Holdover Commission Clause #356

By Gerry Neely
B.A., LL.B.

A fairly typical holdover clause in a commercial listing contract entitles the agent to a commission if a sale takes place within six months of the expiration of the listing, if a buyer is introduced to the property by the agent during the listing period. In one case, an additional proviso made the agent's claim dependent upon whether the buyer was named on a list of the parties introduced to the property, which was given to the seller before the expiration of the listing period.

The agent failed to provide this list, but sued for commission, claiming he was the effective cause of sale. The claim was based upon an offer the agent said was made in his presence by a cooperating agent shortly before the end of the listing period. The agent tried to circumvent his failure to provide the list by arguing that the offer was sufficient notice.

The seller denied receiving the offer. Neither agent was able to produce a copy of it, and their evidence as to the presentation of the offer was contradictory. Apart from the lack of evidence, the agent lost because the purpose of the clause is to make the seller aware of the potential continuing liability for commission if the property is sold to someone named on the list.

A widely-used standard commission clause such as this is interpreted to achieve commercial certainty and minimize litigation. This means that even if the agent had been the effective cause, the express terms of the clause would have defeated his claim.1 A similar decision on a different commission clause is discussed in Legally Speaking 339.

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A member asked me to elaborate on a Supreme Court of Canada decision that challenged the Canada Customs and Revenue Agency's test for deciding whether to disallow business losses claimed by a taxpayer.

The case involved an investor who paid $1,000 cash each for four highly-leveraged condominium rental units in a managed rental pool real estate development. While the ten-year projections were for negative cash flow and income tax deductions, the expected rental income and occupation rates were not realized due to higher interest charges and other losses. The tax department disallowed the losses on the basis that, when the taxpayer made the investment, he had no reasonable expectation of profit.

The taxpayer appealed unsuccessfully to the Tax Court of Canada and the Federal Court of Canada. He succeeded in the Supreme Court of Canada when it decided the tax department's test second guessed bona fide commercial decisions of a taxpayer and resulted in "the unfair and arbitrary treatment of taxpayers."

As a result, the Court substituted a two-step test to first decide whether the activity was commercial or personal. If it was commercial, the next step was to determine if the expenses for which a loss is claimed fall within the Income Tax Act. There was no evidence of personal use by the taxpayer. The Court allowed the taxpayer's claim for losses by applying this new test to the investment.2

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