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Posting for
Monday, August 3, 1998
by: Bert Rush
brush@firstam.com
BROKERS' LIEN/COMMERCIAL REAL ESTATE/ESCROW AND CLOSING
Before leaving on vacation, Frank Melchior (Iselin, NJ) sent two interesting articles from the RPP&E section newsletter of the Pennsylvania Bar Association. One describes Pennsylvania's new Commercial Real Estate Broker Lien Act, which became effective in May.
This Act gives a real estate broker the right to file a lien against commercial real estate to enforce the broker's right to compensation under a written agreement signed by the owner of the real estate, or the owner's agent. The Act was strongly opposed by the PA Bar, but (according to author Vincent Mancini) "nonetheless has achieved the status of law on the lobbying efforts of the Pennsylvania Association of Realtors." Scary stuff--this past year in CA the title industry fought a tough battle in our legislature to defeat some very poorly conceived legislation which would have benefitted realtors at the expense of everyone else. (Maybe you remember hearing Cliff Morgan describe the battle over "assumable" title insurance....)
Anyhow, the PA Commercial Real Estate Broker Lien Act defines commercial real estate as "(a)ny real estate other than: (1) Real estate containing one to four residential units; or (2) real estate that is used for agricultural purposes." Author Mancini writes:
"The (definition) does not include single family residential units such as condominiums, townhouses or homes in a subdivision when sold, leased or otherwise conveyed on a unit-by-unit basis even though these units may be part of a larger building or parcel of real estate containing more than four residential units."
Still, I assume an apartment complex would be "commercial real estate" under this Act.
In order for a broker to qualify for the right to file a lien the following requirements must be met:
1. The real estate must be listed with the broker under a written agreement;
2. The written agreement must be signed by the owner or owner's agent;
3. The broker must procure a ready, willing and able buyer (or lender, lessee, etc., as the case may be);
4. The procured party must be willing to close on terms provided in the written and signed listing agreement.
In order for the lien to attach to commercial real property, the broker must follow these steps:
1. Give notice of claim to the owner and procured party at least three days prior to the date of conveyance, which must (a) be in writing, (b) notify the owner and procured party that the broker is entitled to compensation under the written agreement, (c) notify the owner and procured party that the broker intends to claim a lien on the property, (d) provide a statement of the buyer's (or other procured party?) right to deposit funds in escrow pursuant to Section 10 of the Act, and (e) be served on the parties by registered or certified mail. Where there are two or more owners--or two or more procured parties--the notice must give notice to each.
2. In the case of a broker whose agreement is with an owner, the notice of lien must be recorded in the office of the prothonotary (as I recall, this is what they call the recorder's office in PA) in the county where the property is located prior to the date of conveyance.
3. In the case of a lease, Mancini writes "the notice of lien must be recorded within ninety days of a default by the owner or successors in interest under the terms of the compensation agreement."
4. In the case of a broker whose agreement was with a prospective buyer, the notice of lien must be recorded within ninety days after the date of conveyance.
In the event a lien is properly recorded, but the transaction doesn't close through no fault of the owner, there's a statutory procedure for the broker to record a "satisfaction of lien" or, if the broker balks, a lawsuit may be filed to satisfy or strike the lien, and possibly get sanctions from the broker.
Having had no experience with such as this, I'd like to hear from our friends in PA as to how it's working--or what problems it may cause. It sure seems to satisfy the desire of many brokers to be treated like a party to the transaction. In other jurisdictions (mainly CA) we've seen this desire express itself by brokers inserting words of assignment in their listing agreement. Under the law (which I think arises from common law of contracts and is also part of the UCC--so it may be the law just about everywhere), any party obligated to pay or transfer property to another party may become obligated to instead pay (or transfer property) to an assignee of the original obligee, when the obligor receives notice of the assignment. Example: Oscar is an escrow officer holding funds payable to Bert, Bert assigns to Cliff the right to receive $500 from these funds, Cliff provides Oscar with a written notice of the assignment including evidence of signing by Bert--but Oscar pays all funds to Bert who skips town--now Cliff has a direct right of action against Oscar for the $500.
