On August 1, 2013, Delaware became the latest jurisdiction to join the league of states with legislation that provides for a statutory commercial real estate broker’s lien. Though over 20 states now afford commercial brokers, and in some cases other real estate professionals, the protection of lien rights, these lien acts are anything but uniform. This article summarizes the basic theory and structure of these acts, surveys the different approaches to this legislation taken in several jurisdictions, and discusses the policy implications of the acts.
Actions to Collect Commissions
It has long been the case throughout the United States, and continues to be the case in states that have adopted broker’s lien acts, that a real estate broker who is the procuring cause of the sale or lease of real property under a written agreement can pursue a contractual action to recover the commission due. E.g., Follman Prop. Co. v. Daly, 790 F.2d 57 (8th Cir. 1986). Brokers find this remedy less than satisfying, however, because they are frequently in the position of pursuing sellers after their property has been conveyed and net proceeds spent, or suing buyers or tenants with insufficient assets. Courts in some states have provided some relief for brokers by recognizing the right to attach an equitable lien for the commission on the real estate that is the subject of the transaction. E.g., VRG Corp. v. GKN Realty Corp., 619 A.2d 251 (N.J. Super. Ct. App. Div. 1993). But such equitable liens are available in most jurisdictions only if there is a written agreement between the broker and owner creating such a right. Hoffman v. First Nat’l Bank of Boston, 135 S.E.2d 818 (Va. 1964). Moreover, they are expensive to establish from a litigation standpoint, and their equitable, fact-specific nature makes them uncertain at best.
In the early 1990s, state associations of realtors, unsatisfied with the traditional litigation process and experiencing pressure to lower their commissions at the settlement table in order to complete closings, began a campaign to ask state legislatures to create statutory lien rights to enforce the payment of commissions, similar to mechanic’s and materialman’s liens. Their focus has been on commissions due for commercial sales and leases, rather than residential sales commissions, because of the size of the commissions and the greater incidence of negotiating away commissions in commercial transactions. Some states responded quickly, and by 1995 commercial broker’s lien acts, varying in scope, had been adopted in Connecticut, Georgia, Illinois, Maine, Maryland, Missouri, and Virginia. Stephen Dean Streiker, Getting Paid Commissions: A New Power Balance Between Real Estate Brokers, Appraisers and Their Clients Under the Missouri Commercial Real Estate Brokers’ and State Certified Real Estate Appraisers’ Lien Act, 63 UMKC L. Rev. 727 (1995). Brokers have been successful in expanding the reach of such liens to other states since then, so that now close to half of all U.S. jurisdictions have a statutory lien for at least some commercial transactions.
The Acts in Different States: Theme and Variations
As of this writing, states that have adopted statutory lien protections for brokers or other real estate professionals in certain commercial transactions include Alabama, Ala. Code §§ 35-11-450 to -454; Arizona, Ariz. Rev. Stat. Ann. §§ 33-1071 to -1076; Colorado, Colo. Rev. Stat. §§ 38-22.5-101 to -110; Connecticut, Conn. Gen. Stat. § 20-325a; Delaware, Del. Code Ann. tit. 25, §§ 2601–2615; Florida, Fla. Stat. § 475.700 to -.719; Georgia, Ga. Code Ann. §§ 44-14-600 to -605; Illinois, 770 Ill. Comp. Stat. 15/1–15/20; Indiana, Ind. Code §§ 32-28-12.5-1 to -19; Kansas, Kan. Stat. Ann. §§ 58-30a01 to -30a18; Maine, Me. Rev. Stat. Ann. tit. 10, §§ 3251–3269; Maryland, Md. Code Ann., Real Prop. §§ 14-301 to -313; Michigan, Mich. Comp. Laws §§ 570.581 to -.593; Missouri, Mo. Rev. Stat. §§ 429.600 to -.630; New Hampshire, N.H. Rev. Stat. Ann. §§ 447-A:1 to -:7; New York, N.Y. Lien Law §§ 2, 3; North Carolina, N.C. Gen. Stat. §§ 44A-24.1 to -.14; Ohio, Ohio Rev. Code Ann. §§ 1311.85 to -.93; Oklahoma, Okla. Stat. tit. 42, §§ 201–209; Pennsylvania, 68 Pa. Cons. Stat. §§ 1051–1063; Virginia, Va. Code Ann. §§ 55-526, -527; and Washington, Wash. Rev. Code §§ 60.42.005 to -.901. Most of these statutes are specific commercial real estate broker’s lien acts, but in some states broker’s liens are claimed under the same statutory provisions that establish mechanic’s liens. E.g., N.Y. Lien Law § 2(4) (“improvement” includes performance of real estate brokerage services in obtaining nonresidential lessee for term of more than three years).
