in a signed writing, it would be inequitable not to enforce the oral promise if the broker acted in reliance on the promise in brokering the sale. Here, ICONIC claims that Manju’s promise to pay a commission induced ICONIC to rely on that promise, by assisting Manju in identifying and then purchasing the Ferndale property.

The Court of Appeal’s Decision

The Court of Appeals concluded that, at the time the cause of action arose, there was a triable factual question whether Manju orally promised to pay ICONIC a broker fee for its services, ICONIC fulfilled its end of the bargain, and Manju breached the obligation to pay ICONIC. Therefore, the Court upheld ICONIC’s right to pursue an action under the doctrine of promissory estoppel.

But this is not the end of the story. On March 17, 2020, the Michigan Legislature enacted a further amendment to the Statute of Frauds. Specifically, the Statute of Frauds now states:

A person shall not bring an action to enforce an agreement, promise, or contract to pay a commission for or upon the sale of an interest in real estate against the owner or purchaser of the real estate unless the agreement, promise, or contract, is in writing signed by the party to be charged. MCL 566.132(3).

The Statute of Frauds previously provided that an agreement to pay a commission for the sale of real estate is void unless the agreement is in a signed writing. Notwithstanding this, Michigan courts have repeatedly carved out an equitable exception to the Statute of Frauds, by enforcing certain oral promises, to avoid achieving an unjust result. In 2020 the Legislature responded by trying to close that “equitable exception” loophole. The Amendment’s legislative history specifically references a 2017 Michigan Court of Appeals case that determined that the Statute of Frauds does not bar a commission claim based on promissory estoppel. That is why the Amendment states that a person shall not bring an action to enforce an oral agreement for the payment of a broker commission.

The Michigan Court of Appeals, in overturning the trial court on the basis that the 2019 Agreement pre-dated enactment of the Amendment, implied, but did not specifically state that, if the same set of facts arose today, the broker could not plead a cause of action under promissory estoppel due to this recent change in Michigan’s Statute of Frauds.

Moral of the Story

If you want to enforce the right to receive payment of a commission, get it in a signed writing.

For further information, contact Gregg A. Nathanson, Esq., an attorney at the law firm of Couzens Lansky, 39395 W. 12 Mile Road, Suite 200, Farmington Hills, Michigan 48331, telephone 248-489-8600 or gregg.nathanson@couzens.com. The information contained herein does not attempt to give specific legal advice. For advice in particular situations, the services of a competent real estate attorney should be obtained. These materials are the exclusive property of Gregg A. Nathanson, Esq., and no reprint or other use of the information contained herein is permitted without Mr. Nathanson’s express prior written authorization.

©2022 Gregg A. Nathanson, Esq.