Most seasoned real estate brokers and sales agents have learned the cardinal rule of their profession: PUT EVERYTHING IN WRITING. Whenever they adhere to this requirement, they are pretty much assured they will get paid their real estate commission. When they don’t; disaster is pretty much their fate. The reason for this dates back to an old English law from 1677 when the English Parliament enacted “An Act for the Prevention of Frauds and Perjuries,” with became known as the Statute of Frauds. In 1872, it was codified in California as section 1624 of the California Civil Code, and has been amended numerous times, most recently in 2015.
The Statute of Frauds requires that certain types of contracts must be in writing. While many types of contracts are listed, the key one here is the contract involving the purchase or sale of real property.
Human beings like to work together. If they are friends, come from the same town or country, have worked together for many years and/or just have done things (business or otherwise) together, they often feel it is rude to insist that each party sign a contract to buy and develop land. Sound familiar? Unfortunately, it is one of the biggest human failings clogging our courts today.
Enter two men who worked together as sales agent and client for many years. The agent and the client were from the same part of Russia, and both immigrated to the United States some 40+ years ago. One, who’s English was very poor and who had no formal schooling, became a contractor, while the other, who was educated, became a real estate broker and later worked only as a sales agent. For 15 years, the agent located single family residences for the contractor, who bought them and later sold them, generating a commission for the sales agent. Everything worked out very well, everybody made money and their friendship grew.
After 15 years of the contractor buying houses on his own, he and the sales agent decided to partner on properties. The agent would buy the properties, the contractor would fix them up and the agent would finance would finance the purchases through a hard money lender. The sales agent would list and sell the rehabbed house and would get a commission. Once the lender was repaid, the contractor was paid for his labor and materials and the sales agent was paid their commissions, at that point, if there were any funds left, then the profit was split 50-50. The two Russian partners had great success with this arrangement on 10 houses over a seven year period. There was only one problem: they never wrote down the terms of the partnership agreement.
Despite the success, the contactor, who never had good credit, had to come up with about 30% of the total purchase prices and began to resent it. The sales agent, who had good credit, was able to finance 70% of the purchase price on each property through hard money loans. Both partners repaid the hard money loans equally.
On the last partnership house, the contractor complained to the sales agent and escrow that he did not have to pay ½ of the hard money loan interest. In fact, he went to the agent’s business office and complained loudly to all there that he had been defrauded, cheated and lied to. After this last deal closed, despite the contractor’s theatrics, he sued the agent claiming fraud, breach of contract, and breach of fiduciary duty on every one of the houses they had partnered on for the previous seven years.
What happened is predictable, if not a bit deranged. The friendship torpedoed, anger and resentment replaced reason, and lawyer fees ate up much of their earlier profits. The contractor wrote nasty notes to the sales agent in Russian and gave a deposition in Russian, though answering some questions in English. He was angry that he hadn’t made a better deal saying he trusted the sales agent who had tricked him and betrayed him. Yet, all the while the contractor confirmed he understood English, knew the lender had to be repaid, and approved the escrow disbursement of cash to the sellers.
The judges who heard parts of this case and tried to mediate it, threw up their hands. The sales agent lamented not putting their understanding in writing and kicked himself for trusting the contractor because of their foreign bond. In the end, the contractor lost his lawsuit and now carries the Great Russian “Bear of Hatred” for his former partner. The Russian sales agent/broker, shaking his head at why profit created no joy for his partner, decided to retire to enjoy his years of success and play with his grandchildren. The lesson here is, put everything in writing, even when you don’t have to.