Brokerage Statutes – Shield Or Sword?

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For some reason, it seems that the business of real estate brokerage is subject to a little more scrutiny than experienced by other businesses. For example, there is a common law principle known as the Statute of Frauds. A book could be written about this aspect of the common law and its subsequent incorporation in most state statutes (written law). We won’t write one today.

Most jurisdictions have some form of a Statute of Frauds, and it appears that all or almost all “derive from the Statute for the Prevention of Frauds and Perjuries passed by [the English] Parliament in 1677.” Despite such a lofty name, some have described these laws as “Statutes to Perpetrate Fraud.”

We aren’t going to assume that all readers already know what this kind of “Statute” covers, so here goes. When someone speaks of the Statute of Frauds, she or he is referring to a law that requires enforceable agreements to be in writings signed by the parties against whom someone wants the agreement enforced. The Statute never applied to all agreements and good quality Swiss cheese doesn’t have as many holes as does the Statute of Frauds.

Today, however, we’re going to write about real estate brokerage commissions, specifically some aspects of the ability of someone to collect one or to sue to collect one.

What’s the connection? Well, as jurisdictions revise their Statutes of Frauds to further reduce their scope of coverage, brokerage agreements still need to be writing (though not always ones signed by the party who would be paying the commission). The law in this regards varies from jurisdiction, but the basic principle seems to be that brokers can’t be trusted and they had better document the commission agreement in writing. In New Jersey, by way of example, to be collectable in the absence of a signed commission agreement, the commission arrangement needs to be in an unobjected-to writing from the broker to the “customer” before the deal takes place.

In fact, when New Jersey made a major revision to its Statute of Frauds, one that eliminated a “core” kind of agreement, one dealing with the sale of real property, it expressly retained the “protection” for dealings with brokers. Here are the words of the New Jersey Law Revision Commission in its comprehensive report that led to a “skinny-down” of New Jersey’s Statute:

The provision regulating contracts with real estate brokers is essentially a consumer protection law. The source statute serves to protect the public from “fraud, incompetence, misinterpretation, sharp or unconscionable practice.” … It also discourages agents or brokers from contracting land sales meant to bind owners, unless owners confer written authority. … By preventing overreaching and misunderstanding, the section aids real estate brokers as well as owners. The same reasons that give this provision continued vitality support its extension into broker contracts unrelated to the sale of real estate: contracts with real estate brokers concerning leases and the transfer of other interests in real property and contracts with business brokers. The Commission recommends retaining and broadening the real estate broker commission provision of the Statute of Frauds and clarifying and simplifying its language.

An uncharitable interpretation is that brokers can’t be trusted. Ruminations disagrees with that charge, but sees it hidden in what the law is thinking.

There is another aspect of protecting the public from “fraud, incompetence, misinterpretation, sharp or unconscionable practice.” In particular, that is the fraud, etc. that might be perpetrated by persons not licensed as brokers. As a general principle, unlicensed persons aren’t permitted to collect real estate commissions and the way this is enforced is by laws that bar unlicensed persons from suing for claimed commissions. “General” is a good word to use because it relieves Ruminations of the burden of researching laws in more than 50 United States jurisdictions. Nonetheless, we feel pretty comfortable in using such a characterization when we write that the bar against commissions goes to referrals, finders’ fees, and things like that.

By way of example, here is how New Jersey law reads:

No person shall engage either directly or indirectly in the business of a real estate broker, broker-salesperson or salesperson, temporarily or otherwise, and no person shall advertise or represent himself as being authorized to act as a real estate broker, broker-salesperson or salesperson, or to engage in any of the activities described in [the text recited by Ruminations below], without being licensed so to do as hereinafter provided.

Who is engaged in the “business of a real estate broker”? Well, under New Jersey law, that is:

a person . . . who, for a fee, commission or other valuable consideration, or by reason of a promise or reasonable expectation thereof . . . offers or attempts to negotiate a sale, exchange, purchase or rental of real estate . . . or solicits for prospective purchasers or assists or directs in the procuring of prospects or the negotiation or closing of any transaction which does or is contemplated to result in the sale, exchange, leasing, renting or auctioning of any real estate . . . .

