Listing Agreement Exclusion Clauses: Examples and Education

What is a Listing Agreement Exclusion Clause?

Listing agreement exclusion clauses (also sometimes referred to as exclusion provisions) may be found in any purchase and sale agreement; however they are most commonly associated with residential real estate sale contracts and listing agreements directly between principals and real estate licensees.
Listing agreement exclusion clauses permit the seller of residential real estate to exclude one or more specific individuals (or businesses) from the commission or fee otherwise payable to the listing broker/real estate agent if the excluded individuals or businesses purchase the real estate during the term of the listing agreement. The intent of an exclusion clause is to allow the seller to deal directly with his friend (or family member) who happens to hold a real estate license or to allow those individuals to whom the property was sold to purchase the property without paying a broker commission.
The term "Internet listing", refers to a listing (or notice) on a multiple listing service that has been posted on a public website . Typically, Internet listings provide a hyperlink to the selling broker’s (or listing broker) website. Most brokers and real estate agents will not permit any individual to contact them directly if that person is "excluded" from the listing agreement commission structure. Instead, the buyer must work with a real estate broker, who can communicate with the listing broker. Even if the "excluded" buyer decides not to work with a real estate broker, the individual can still negotiate with the seller directly.
Because the typical multiple listing service listing agreement between a broker and a seller will allow the seller to add written terms to the listing agreement, all exclusion clauses might be viewed as a type of written listing agreement modification. Therefore, as long as the listing agreement provides the method to modify the listing, such as in writing, the listing can be modified to exclude certain buyers from paying or earning a commission or fee.

Elements of an Exclusion Clause

An effective exclusion clause typically has several key components. The most important component for a real estate agent is that it must be clear and unambiguous. It must clearly articulate the limitations and exclusions of the agreement. The clause must also clearly excludes any claims the seller may have through the listing agreement. A more ambiguous or potentially exclusionary clause may hinder the real estate agent’s ability to withstand a claim from a seller. It can act as a dangerous, gaping hole in the protections it offers. As we mentioned above, not every scenario is covered in a specific clause, and courts can generally enforce clauses that are reasonable and perform as intended.
The clause should also provide details of the compensation entitlement and specify when the listing agent may recover its commission. If these aspects of the listing agreement are missing or incomplete, the exclusion clause could be considered invalid and unenforceable. For example, if the listed property sells, but the scope of the commission schedule fails to stipulate a minimum commission dollar amount, the listing agent may be out of luck on a potential claim to collect the balance of the stated commission (i.e. if the listing agent is entitled to 6%, but agrees to 4%, the listing agent essentially just settled for less than they may have been entitled to). Clauses anticipating potential exclusions should broadly include not only a listing agent, but also its affiliates. California’s Civil Code section 1089 grants the principal the right to approve but not an obligation to approve the assignment or delegation of agency authorities. As such, a broad clause explicitly covering corporate assignments and/or delegations may prove beneficial in minimizing liability upon all affiliates involved. It is also helpful to include a disclaimer that the listing agent may seek attorneys’ fees recoverable in the event of any disputes arising under a listing agreement.

Common Situations for Including Exclusion Clauses

Exclusion clauses are typically incorporated into listing agreements in two common scenarios. First, if it’s a brand new listing of a home the seller has lived in for many years, the seller may choose to try to keep the identity of the buyer anonymous to their friends and neighbors. The listing agreement will require the listing broker to include the names of everyone who will be showing the home with the right to do so. This does not mean that the people going into the home need to have a very good reason for going in if they have been included in the listing agreement.
The other scenario is when the listing is on investment property (especially when a business is involved). A retail store, shopping center or other commercial endeavor may be for sale, but the owner prefers to keep the sale confidential – for the good of the business. The seller may want to stay in the same location and continue to manage the property until the deal closes. They don’t want their competition to know they’re selling and are only giving serious buyers the opportunity to purchase under those terms and conditions.
It’s common for the listing agreement to have the accepted offer as an attachment or Addendum A to the listing agreement. This is a form of exclusion as well, provided all the parties to the contract are listed.
These and other situations generally call for an exclusion clause to be written into the listing agreement to keep the seller or buyer anonymous.

Sample Listing Agreement Exclusion Clauses

When the real estate agent is the parent, the spouse, the sister, or the friend of the seller, an exclusion clause may be used to limit the scope of any commission that the agent would otherwise be entitled to receive under the listing agreement. A typical clause might exclude any sale resulting from the marketing effort of the real estate agent.
The ban on commission will be less broad if the exclusion clause limits to agents with relationships to the seller. Something like: "All sales to immediate relatives including but not limited to parents, children, spouses, and siblings will not be subject to any commission or fee for services."
If the listing agent is a friend of the seller, he or she might set the commission reasonably high as a means of neutralizing or mitigating the danger that the friendship might cause the agent to go out of his or her way to get a higher price or more favorable terms. In fact, the relationship between the seller as Trustee and the listing agent might be used as an exclusion clause given that agents have received lower commissions when representing a Trustee as seller as compared to when representing a Trust as seller. And the principal, if seen as having special influence over the subagent, might be best served by the higher commission contemplated by a non-exclusionary listing.
Exclusion clauses, of course, work both ways. That is, the seller might want to exclude the agent from selling the property back to her, or to the agent’s associate, or even anyone to whom the agent’s name or marketing effort is shown. For example, the seller’s mother might instruct the seller not to sell to her agent, who is the seller’s friend.

