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Some of the Contract is Illegal, Does it Still Have to be Paid?

Breach of Contract by Simon Offord, Esq.

Many people enter into contracts with individuals or entities who purport to be licensed real estate brokers, without looking into whether they are actually licensed. If you later find out the “agent” was not licensed, do you still have to pay? Unfortunately, the answer is “it depends.”

This issue has been a hot topic in California real estate law in the past few months, with two recent appellate decisions coming to similar rulings.

If you were to take someone to court on this issue, the court will look to the overall, central purpose of the contract, and determine if the central purpose of the contract is “tainted with illegality” (namely, the lack of licensure), or if the tainted provision can be eliminated from the contract. The court will also look to the purpose of the real estate licensing statutes. If the statutes were created to protect against the type of conduct the contract at issue contemplates, the court will likely determine that compensation for the services should be barred.

If the court determines that the contract has several distinct objects, of which one is lawful and at least one is unlawful, the court will likely determine the contract is void to the unlawful object and valid to the rest, thus allowing the unlicensed individual to collect compensation for those acts they were legally entitled to perform.

For example, say you hire and unlicensed Palo Alto property management company to collect rents and maintain and decorate apartment units. The court would likely allow the company to recover compensation for the maintenance and decoration of the units, because no license is required for that, but not for collecting rent and entering into leases, which requires a license.

The above is just an example, and the answer in each situation will be heavily dependent on an analysis of the contract and surrounding facts.

Have you entered into a contract with (or as) an unlicensed real estate professional, and want to better understand your rights? If so, please contact Brewer Offord & Pedersen LLP at (650) 327-2900 and we can assist you in evaluating your contract, and help you understand what rights or responsibilities you may have under that contract.

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