First enacted in 1872, California's Statute of Frauds declares invalid any agreement authorizing or employing an agent, broker or any other person to purchase or sell real estate unless that agreement is in writing and is signed by the broker's client. Civil Code §1624(a)(4). Although more than 140 years old, the Statute of Frauds is still enforceable in California as illustrated in the recently published opinion in Westside Agency, Inc. v. James Randall, et al. (2016) WESTLAW 7011334. ("Westside Agency case").
In the Westside Agency case, a high end residential real estate brokerage firm based in Beverly Hills, Westside Agency, Inc. ("Westside Agency"), was retained by James and Eleanor Randall (the "Randalls") to purchase an estate in Bel Air. However, the Randalls did not sign a broker commitment. In spite of that, broker Stephen Shapiro of Westside Agency identified a potential property which was listed for $65,000,000 in the Bel Air neighborhood. The listing provided for a 2 percent cooperating broker's commission. The Randalls, aware of the 2 percent commission, asked Shapiro to apply any broker's fee that the Westside Agency would receive towards the purchase price. Shapiro refused. However, Shapiro nevertheless made a $42,000,000 offer on the Bel Air property on behalf of the Randalls (without the benefit of a signed broker agreement). Over the next month, Shapiro and the seller negotiated back and forth with Shapiro finally presenting a new written offer by the Randalls to purchase the Bel Air estate for $45,000,000. The seller indicated it would accept the offer with certain conditions. The Randalls then reached out to their attorney, Richard Meaglia, for his advice. Shapiro continued to work with the seller's broker but the Randalls then advised Shapiro that they were cancelling their offer. No broker agreement was ever executed between Shapiro and the Randalls at the time the deal fell through.
For reasons which are not clear, in February 2015, some three months later, the Randalls made a larger offer, in the amount of $47,000,000, on the same property with Meaglia acting as their broker. Escrow closed a month later with a final purchase price of $46,250,000, which exceeded the purchase price that Shapiro had negotiated in November 2014. A $925,000 cooperating broker's commission was paid at the close of escrow which Meaglia agreed could be applied against the purchase price (it is not clear whether Meaglia received any of the commission).
In April 2015, the Westside Agency sued the Randalls and Meaglia for breach of implied contract, and sued Meaglia for intentional interference with implied contract. A First Amended Complaint was filed which focused on the breach of the implied contract theory. The Trial Court sustained the Demurrer of the Randalls without leave to amend. Leave was granted to Meaglia, but the Westside Agency dismissed and the Trial Court entered a final judgment dismissing the First Amended Complaint against all the defendants.
On appeal, the Westside Agency challenged the Trial Court's dismissal of its breach of implied contract claim arguing, among other things, that the Statute of Frauds did not apply to brokers who do something other than assist with the purchase or sale of real estate and does not apply to disputes between brokers to divide a commission. The Westside Agency also argued estoppel. The Westside Agency also argued the exception for disputes between brokers who are permitted to recover when their principals enter into a written, binding real estate purchase contract that contemplates a commission for the broker. The Westside Agency also argued that its claim against the Randalls was for breach of an implied in fact contract resulting in damage for the disruption of its expectation of a commission.
The Court of Appeal rejected all the arguments of the Westside Agency. The Court of Appeal ruled that Westside Agency had not pled the existence of a signed agreement as required by the Statute of Frauds. The Court appeared to acknowledge that the Randalls may have signed documents which contemplated a commission but noted that the deal which Shapiro negotiated in November 2014 was never accepted by the Randalls and that the deal that went through in February 2015 (with less favorable terms for the Randalls) was the one negotiated by Meaglia.
The Westside Agency case certainly is a harsh result. However, it makes clear that the Statute of Frauds will be enforced in California even though there may be writings that could for the basis for an estoppel argument or implied contract. Having said that, a distinction can at least be made that the deal the Randalls ultimately reached in February 2015 was a different deal than negotiated by the Westside Agency in November 2014 and, perhaps, the outcome might have been different if Meaglia had simply taken over with the Randalls agreeing to the same terms negotiated by the Westside Agency. Nevertheless, it cannot be emphasized enough that the Statute of Frauds dealing with real estate transactions continues to be viable in California and, at least for brokers and agents, no work should commence until and unless there is a signed writing with the client.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.
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