We've avoided "assignment" liability with brokers in CA--by and large--and I'd hate to see us stuck with a brokers' lien law.
In his fax to me, Frank Melchior writes: "The Brokers' Lien seems to be spreading. NJ has a similar law by judicial creation; the lien following the sales proceeds. (Try that for size when it comes to liability of the closing entity!)"
Questions, comments, argument? Just press the "reply" button and send your thoughts to LandSakes.
**********
Following Monday's posting, Jim DeCourcey (southern Oregon) writes:
Oregon has an interesting law which allows a broker to assert a presale interest in the proceeds of a transaction.
The broker has the right to provide a notice of demand for commission to the escrow agent. The broker is required to serve the demand on the seller, or the party responsible for the commission. The demand must be accompanied by a written listing agreement. The escrow agent may thereafter close the transaction, but is required to hold so much of the proceeds as is required to pay the commission. Definitions of which transactions the demand affects are not a problem, since all are affected.
We sometimes wonder where these kind of laws come from. In this case, a broker had a special relationship with a builder, and was selling a lot of his homes. Seems that cash flow became an issue for the builder, and he instructed the escrow agent not to pay a commission on a deal (which can be done in Oregon since there is no lien, and no duty to the non-party broker). After the first one, the builder assured the broker that he would take care of it out of the next deal, but....
After the third time the broker was stiffed for the commission, he figured things out. Through the Oregon Association of Realtors, supported by other associations, the law was passed. The Oregon Land Title Association is a small organization, but was effective in crafting language for the bill which has minimized difficulties. Recently, we were not so lucky when the nursing home industry got a law passed giving them an incohate lien on property for unpaid bills of residents. Until the legislature met again to repeal the law, we were asking everybody to fill out an affidavit that the seller was not hot footing his nursing home bills.
Jay Dobson (Portland) writes:
Oregon has had a statute (ORS 696.582) since 1985 giving brokers a lien on funds held in escrow when a "stautory demand" has been made on escrow. It does make the broker a sort of principle to the transaction, but it doesn't change a lot as a practical matter. (They already believed they were principles and acted accordingly - which can create touchy situations in an escrow driven state.) Now they often don't file them (don't want to insult their customers) but want to act like they have.
And Don Schenker (Madison, WI) writes:
The story is the same in Wisconsin. The Realtor lobby prevailed over opposition from everyone else. The wording of our law is very similar to that of Pennsylvania. Our law becomes effective November 1, 1998. The Wisconsin Land Title Association has drafted forms for filing and releasing these liens. We also plan on getting affidavits from seller's and buyers. The only silver lining is that lenders who do their own refinance closings will run the risk that their mortgages will be subordinate to these lease liens if they do not get GAP coverage. The silver lining being we will get more closing work.
**********
Following up on Monday's posting, Keith Pearson (Glendale/L.A.) writes:
Regarding broker's liens, the NJ model where the lien follows the proceeds seems like it may cause as many problems as the Pennsylvania model where a notice of lien is recorded. I like the notice of lien route better (the lesser of two evils) if there are protections for a BFP and BFE because we can at least protect ourselves (assuming the title plant is not too far behind). In either circumstance the escrow or closing office will no doubt see a increase of claims for monies that should have gone to brokers under theories like breach of constructive trust, missed notices of lien on datedowns, etc. Any bad ideas like this that spread to other states should be fought by the ALTA in my opinion.
**********
Following last Monday's (8/3) posting, Rich Angelo (Valley Forge/Philadelphia) writes:
I issued a memo to all agents and offices, and we discussed the Brokers Lien Law during our recent seminar series throughout Pennsylvania (I am sending you a copy in the mail). We have not yet been alerted to any lien filed under the act.
Connecticut has a very similar law, and our state office reports that their law has not caused any problems.
I question whether any Commercial Broker wants to be known as one who files "liens" against his clients. It can't be good for repeat or referral business. The bigger problem would be if they try to extend the law to the residential market.
Additionally, the Prothonotary's Office is the Clerk of the Court, and this is where judgments and similar "liens" are filed. The Recorder of Deeds Office handles the recording and indexing of deeds and mortgages.
