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Court Finds Oral Commission Agreement May Be Enforceable

Apr 4, 2017

Gregg A. Nathanson, Esq.

The Michigan Court of Appeals recently determined that the statute of frauds does not bar a commission claim based upon promissory estoppel.

The Facts

Brokers worked with St. John Providence to develop a concept that required a particular type of property. The Brokers believed that a property Howell Public Schools had for sale, suited their concept. The property had a for-sale sign that indicated it was “broker protected.” The Brokers approached St. John Providence about the property. Howell Public Schools and St. John Providence eventually reached a purchase agreement through another real estate agency. In the end, the Brokers received no commission.

The Brokers sued Howell Public Schools and St. John Providence, alleging a variety of claims, including a count of promissory estoppel. Howell Public Schools filed a motion to dismiss the action, arguing that the statute of frauds barred the Brokers’ claims.

The Statute of Frauds

A statute of frauds is a statute passed by the Michigan State Legislature, that requires certain contracts to be in writing, and signed by the parties who are to be bound by them, in order to be enforceable. One such contract is a real estate broker commission agreement.

When Will Courts Refuse to Strictly Enforce the Statute of Frauds?

As a general rule, the Legislature passes laws, and the courts interpret those laws.
The Michigan Supreme Court has ruled that some courts may refuse to strictly enforce the statute of frauds because, based upon the facts before them, it would be inequitable to do so.

What is Promissory Estoppel?

Promissory estoppel is a judicially created, equitable exception to the Legislative statute of frauds. The elements of promissory estoppel are: (1) a promise; (2) the party making the promise expects the other party to rely on the promise; (3) the other party does rely on the promise by acting in a certain manner; (4) the promise must be enforced to avoid injustice.

In other words, even though a contract promising to pay a commission is not in a signed writing, it would be inequitable and unfair not to enforce the promise if it induced conduct by the broker who relied upon the promise. The for-sale sign on the school property was not a signed writing for the purposes of the statute of frauds. However, the Brokers alleged that the “broker protected” sign was a promise that induced them to cultivate St. John Providence as a buyer of the property and, based upon the doctrine of promissory estoppel, Brokers should be entitled to a commission.

What Did the Court Decide?

The Michigan Appellate Court agreed with the Brokers and reluctantly applied the judicially created promissory estoppel exception to the statute of frauds. The Court felt bound to follow decisions of the Michigan Supreme Court, and decided that the Brokers were entitled to pursue their promissory estoppel claim at the trial court level.

In a remarkable footnote to its holding, the Appellate Court stated:

While we acknowledge that our opinion reaches the correct result under our present legal framework, it is the wrong result. We urge the Michigan Supreme Court to grant leave to address the issue presented in this case. The judicially created doctrine of promissory estoppel, as applied to the facts of this case, subsumes the statute of frauds and makes the statute of frauds irrelevant.

Takeaway

As a general rule, the Michigan statute of frauds provides that an agreement to pay a real estate broker commission is void, unless it is in writing and signed by the party promising payment. While the judicially created promissory estoppel exception to the statute of frauds persists, best practice and law requires all real estate commission agreements to be in a signed writing. Expecting that an oral promise to pay a real estate commission will be upheld by a court, is a risky proposition.

The information contained herein does not attempt to give specific legal advice. For advice in particular situations, the services of a competent real estate attorney should be obtained. These materials are the exclusive property of Gregg A. Nathanson, Esq., and no reprint or other use of the information contained herein is permitted without Mr. Nathanson’s express prior written authorization. Gregg Nathanson may be contacted by email: gregg.nathanson@couzens.com, telephone 248-489-8600, or regular mail: Couzens Lansky, 39395 W. 12 Mile, Suite 200, Farmington Hills, Michigan 48331.©

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