A broker’s entitlement to a fee according to the Law on Real Estate Brokers, 5756-1996 (hereinafter: “the Law“) is conditional upon the existence of several conditions, including: a license to engage in brokerage, including compliance with all the conditions for its receipt; Drafting a written document of an order for real estate brokerage services; including specific details in that document; and of course the fundamental and frequent condition regarding the broker being the effective factor in the transaction (sale or rental)[1].
However, although a broker has met the formal requirements of the law and served as the effective agent in the transaction, there are other factors that have a decisive effect on the broker’s entitlement to fees.
The obligations applicable to a broker
Among the other obligations that apply to the broker in the contact with his client, we can name section 8 of the Law which states that a broker must act faithfully, fairly and in an acceptable manner, and provide his client with any information he has on a material matter concerning the asset that is the subject matter of the brokerage transaction. Section 10 of the Law prohibits a broker from providing brokerage services in a real estate transaction if he has a personal interest in the real estate or the transaction, unless he has disclosed this interest and obtained the client’s written consent.
The Brokers’ Law establishes specific requirements regarding the level of loyalty and disclosure that a broker must have towards his client, and it is clear that a broker who fails to meet them bears the risk of his fees. At the same time, the obligations that exist in the general law are not the same in scope as the obligations in the law of brokers, and the question arises, what is the relationship between them? For example, in the case where the broker met the requirements of the specific law but not those of the general law.
The ruling in the Prosperity case[2]
The facts of the case
In this case, the owner of the real estate signed an order for brokerage services with the broker regarding the building he owns, when on the brokerage agreement it was specifically stated that no exclusivity would be granted and that the brokerage fee for these services would be 1% plus VAT (hereinafter: “the First Brokerage Agreement“). It was also stated in the Agreement that regarding this asset, negotiations had been conducted in the past with specific interested parties and if the asset is sold to them, no brokerage fees will be paid.
At the same time, the owner’s representative also corresponded with another party (hereinafter: “the Buyer”) regarding this asset and gave him details about the asset. The Buyer refused to purchase the asset at this stage under the existing conditions because according to him the existing tenant pays low rental fees. A few months after the owner signed a Brokerage Agreement with the broker, she herself interested the buyer in the transaction, and he replied that the property had already been presented to him by the owner, but he had no interest in the transaction due to the low rents that were being paid. At the end of the day, the Buyer purchased the property, ten months after the property had been presented by the owner, and this after the broker found tenants for it who pay significantly higher rental fees.
The negotiation was conducted when the broker hid the Buyer’s identity from the owner and indicated to him that this was a Buyer he did not know, despite knowing well that the owner and the Buyer had exchanged information in the past regarding the asset. A few hours before signing the sales agreement, another brokerage agreement was signed between the owner and the broker, in which he undertook to pay a brokerage fee at the rate of 2% plus VAT (hereinafter: “the Second Brokerage Agreement”).
It was only during the signing of the sales agreement that the owner and the Buyer met and then the owner learned that in fact the Buyer first received the details of the asset directly from him and not from the broker. It should also be noted that at the end of the day the sales agreement was not carried out, and the parties agreed on an agreed compensation.
The owner refused to pay the demand for brokerage fees both because the Buyer did not receive the details of the asset from the broker and because she misled him by hiding the Buyer’s identity from him. For her part, the broker claimed that she was the effective agent in the transaction and claimed her right to a brokerage fee.
The district court ruling
The ruling of the district court stated that the broker was the “effective factor” that led to the engagement, and she was the one who created the economic viability of the transaction (while locating tenants willing to pay particularly high rents). Nevertheless, her claim was rejected due to the determination that she misled the owner both regarding the identity of the Buyer by telling the owner that he did not know him, and by not revealing to the owner that the Buyer had indicated to her that the property had already been shown to him earlier.
It was determined that if the buyer’s identity had been revealed ahead of time, the owner would not have agreed to pay a brokerage fee of 2% and thus the broker withheld from the owner relevant data regarding the brokerage fee. It was further determined that the owner has the right to cancel the Second Brokerage Agreement due to deception as stipulated in section 15 of the Contracts Law[3].
Supreme Court ruling
At the appeals instance, the broker argued that the appellant’s disclosure obligations should not be examined according to Section 15 of the Law of Contracts, but in relation to the Broker’s law only, since it is a special and late law. Since according to the Brokers’ law the obligation is to provide essential information “relating to the asset”, rather than the identity of the party entering into the transaction, there is nothing wrong with her conduct. In addition, she claimed that even if she had violated the obligation of disclosure, the result of the violation must be examined according to the Brokers’ Law and not according to the Law of Contracts, and there is no reason to deny the brokerage fees based on the determination that she was the effective factor in the transaction. It was further argued that it cannot be ignored that the First Brokage Agreement was signed between the parties even before the broker met the Buyer and therefore remains valid.
The Supreme Court ratified the ruling of the District Court according to which the owner was misled by the broker as to the identity of the Buyer and thus he had the right to cancel the Second Brokerage Agreement.
The court even rejected the claims of the broker regarding the non-applicability of the obligations under the general law in light of the existence of a specific law, and stated that the existence of obligations under a specific law does not exclude the obligations from the general law, and in the absence of any other intention implied by the specific law, then these obligations will apply alongside the obligations under the general law and do not come in their place.
However, the court ruled that since the Second Brokerage Agreement was legally cancelled, the benefit received pursuant to it must be returned, either in kind or in the benefit value. In the present case, the Court ruled that in accordance with the determination that the brokerage services were provided by the broker and she served as the effective factor in the transaction, the owner received the main consideration. Failure to oblige the owner to return the value of the service he received will therefore lead to his unjust enrichment at the expense of the broker.
In determining the restitution rate, one must act according to the principle of preventing unlawful enrichment. It was ruled that the correct way to assess the proper fee is to use previous contracts made between the parties or the existing practice in large-scale real estate transactions. In this case, both ways lead to the same result – a proper fee at the rate of 1%. In addition, even ignoring the assessment of the restitution value, the cancellation of the Second Brokerage Agreement does not transfer the parties to an empty space but to the contractual framework that existed before that, which is the First Brokage Agreement.
In conclusion
Even though a broker meets the formal requirements that entitle him to a fee for the brokerage services he provided, and even if he fulfills his obligations according to the Brokers’ Law, he is still subject to the limitations applicable under the general law. Violation of these obligations may deprive the broker of his fees or reduce them.
[1] Section 14(a)(3) states that “a real estate broker will be entitled to brokerage fees from a client if all of these are met…” he was the effective factor that resulted in the parties entering into a binding agreement.
[2] Civil appeal 214/23 Prosperity Sal Real Estate Investment – Consulting investments, Property, Marketing Ltd. and others v. the building at 21 Jaffa Street Jerusalem Ltd.
[3] The Contracts Law (General Part), 5733-1973 (hereinafter: “The Contracts Law“)
For further information please contact:
Chen Weinstein, Adv. Ofer Inbar, Adv.
Office: 03-691-6600 Office: 03-691-6600
E-mail: chen@ekw.co.il E-mail: ofer@ekw.co.il