October 18th - 2015

Legal Beat: Brokerage sale leads to debate over turnkey operation

In this transaction, the owner sold her brokerage to buyers who later argued it was supposed to be a turnkey operation – a business already set up and ready to go with no changes needed. A lawsuit ensued.

Legal Beat

In this transaction, the owner sold her brokerage to buyers who later argued it was supposed to be a turnkey operation – a business already set up and ready to go with no changes needed. A lawsuit ensued.

Legal Beat

by Merv Burgard, Q.C

Carol ran a team in a real estate brokerage. She decided to sell that business. She approached her Realtor daughter and others and offered to sell it for between $400,000 and $450,000 without success. She eventually negotiated a deal with Roy and David. The first two draft Asset Purchase Agreements were for $400,000.  Eventually an agreement was signed for $200,000 with deposits of $5,000 and $15,000 and payments of $10,000 quarterly. There was also a “persistency bonus” based on a gross annual income of $366,185. There was an extended ‘no representations or warranties’ clause.  Several Schedules were contemplated, including a Form of Agreements with the agents in the team, but in the end there were in fact no signed agreements with some of the salespeople.

After Roy and David paid one deposit of $5,000 and took over the business, they had issues over commission and management with two of the team’s “Buyer Specialists” (one of whom was Carol’s daughter) who then left. Roy and David complained that this was supposed to be a turnkey operation – a business already set up and ready to go with no modifications needed -- and that Carol had said that these specialists (including her daughter) were happy. There were no signed agreements with them, and, in any event, Roy and David would have changed any existing agreements to their own independent contractor forms, which included an even shorter termination period.

Roy and David later changed their minds about completing the purchase and offered Carol a percentage of profits earned from the team leads. Carol did not agree and sued for the purchase price and a bonus. The judge agreed with Carol that there was a valid and binding agreement. If it was important to the buyers to have written employment contracts with the agents, those buyers should have included that as a provision in the agreement. He did not believe that there was a turnkey operation representation and, in any event, that was not incorporated into the agreement. Roy and David were held responsible for breach of contract, and damages were assessed at $225,000.

Hammer v. Cleeves 2015 ONSC 2547

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MERV’S COMMENTS

Mervin Burgard Q.C.

As Roy himself testified “…It is not possible to become a successful real estate agent by simply showing up. To be successful requires much hard work.” So much for the turnkey argument.

It is almost impossible to keep unhappy agents in a brokerage, whatever the terms of their contracts might say. In any event, Carol’s contracts called for a 30-day notice and Roy and David’s was only for 14 days. This case is another good example of the significance of “no representation” clauses and the importance of including important matters of concern in any agreement.

Does TEAM stand for “Together Everyone Earns More”? If you have a real estate team, be sure to emphasize to everyone on the team the importance of taking the time to spell out contracts. 

Mervin Burgard, Q.C.

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