North Carolina last week became the 29th state to enact a law allowing commercial real estate brokers to obtain a lien as a legal remedy against a property if the buyer, seller, lessee or lessor fails to pay the agreed-upon commission or fee.
The Tar Heel State follows Colorado and Michigan, which adopted similar laws in August and October of 2010, respectively. Legislation has been introduced in a number of other states over the last year, including Oregon, North Dakota and Delaware.
The laws have a common purpose: to protect brokers by statute from clients who can’t or won't pay commissions, often forcing a time-consuming and costly legal standoff where costs may far exceed the disputed commission or fee. Without the protection of a lien, proponents of the law say, the real estate broker may get stiffed on the commission, or forced to accept a reduced fee or "commission-ectomy," as it’s known in the business.
The past real estate downturn was rife with examples of brokers losing out on commissions, often by financially distressed buyers, sellers, landlords and tenants.
North Carolina Gov. Bev Perdue on June 17 signed HB174, the Commercial Broker Lien Act. The legislation, co-sponsored by Reps Darrell McCormick (R-Iredell), Pryor Gibson (D-Anson), Leo Daughtry (R-Johnston) and Tom Murry (R-Wake), culminates an effort that started in 1997.
The legislators worked in cooperation with the North Carolina Association of Realtors to steer the bill through the Legislature. In most states, Realtor groups, with support from the National Association of Realtors (NAR) and its affiliates, the Society of Industrial and Office Realtors (SIOR), the CCIM Institute, the Institute of Real Estate Management (IREM), and the Realtors Land Institute (RLI), have led legislative initiatives to introduce and enact the state laws.
Opposition to the laws historically has come through State Bar associations, banks and other groups opposed to the addition of another lien to the property transaction process. Opponents claim the liens may complicate deals, cloud a property's title, impede financing, interfere with basic property rights and even violate due process.
James A. Hochman, a commercial real estate attorney with Coman & Anderson P.C. based in Lisle, IL, said such arguments are an attempt to exploit "fear of the unknown" and are not grounded in facts, based on his experience asserting and litigating broker lien claims in several states over the last two decades. Hochman has consulted for and represented real estate groups and testified before several legislatures in pushing for broker lien acts, including the first significant law, enacted in Illinois in 1992. He worked as legal counsel for CB Richard Ellis when several of the early laws were adopted.
In North Carolina, he represented NAR and its affiliate SIOR, working with Rep. McCormick and the state association to craft and fine tune the legislation, and address objections.
“[Broker liens] don’t hurt anybody other than somebody who agrees in writing to pay a commission and then doesn’t do it,” Hochman tells CoStar. "When brokers have lien rights, they typically get paid without the need for litigation. The mere threat of the broker lien leads to payment at closing in exchange for a lien waiver."
The NAR supports enacting legislation in the remaining 21 states where no broker lien law exists, the association said in a statement.
Litigation to recover commissions is not always economically feasible and invariably results in delays, to the detriment of the real estate brokerages and commissioned agents involved in the transaction, CCIM Institute said in a public policy statement published on its Web site this week. However, because attorney's fees can be recovered by the successful lien claimant, brokers in states protected by the law can threaten or pursue litigation to protect their interests that otherwise wouldn't make financial sense, Hochman said.
Language varies from state to state, but most laws require that the lien language be placed in the written agreement signed by both the client or party the broker represents, and the real estate brokerage agency. Typically the agreement is valid only for the principal broker.
In its position statement, CCIM Institute "supports the enactment of commercial broker lien laws in all states to serve as a safety net for brokers who previously had no means of insuring payment of the agreed upon fee for their services, other than costly legal battles." Further, lien laws should be forceful and efficient in protecting brokers in commercial lease transactions as well as property sales.
"As more and more states contemplate creation of such laws, commercial brokers will have a greater sense of security when completing a transaction, which is beneficial to not only the brokers themselves, but their clients and the commercial real estate market as a whole," CCIM said.
Although brokers take haircuts on commissions in good times and bad, the weak economy and pressure on small brokerages played a role in finally pushing the law through in North Carolina after 14 years.
"Because of the economic situation we’re in, and what we’re seeing happening to our brokers, this definitely gave us a better leg to stand on to get this done," said Cady Thomas, director of government affairs for the North Carolina Association of Realtors, who pushed for the recent legislation. "We’ve been trying to enact this law since 1997. We couldn't even get a hearing back then."
Realtors in North Carolina resurrected the issue two years ago during the recession but could not get the state legislature to bring the matter to a vote.
The North Carolina law gained impetus from the case of a Raleigh broker who had been working on a transaction for several years with an investor based in Texas, which has lien rights for brokers. "Whenever they sent a closing packet, it included a lien waiver. The broker promptly called the investor and said ‘we don’t need this, we don’t have lien rights,’" Thomas said.
The Texas investor then said they intended to renegotiate the broker’s commission, at a loss of $170,000.
"That gave us a real-life example of our brokers being taken advantage of," Thomas said.
Some claim the broker lien laws afford more protection for smaller firms that may lack the legal resources of larger ones, Thomas said. Larger companies tend to have more clout, contacts and resources than boutique shops, ensuring their participation in a transaction from start to finish, and often representing both sides in deals.
"The broker is the easiest party to cut out of a transaction when they don't have lien rights because in most cases it's not economically feasible to sue for their commissions," added Thomas.