New Jersey Statutes also expressly require a suing claimant to allege and prove that she or he was a licensed real estate broker at the time the claim arose.

Many other jurisdictions use very similar language, but there are exceptions and that’s why, when it really matters, one has to research the law. For example, we just saw a court decision out of Georgia that introduced us to a little statutory “twist” to the “Not a broker – No commission rule.” By reading that decision (something readers can do by clicking: HERE), we learned that, under Georgia law, certain very passive, occasional “referrers” CAN collect a commission. Here’s the text of that exception (i.e., who CAN collect):

[a]ny person acting as a referral agent who is not involved in the actual negotiations, execution of documents, collection of rent, management of property, or other related activity which involves more than the mere referral of one person to another and who:

(A) Does not receive a fee for such referral from the party being referred;

(B) Does not charge an advance fee; and

(C) Does not act as a referral agent in more than three transactions per year.

A lower court ruled that, as a matter of law, a property seller who, in writing, promised a woman that she would get a fee if she found a real estate buyer, did not have to pay her because she was not a licensed broker. Some facts might be in dispute, but there didn’t appear to be any disagreement that the woman delivered a buyer and that a sale took place. The Georgia Court of Appeals seems to have read Georgia Statutes a bit more closely than did the lower court because it was its written decision that informed us of the “casual, uninvolved referrer” exception (above) to the general the “Not a broker – No commission rule.”

That “surprise” exception reminded us of a 10- year old court decision by a New Jersey intermediate appellate court. Simply stated, New Jersey gives very, very, very short shrift to commission claims made by unlicensed persons. [It also gives only a single “very” short shrift to quantum meruit claims by licensed brokers. Quantum meruit damages means: “a reasonable sum of money to be paid for services rendered or work done when the amount due is not stipulated in a legally enforceable contract.” We can provide any requesting readers with a copy of an unpublished New Jersey court decision granting such damages. Just ask us.]

The story in the 10- year old decision (which decision can be seen by clicking: HERE) just begs for paying a commission. So, don’t think the court opened up an interstate highway for this type of claim. It is a foot trail for small animals. Here is the essence of what went on.

A professional developer set its designs on “one of the largest and most prominent pieces of remaining open land in” a well-developed and affluent part of the state. The land was owned by an old-line, out of state, real estate family, one notoriously known for marching to its own drummer. For years, the developer tried, but failed, to get the time of day from the property owner. Then, serendipitously, it was introduced to the personal chef of the owning family’s decision maker. The developer orally promised to pay a specific commission to that chef (and family confidant) if the property could be acquired.

The developer’s approach worked. The personal chef brought the marriage about. The developer bought the property and went on to build something in the neighborhood of 611 townhouses, apartment units, and high-rises, 100,000 square feet of retail space, 90,000 square feet of office space, and a 19 story hotel.

In gratitude, it refused to pay the promised commission. When sued, it asserted that New Jersey law barred such suits by persons lacking a broker’s license. The lower court read the statute and ruled, mechanically and probably correctly absent some overarching factor, that the man was barred from pursuing his claim. The Appellate Division thought more deeply about what had gone on here, and set aside the harsh, bright-line statute. Unlicensed persons, don’t take heart here. The circumstances, as will be revealed below, were quite unusual.

Basically, the court recognized that New Jersey law absolutely barred claims like that of the “chef.” In fact, even under the “Georgia exception,” he would have lost. Unlike in the Georgia case, this former chef was very involved throughout the course of the deal. Had he not been so involved, it seems the sale would not have closed. Essentially, what the court did was to bar the developer from raising the defense (and presumably closed its own eyes to the ability of the lower court to raise the defense in its own right).

