An Iowa appellate court has considered whether a broker could collect a commission when he failed to enter into a written listing agreement with the seller.

Jeffrey Sisson (“Seller”) owned a bar/restaurant that he was interested in selling. He contacted Larry Stewart (“Broker”), a licensed real estate broker, about selling his business. The Seller did not want to have his business listed for sale because he thought it would hurt his customer base. Instead, he orally agreed to pay the Broker a commission based on a percentage of the sale price if the Broker found a buyer. The parties never entered into a written agreement.

Meanwhile, Michael Waller (“Buyer”) contacted the Seller about his interest in purchasing the property. As he considered purchasing the property, the Buyer asked the Broker to show him other properties and he also requested financial information about the Seller’s business from the Broker. The Broker had the Buyer sign a nondisclosure agreement so that the Broker could give him financial information related to the property. The Broker was not aware of the Buyer’s prior interest in purchasing the property.

The Seller then sold his business to the Buyer. The Seller refused to pay the Broker a commission from the sale. The Broker filed a lawsuit seeking payment of the commission and also made a variety of other allegations against the Seller, including a constitutional challenge to the state’s regulations requiring a written listing agreement.

The trial court entered judgment in favor of the Seller, ruling that the Broker’s claims were barred by a state regulation making oral agreements unenforceable. The Broker appealed, and the state’s highest court sent the case back to the trial court for further proceedings. The trial court ruled that written brokerage agreements were required under state law in order to collect a commission. The Broker again appealed.

The Iowa Court of Appeals affirmed the trial court. The court first looked at the relevant provisions of Iowa law. The Iowa Real Estate Commission has published two administrative regulations relevant to the Broker’s claims. First, rule 193E-1.23 requires that all listing agreements must be in writing and also imposes certain requirements on the content of the listing agreement, such as the terms and conditions of the prospective sale like the list price. Second, rule 193E-1.42 requires that brokerage agreements must be reduced to a writing. The rules define a brokerage agreement as an agreement between a broker and a client which sets forth the brokerage services to be provided to the client.

The court ruled that oral brokerage agreements are not invalid but unenforceable if the client objects to the alleged oral agreement. The court determined that the rule requiring a writing is analogous to the Statute of Frauds requirements for written real estate purchase contracts, serving to protect consumers from multiple commission claims. The court did not accept argument that the Broker should receive a commission because the Seller admitted to entering into the oral agreement with the Broker, finding that the facts of this case did not support the creation of such an exception.

Next, the court considered the constitutional challenge raised by the Broker. The Broker alleged that the state’s real estate commission exceeded its authority in enacting its rules, and also violated due process and the rules that constituted a taking. The court found that the commission’s rules had a “strong presumption of constitutionality”, and the commission had stated that it had enacted these rules to protect the public, standardize the real estate process, and establish fair dealing between the parties. The court determined that the rules served a legitimate governmental interest and so rejected the challenge by the Broker. Therefore, the court affirmed the trial court.

Stewart v. Sisson, No. 07-2104, 2009 WL 775440 (Iowa Ct. App. Mar. 26, 2009). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].

Editor’s Note: Special thanks to Paul McLaughlin, General Counsel for the Iowa Association of REALTORS®, for alerting NAR Legal Affairs to this decision.