A listing agreement contains a 'holdover clause' stating that if the property sells within 90 days after expiry to anyone shown the property during the listing period, the brokerage is entitled to commission. The seller lists with a new brokerage immediately after expiry and sells to a buyer who attended an open house during the original listing period. Who is entitled to commission?
Correct Answer
A) Only the original brokerage due to the valid holdover clause
A properly drafted holdover clause protects the original brokerage's commission when they introduced the buyer to the property during the listing period, even if the sale occurs after expiry. Since the buyer attended an open house during the original listing period and the sale occurred within the 90-day holdover period, the original brokerage's introduction was the effective cause of sale, entitling them to commission.
Why This Is the Correct Answer
Option A is correct because the holdover clause creates a valid contractual obligation. The buyer attended an open house during the original listing period, establishing the original brokerage as the effective cause of sale. Since the sale occurred within the 90-day holdover period specified in the listing agreement, the original brokerage's introduction during the listing term entitles them to commission, regardless of which brokerage facilitated the final transaction. This principle protects brokerages' marketing investments and prevents commission avoidance.
Why the Other Options Are Wrong
Option B: Only the new brokerage since they procured the actual sale
The new brokerage procuring the actual sale does not override the original brokerage's prior introduction during the listing period. While the new brokerage may have facilitated the final transaction, commission entitlement is determined by the effective cause of sale principle, not who completes the paperwork. The holdover clause specifically protects against this scenario, ensuring the original brokerage receives compensation for their initial introduction of the buyer to the property.
Option C: Both brokerages are entitled to split the commission equally
Commission splitting is not automatic when holdover clauses apply. The original brokerage's valid holdover clause gives them exclusive entitlement to commission since they were the effective cause of sale through the open house introduction. Unless there's a specific cooperation agreement between brokerages or the listing agreement provides for commission sharing in holdover situations, the original brokerage retains full commission rights under the properly executed holdover provision.
Option D: Neither brokerage, as the seller must pay double commission which invalidates both claims
The seller is not required to pay double commission, and this does not invalidate either claim. The holdover clause is a valid contractual provision that transfers commission obligation from the new listing to the original brokerage when buyers introduced during the original listing period complete purchases within the holdover timeframe. The original brokerage has the superior claim, and the new brokerage would need to seek compensation through other arrangements with their client or the original brokerage.
Deep Analysis of This Contracts & Agreements Question
Holdover clauses are essential protective mechanisms in listing agreements that ensure brokerages receive compensation for their marketing efforts even when sales occur after listing expiry. This question tests understanding of the 'effective cause of sale' principle, which determines commission entitlement based on who first introduced the buyer to the property. The scenario involves competing claims between two brokerages, highlighting the importance of properly drafted holdover provisions. Under Canadian real estate law, when a buyer is introduced to a property during the listing period (through open houses, showings, or marketing materials) and subsequently purchases within the holdover timeframe, the original brokerage maintains commission rights regardless of who facilitates the final transaction. This protects brokerages from sellers who might attempt to circumvent commission obligations by waiting for listing expiry before completing sales with previously introduced buyers.
Background Knowledge for Contracts & Agreements
Holdover clauses are contractual provisions in listing agreements that extend a brokerage's commission rights for a specified period after listing expiry when buyers introduced during the listing period complete purchases. The 'effective cause of sale' principle determines commission entitlement based on who first brought the buyer and property together. Under provincial real estate legislation like TRESA (Ontario) and RESA (Alberta), these clauses must be clearly disclosed and agreed upon. Holdover periods typically range from 30-180 days and protect brokerages' marketing investments while preventing commission avoidance schemes where sellers wait for expiry before completing sales with previously introduced buyers.
Memory Technique
The HOLD PrincipleHOLD: Holdover clauses Override Later Dealings. Think of a brokerage 'holding onto' their commission rights like holding a winning lottery ticket - even if someone else cashes it in later, the original ticket holder keeps the prize. The brokerage that first introduced the buyer 'holds' the commission rights through the holdover period, regardless of who completes the final sale.
When you see holdover clause questions, remember HOLD - ask yourself who first introduced the buyer during the original listing period. That brokerage 'holds' the commission rights if the sale occurs within the holdover timeframe, overriding any later dealings with new brokerages.
Exam Tip for Contracts & Agreements
For holdover questions, identify: (1) Was the buyer introduced during the original listing period? (2) Did the sale occur within the holdover timeframe? (3) Is the holdover clause valid? If all three are yes, the original brokerage gets commission regardless of who completed the sale.
Real World Application in Contracts & Agreements
A homeowner lists with Brokerage A for six months. During this period, potential buyers attend open houses and receive marketing materials. When the listing expires, the seller immediately lists with Brokerage B at a lower commission rate. Two weeks later, a couple who attended Brokerage A's open house contacts the seller directly and purchases the property through Brokerage B. Despite Brokerage B handling the paperwork, Brokerage A's holdover clause entitles them to commission since they originally introduced the buyers during their listing period.
Common Mistakes to Avoid on Contracts & Agreements Questions
- •Assuming the brokerage completing the sale automatically gets commission
- •Thinking holdover clauses are invalid or unenforceable
- •Believing sellers must pay double commission in holdover situations
Key Terms
More Contracts & Agreements Questions
What is the primary purpose of an Agreement of Purchase and Sale (APS) in a real estate transaction?
In a listing agreement, what does the term 'holdover period' refer to?
Which of the following is NOT typically considered an essential element for a valid contract under Canadian common law?
When can a conditional offer become unconditional in a real estate transaction?
A buyer submits an offer with a financing condition that expires at 11:59 PM on Friday. The buyer's mortgage application is approved at 10:30 AM on Saturday. What is the legal status of the offer?
- → In Ontario, what is the significance of the 'irrevocable' period in an Agreement of Purchase and Sale?
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A listing agreement contains a clause stating 'commission is earned when a ready, willing, and able buyer is procured.' The seller refuses to complete the sale after such a buyer is found, claiming they changed their mind. What are the agent's rights regarding commission?
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