It was clear to the court that the developer, at the time of making its promise, absolutely knew that the law would prevent the “referrer” from maintaining a commission suit. How was the court so sure of that? It’s simple – this same developer had been through this before. In the court’s words: “[I]t cannot escape our notice that [this same developer] is both an experienced real estate developer and is familiar with litigation.” Also, it also could not “escape [the court’s] notice that [the developer] was familiar with the requirements of the real estate broker statute, a fact which is demonstrated by” the court’s decision in earlier, unrelated, protracted litigation where the developer successfully avoided paying a commission to a broker who was unlicensed at the time of the commission agreement.

So, citing an earlier, different New Jersey Supreme Court case, the court would not permit the developer, a “sophisticated business [entity] [and] experienced in real estate transactions … to convert the statute from a shield to protect the public into a sword.” Basically, “one who induces the alleged wrongdoing should not benefit as a result of it.”

So, there are some lessons in today’s posting. When it comes to the need for, and the required content of, agreements to pay real estate commissions, one cannot rely on “general knowledge.” All jurisdictions’ laws are readily available on the Internet. There are statutory exceptions, but they are hardly universal. And, just because you’ve read and absolutely understand the relevant statutes, unless you know the related court-made law, you can’t be sure that what you know is true. As is attributed to Will Rogers, “It’s not what he doesn’t know that bothers me, it’s what he knows for sure that just ain’t so.”

We have no doubt that commissions are being paid even where the law would not enforce the agreement to pay. We also know, as we have related above, that when the reality of having to pay (an often unexpectedly large) commission happens, there are those “promisors” who raise these statutes designed to protect the public from “fraud, incompetence, misinterpretation, sharp or unconscionable practice” as a shield to protect against the obligation to pay. Ruminations isn’t so sure that these broker commission statutes, like the Statute of Frauds, designed to be a shield against fraud, aren’t more commonly used as a sword to perpetrate fraud.

This is a tough issue. There are valid thoughts on both sides of the issues raised. So, please, no flaming. We invite thoughtful comments about these kinds of statutes. If you have any, just post your comments below.

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Comments

  1. Anyone who has been in real estate for long knows that there are many people who will take credit for a deal. The strict interpretation of the statute protects principals from their predatory claims. The old adage, “Success has a thousand fathers, failure is an orphan” applies here.

    I’ve been burned by an unscrupulous seller who cut me out of a deal. So I know the angry and frustration that can result. After that instance I only did oral deals with sellers I knew and trusted.

  2. Tim Scott says:

    Who hasn’t done a deal where a broker that never marketed the property or touched the deal has claimed a commission. Who hasn’t read a broker’s commission agreement from seller’s perspective and said “never sign this”. My blanket advice for broker prepared agreements. I have yet to see one that didn’t have unconscionable provisions or those that couldn’t be easily interpreted in unconscionable ways.
    Brokers’ unique position means they daily do business that many clients do very rarely. A large sophistication disparity often exists, even in commercial deals. And when a broker can claim a commission for originating the deal merely by introducing the prospect, the SOF is the only protection against claims based on a deluge of overlapping prospect submissions from multiple brokers.
    Good brokers are great partners, but a commission agreement is little to require of a great partner or to protect honesty and ethics in the profession. For every actual broker hurt by the sword of the SOF, they knew better going in, and they were wrong about the ethics of their client. For every non-broker “finder” that felt that sword, they were playing a risky game that danced with legal violations (and they were wrong about their client’s ethics).
    For every instance where the SOF was a sword, I’ll bet there were 10+ instances where the SOF was a shield against unwarranted claims. And that doesn’t count the chaos that would ensue absent the SOF as unethical brokers sent in the Chamber of Commerce directory in order to have a claim for a commission. On the up side, it would be more business for lawyers. No thanks.
    And yet, I endorse the unpublished NJ decision for the Chef. Where the hirer actively induces the conduct based on an agreement it knows to be unenforceable based on the SOF, that hirer is guilty of a fraud the moment he refuses to pay. The SOF should not be his shield for his own inducement and fraud.

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