52 Years Since a Landmark in Real Estate Brokerage Commission Law

On December 18, 1967, the Supreme Court decided Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528 (1967). The Court’s 6-0 opinion, authored by Justice Francis, overturned nearly 100 years of New Jersey jurisprudence about when a broker earns a commission payment from a seller.

As Justice Francis stated, in Hinds v. Henry, 36 N.J.L. 328 (Sup. 1873), “the former Supreme Court ruled that when a broker who had been duly authorized by the owner to find a buyer for his property produced a willing and able purchaser who entered into a contract to buy on terms agreeable to the owner, the broker had fulfilled his undertaking and his right to commission from the owner was complete.” Decisions of New Jersey courts, including the highest courts, followed that rule thereafter.

But no case gave “consideration to the matter of the buyer’s financial ability to complete the transaction by paying the agreed price and taking title to the premises. Nothing was said specifically as to whether it was any part of the broker’s obligation to present a financially capable buyer, or whether he had any duty to make such an inquiry of the buyer. Nor was it said that by producing the buyer the broker impliedly represented that he was able, in the financial sense, to perform.”

Other jurisdictions defined an “able” buyer as one who had the financial ability to conclude the transaction. But New Jersey cases after Hinds put the burden on the seller to investigate whether the buyer had the financial ability to close, though the precedents also provided that the seller could include language in the brokerage contract that limited the obligation to pay a commission to the circumstance where the buyer was in fact financially able (assuming that the seller was sufficiently savvy and had the bargaining power to include such a provision).

The Court asked “Is it just to permit a broker to recover commission from an owner simply because he entered into a contract on mutually agreeable terms with a buyer produced by the broker, when it later develops that the buyer cannot or will not complete the transaction by closing the title?” The Court’s answer was “We do not think so. A new and more realistic approach to the problem is necessary.”

The Court stated that the seller’s reasonable expectation is that a buyer whom a broker produces is not merely “a human being who is physically and mentally capable of agreeing to buy the property on mutually satisfactory terms,” but one who “will perform, i.e. he will pay the consideration and accept the deed at the time agreed upon.” Justice Francis quoted at length from an English case and cited cases from Maryland and Rhode Island in support of abrogating the prior rule.

The new rule was that “absent default by the owner, the contract of sale must be performed by the buyer before liability for commission is imposed upon the owner.” And “even if both broker and seller, on execution of the contract of sale, in good faith believe the buyer to be financially able to perform, and it turns out otherwise at the crucial time, the seller cannot be held for commission.”

Finally, the Court stated that brokers would not be allowed to use their superior bargaining power to frustrate the new rule. “[I]n our judgment public policy requires the courts to read into every brokerage agreement or contract of sale a requirement that barring default by the seller, commissions6 shall not be deemed earned against him unless the contract of sale is performed. By the same token, whenever the substantial inequality of bargaining power, position or advantage to which we have adverted appears, a provision to the contrary in an agreement prepared or presented or negotiated or procured by the broker shall be deemed inconsistent with public policy and unenforceable.”

The Court then turned to the question of whether “a real estate broker may sue a purchaser who refuses to carry out his contract with the vendor, even though the broker has agreed to look to the vendor for his commission.” Tanner Associates, Inc. v. Ciraldo, 33 N.J. 51 (1960), had held that “when a prospective buyer solicits a broker to find or to show him property which he might be interested in buying, and the broker finds property satisfactory to him which the owner agrees to sell at the price offered, and the buyer knows the broker will earn commission for the sale from the owner, the law will imply a promise on the part of the buyer to complete the transaction with the owner,” and that if the buyer fails to close without valid reason, he can be liable to the broker for breach of the implied promise.

Citing a legal encyclopedia and decisions from other jurisdictions, the Court held that the Tanner holding was not limited to the facts of that case. Instead, that principle would be broadly applicable.

The Court’s ruling about the obligation of a seller to a broker was revolutionary in 1967. It has since become a standard of our jurisprudence, one that most people would doubt was ever not the law. Ellsworth Dobbs has been cited hundreds of times. It is truly one of the monumental cases in real estate brokerage commission law, a subject in which New Jersey jurisprudence is very rich.