Legal Considerations / Limitations

The enforceability of exclusion clauses in listing agreements depends on the specific circumstances of each case. One important factor is whether the party that drafted the exclusion clause had an unequal bargaining power over the other party. The most common example of this is where the buyer, often the developer, is in a superior position to the seller as the buyer has knowledge about the product, plans to pay for the product and even control over the timing of the payment which places pressure on the seller to agree to whatever the buyer wants especially if there is no competition from any other potential buyers. English law supports the proposition that in these circumstances the buyer had the primary power to dictate the terms of the contract with the result that the court must be more cautious before finding that a contractual obligation was excluded.
Another consideration is the general principle applied by courts that unless there has been reasonable notice of an exclusion clause it will not be binding on the parties. Reasonable notice can be given before or after acceptance but it must be given before performance is completed. It is also satisfied if the person relying on the term can show that it was brought to the attention of the other party in some way before or at the time when the contract was made. In addition , if a contract is renewed by a series of renewals there will be reasonable notice of an exclusion clause if it was brought to the attention of the parties prior to the first contract.
In deciding whether reasonable notice was given, courts will consider whether the exclusion clause was onerous or unusual. If an exclusion clause attempts to exclude liability for negligence it will generally be required to be brought specifically to the attention of the party against whom it is to be enforced through, for example, being typed in red ink in a larger font than the normal type.

Best Practices when Drafting Exclusion Clauses

Best practices when drafting exclusion clauses

• Limit the duration of the exclusion clause. An exclusion clause with a lengthy duration is unlikely to accomplish its purposes. Most properties are sold within fifteen months of the listing agreement, so limiting an exclusion clause to twelve months is usually appropriate.
• Consider exclusion of investment buyers. You should consider whether it is appropriate to exclude buyers that are investing in a property. For example, commercial real estate purchasers are often financially sophisticated companies that ‘flip’ properties after adding value. An exclusion clause that does not capture investors may allow the purchaser and its team to use your services in helping them find other opportunities.
• Make the clause more specific for key target buyers. A general clause that categorically protects your interests usually provides insufficient protection for your practice. You should consider the identities of your best target buyers, and tailor the clause to fit. From another perspective, be careful about using standard exclusion clauses and templates unless you are satisfied that they provide adequate protection.
• Use a standard form. An exclusion clause does not have to be included in the listing agreement, and could be placed as a standalone document. But including it in the listing agreement itself provides a clearer mutual understanding of expectations.
• Give your clients freedom with respect to third parties. A former customer often refers your services to his or her friends. It is often an ‘unethical and unprofessional’ practice to use an exclusion clause to preclude your client from working with these new buyers. Avoid exclusion clauses that prevent clients from working with third parties with which you have no connection.

The Role of Real Estate Professionals

The parties we are discussing in this article – all without exception – were represented by real estate professionals. The real estate agents or brokers did a great job in drafting the listing agreements, we suspect with the intention of creating clear and unambiguous language for their clients and the prospective purchasers to clearly understand.
What is important for you to understand is that it is a huge disservice to a vendor and a purchaser if an agent does not properly explain and clarify the scope and implications of an exclusion clause.
If the matter had been entrusted to a real estate lawyer at the time of the transaction, he or she could have easily made it clear to both purchaser and vendor what the exclusion clause meant, and that such clause or limitation might preclude the purchaser from bringing a claim against the vendor for a defect that was expected of the purchaser to carry out. But, with experience we also know that many real estate lawyers are only retained for the signing of the deal, and not ahead of that when the vendor has committed to list it and the purchaser is visiting open houses .
While a real estate lawyer can assist in setting out a limit to the scope of protection afforded to a vendor, it is more difficult to be on the alert for a claim that a purchaser did not receive the benefit of the warranty that the vendor has just given and that the purchaser clearly paid extra for.
Effectively, the contracts must be read and understood by all parties at the time they are signed. In our experience, what has been lacking in many of the cases we have seen is a clear communication with the parties as to their rights and obligations under the agreement so that the question "did a defect manifest itself post possession/transfer" becomes relevant.
This is a common sense proposition but unfortunately in many transactions there is only the rare instance when the fine print gets read carefully and explained clearly by everyone involved in the sale for all parties to understand. Normally it is only the signing of the Sale Agreement that the purchaser will engage a lawyer, but then it is too late to be cautious.