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Michigan Supreme Court Finds Oral Commission Agreement May Be Enforceable

By Gregg A. Nathanson, Esq.

The Michigan Supreme Court recently confirmed that the statute of frauds does not bar a real estate broker’s commission claim based upon the equitable doctrine of promissory estoppel.

The Statute of Frauds

The Michigan State Legislature has determined that it is good public policy to require the parties to a transaction to put the contract in writing, and sign the contract, in order for the contract to be enforceable. This generally means certain oral contracts will not be enforced. The Michigan statute of frauds addresses real estate broker commissions. It states:

In the following cases an agreement, contract, or promise is void unless that agreement, contract, or promise, or a note or memorandum of the agreement, contract, or promise is in writing and signed with an authorized signature by the party to be charged with the agreement, contract, or promise … (an agreement, promise or contract to pay a commission for or upon the sale of an interest in real estate.)

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 statute of frauds is an example. One court noted, “the role of the judiciary is to apply the statute of frauds as written, without second guessing the wisdom of the Legislature.”

Notwithstanding this, under certain circumstances, equitable doctrines such as promissory estoppel have developed to avoid the arbitrary and unjust results required by an overly mechanistic application of the statute of frauds. Some courts have refused to strictly enforce the statute of frauds because, based upon the facts before them, they determine that 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 should have expected the promise to cause the party relying on the promise, to act in a definite and substantial manner; (3) that person did in fact rely on the promise by acting in accordance with its terms; (4) the promise must be enforced to avoid injustice. In other words, even though a contract for payment of 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 Facts

North American Brokers, LLC and Mark Ratliff (“Brokers”) worked with St. John Providence to develop a concept that required a particular type of property. The Brokers believed that the Latson School property, which 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. Instead of filing an answer to the complaint, Howell Public Schools immediately filed a motion for summary disposition to dismiss the action, arguing that the statute of frauds and governmental immunity barred the Brokers’ claims

What Did the Supreme Court Decide?

The Michigan Supreme Court decided the doctrine of promissory estoppel remains a viable equitable exception to the statute of frauds. The for-sale sign on the Latson 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. The Michigan Supreme Court concluded the Brokers did not need a signed writing in order to argue they are entitled to receive a commission under the equities of the facts presented.

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 still 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. In any event, always obtain a signed affidavit and lien waiver from all brokers receiving a commission at closing.