Recent Wisconsin Supreme Court Decision Clarifies “Substantial Variance” Standard Impacting Real Estate Brokers and Sellers.
On May 10, 2018, the Wisconsin Supreme Court released a game changing decision in McNally v. Capital Cartage, Inc., 2018 WI 46 impacting the potential commission for real estate brokers as well as the obligations of brokers and sellers. The Court held that a substantial variance between a full price offer and the listing contract can be declared when the listing contract does not address terms included in the offer. The case is a reminder to real estate brokers to consider addressing terms in addition to price in the listing contract to avoid losing a commission on a full-price offer. The case also highlights the importance of an owner providing a written statement of reasons when he or she elects to reject an offer at or above the listing price because it contains terms that are not addressed by the listing contract.
Wisconsin law generally requires a seller to call the attention of the broker to minor variances between the other terms of a full price offer and the listing contract. If a seller rejects an offer without explaining why, the seller runs the risk of a court deciding that the variances were insubstantial and therefore waived and the seller owes a commission but still has a property to sell. Where the variance is “substantial,” a seller has no duty to point out the variance to the broker in rejecting the offer but rejecting a full-price offer without explaining may lead to a lawsuit as it did in McNally.
The basic facts in the McNally case are as follows. Real Estate Broker Mark McNally (“McNally”) and Mary Hermanson (“Hermanson”) one of the owners of Cartage Capital, Inc. (“Cartage”) executed a WB-6 Business Listing Contract (“Listing Contract”) for the sale of a moving and storage business and real estate. The asking price in the Listing Contract was $1.2 million. The Listing Contract provided in part that:
Seller shall pay Broker’s commission, which shall be earned if, during the term of this Listing . . .[a]n offer to purchase is procured for the Business or included property by the Broker, by Seller, or by any other person, at the price and on substantially the terms set forth in this Listing and the standard provisions of the current [state form offer to purchase.]
Before submitting an offer, Mark Erickson (“Erickson”) presented a Letter of Intent (“LOI”) to Hermanson. Among other terms, the third page of the LOI included the following provision:
Mary and Rolyn Hermanson agree to operate business as normal until acquisition takes place and for Mary to stay on full time and without pay for period outlined in the proposed structure.
The “proposed structure” was described on page 1 of the LOI as “Seller stays on full time for a period of 3 months to ensure proper transition.” Hermanson did not sign the LOI.
Even though the LOI had not been signed, Erickson submitted an Offer to Purchase at the list price of $1.2 million on a WB-16 “Offer to Purchase – Business with Real Estate” (“Offer”). Attached to the Offer was page 3 of the LOI which contained the provision calling for Hermanson to stay on full time and without pay. Erickson did not include page 1 of the LOI which described the “proposed structure” for Hermanson’s post-closing work for Erickson.
Cartage rejected Erickson’s Offer. However, rather than providing a statement of reasons, Cartage wrote McNally a letter stating only that a majority of the shareholders of Cartage had not voted in favor of accepting the Offer.
McNally sued Cartage for his commission under the Listing Contract. Cartage answered and argued that it was not liable for a commission because of substantial variances between the other terms of the Offer and the Listing Contract, including the provision calling for Hermanson to work full time and for free after the closing. A jury ruled in McNally’s favor. Cartage appealed but the Court of Appeals affirmed reasoning that a substantial variance exists between an offer and the listing agreement only when the variance “directly conflicts with express terms in the corresponding listing agreement.”
The Wisconsin Supreme Court granted Cartage’s Petition for Review and reversed. The Court held that there can be a substantial variance between the terms of an offer and a listing contract without there being a direct conflict. The Court then looked at the provision on page 3 of the LOI attached to Erickson’s Offer requiring Hermanson to work full time and without pay after the closing and held, as a matter of law, that the provision constituted a substantial variance from the Listing Contract. Accordingly, the Court set aside the judgment in favor of McNally for his commission.
The McNally case offers several lessons in the interest of mitigating the risk of litigation and safeguarding your interests should litigation ensue. When appropriate, real estate brokers should consider addressing terms in addition to price in the listing contract. For example, in the commercial context, the Listing Contract could address acceptable time periods for due diligence and financing contingencies, earnest money and other terms that the broker thinks could come into play. The case also highlights the fact that the decision by a broker to file a lawsuit for a commission based upon a full-price offer that was rejected is not one to be made lightly if all the material terms of the offer are not addressed by the listing agreement.
For sellers of real estate, the case illustrates the risk of rejecting a full-price offer without making a contemporaneous written record of why the offer was rejected. One cannot help but wonder if the McNally litigation might have been avoided if Cartage had provided McNally with a written statement of reasons explaining why Erickson’s full price Offer had been rejected.
If you have any questions regarding this article, please contact your Davis & Kuelthau attorney, the author noted above or our Real Estate practice co-chairs linked here.