The Holdover Clause; What Does It Mean For A Private Home Seller?

Is the Holdover Clause a gun to your head?

The nature of our business has us talking to quite a few people that are unhappy with their current situation selling with a real estate agent.  I am sure you have seen the frustrated home seller before; sometime they go through 3 or 4 different real estate signs before they sell.  The most common question we get from people approaching the end of their listing agreement with a real estate agent is "How does the holdover clause work?"  So many people just gloss over their listing contract with their realtor at the time of listing because they just want to get it on the market and "all the contracts are the same."  As they approach the end of their listing contract they start to delve into what they signed and can't believe that not only were they stuck with their agent for 90 days from the start but now they have a 90 day holdover clause where they may have to pay them as well!

I will explain to you in basic English what the holdover clause is and how they work from my personal understanding.  I must first say, I am not a lawyer and this does not represent legal advice. Any questions you may have regarding a legal contract you are best to talk with your lawyer for a clear understanding. If you don't have a lawyer you could always contact one of our legal partners like Teixeira Law in Cambridge.

The typical misunderstanding around the holdover clause is that you cannot sell your home for a specified amount of time without paying the agent commission.  This is not the case. The holdover clause was designed  to protect agents from being cheated out of their (high) commissions.  If you were listed with an agent and someone came in and said "Once your listing is done; sell the house to me and we can split the commissions. Drop the price by half the commission and we both win." The holdover clause keeps this from happening. But if your agent has done very little for you, except maybe tell you to lower your price, the holdover does not restrict you from selling your home without them once the listing is up. It just stops you from selling it to someone that they or another agent "worked hard" at getting into your house without paying them what you had previously agreed to.

So here is a typical holdover clause as laid out in an OREA Listing Agreement:

The Seller further agrees to pay such commission as calculated above if an agreement to purchase is agreed to or accepted by the Seller or anyone on the Seller’s behalf within............................. days after the expiration of the Listing Period (Holdover Period), so long as such agreement is with anyone who was introduced to the Property from any source whatsoever during the Listing Period or shown the Property during the Listing Period.
If, however, the offer for the purchase of the Property is pursuant to a new agreement in writing to pay commission to another registered real estate brokerage, the Seller’s liability for commission shall be reduced by the amount paid by the Seller under the new agreement.
The Seller further agrees to pay such commission as calculated above even if the transaction contemplated by an agreement to purchase agreed to or accepted by the Seller or anyone on the Seller’s behalf is not completed, if such non-completion is owing or attributable to the Seller’s default or neglect, said commission to be payable on the date set for completion of the purchase of the Property.
Any deposit in respect of any agreement where the transaction has been completed shall first be applied to reduce the commission payable. Should such amounts paid to the Listing Brokerage from the deposit or by the Seller’s solicitor not be sufficient, the Seller shall be liable to pay to the Listing Brokerage on demand, any deficiency in commission and taxes owing on such commission.

Let's break it down into chunks to better understand it.

The Holdover Period
The holdover period is the length of time that you are bound by.  This is typically 90 days but I have seen them as little as 30 days and as long as 180 days (6 months).

Who is Covered
This is a critical part.  The holdover clause is only binding on people that were introduced to your property while it was listed with your agent.  The simple way to understand this is if your home was shown to someone while it was listed and you sell it to them during the holdover period you owe commission to your agent.  If you sell it to someone that first saw it while listed on PropertyGuys.com then you do not owe any commissions.  If you want to really cover your butt, contact your lawyer and ask about including an amendment to your agreement to purchase that has the buyer acknowledges that they were not introduced to your home while it was listed by a brokerage nor do you owe any consideration financial or otherwise to a real estate agent or brokerage regarding the purchase. In the event that consideration is due to any party - it is agreed that it becomes the sole responsibility of the buyer.

How Much Commission is Owed
As the seller if you enter into a purchase agreement with someone who had come through while you were listed with the agent you are required to pay the full amount as was agreed to.  The only way that would be reduced would be if you had paid another agent an amount in the transaction. So as an example if you had agreed to 5% in your listing and then when you sold it privately to a buyer with an agent and that agent got 2% you would be required to pay 3% (5% - 2%) to your former listing agent.

The Ugly Part
If you sign an agreement to purchase with a buyer and later find out they were through the house so you cancel the agreement, you could still be required to pay the commission.  I assume this is in place for people that were caught with their hand in the cookie jar.  It does not take into account that if you were not aware that the buyer was previously introduced.  This is another good reason to have the above amendment added to your agreement to purchase.

Monies Held in Trust
This just says any monies held in trust (deposit) shall be used first and then any additional monies owed would need to be paid directly to the brokerage at their request.

Bottom line is the listing agreement is a legal contract.  Any questions you have surrounding the agreement or any clauses within it you should talk to your lawyer, not the other party you are entered into the contract with!

M