Most states have looked to the acts of other states in developing their own broker’s lien statutes, and several basic formats have been developed for the acts. Even within the similar formats, however, there is a great deal of variation from state to state on a number of substantive issues, some of which are discussed in greater detail below.
Focus on “Commercial”
All of the states that have adopted such statutory liens agree that the liens can be filed only against commercial real estate and not real estate that is strictly residential in nature. What constitutes “commercial real estate,” however, differs by state.
Delaware’s definition of “commercial real estate” to which the act applies includes any real estate with improvements other than one to four residential units; unimproved land zoned or available for commercial, manufacturing, industrial, retail, or multi-family use; unimproved land of any zoning classification being purchased for development or subdivision other than land with four or fewer single-family residential lots; and even real estate used for agricultural purposes unless the purchaser is buying the property for the purpose of continuing agricultural use. Del. Code Ann. tit. 25, § 2602(4). Delaware clarifies that its act also applies to mixed-use real estate, including real estate with one to four residential units that also has another nonresidential portion. Id. The act’s lien cannot be imposed on residential condominiums, townhomes, mobile homes, or other homes sold or leased on a unit-by-unit basis even if part of a larger building with more than four residential units. Id.
Delaware’s definition is broader than in Maryland, where the lien applies only to real estate with building floor space intended to be used by the tenant for nonresidential use. Md. Code Ann., Real Prop. § 14-301(e). Pennsylvania defines “commercial real estate” subject to a broker’s lien more simply—any real estate other than real estate containing one to four residential units or real estate zoned agricultural not subject to an agreement of sale contingent on rezoning to non-agricultural uses—but specifically excludes single family residential units or building lots 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. 68 Pa. Cons. Stat. § 1052. Washington’s statute states that real estate will be considered commercial real estate if the commission agreement so provides; otherwise, it is commercial unless it is an interest in real property that meets one of the following four tests:
(a) improved with one single-family residential unit or one multifamily structure with four or less residential units, or (b) unimproved and the maximum permitted development is one to four residential units or structures under the county or city zoning ordinances or comprehensive plan applicable to that real estate, or (c) classified as farm and agricultural land or timber land for assessment purposes pursuant to chapter 83.34 [Revised Code of Washington], or (d) improved with single-family residential units such as condominiums, townhouses, timeshares, or stand-alone houses in a subdivision that may be legally sold, leased, or otherwise disposed of on a unit-by-unit basis.
Wash. Rev. Code § 60.42.005(1).
Scope: Leasing Brokers or All Brokers?
There is a fundamental divide among the states that have adopted commercial real estate broker’s lien acts on whether only leasing brokers can establish liens or whether lien rights extend to real estate sales brokers, too. Jurisdictions that have concluded that only leasing brokers should be able to file liens include Arizona, Ariz. Rev. Stat. Ann. § 33-1071(A); Maryland, Md. Code Ann., Real Prop.§ 14-302(a); Virginia, Va. Code Ann. § 55-527; and Washington, Wash. Rev. Code § 60.42.010(2). States that extend lien rights to buyer and seller brokers include Florida, Fla. Stat. § 475.703; Illinois, 770 Ill. Comp. Stat. 15/10(3); Indiana, Ind. Code § 32-28-12.5-5; Michigan, Mich. Comp. Laws Serv. § 570.584; Missouri, Mo. Rev. Stat. § 429.605; North Carolina, N.C. Gen. Stat. § 44A-24.1; and Ohio, Ohio Rev. Code Ann. § 1311.86.
Other Guests at the Lien Table
Some states extend lien rights to other real estate professionals for services connected with a sale. Missouri, for example, protects certified real estate appraisers and persons performing title examination services. Mo. Rev. Stat. § 429.629. In Delaware, an individual who holds a broker license from the Delaware Real Estate Commission can file a lien for services under a property management agreement or exchange agreement. Del. Code Ann. tit. 25, § 2602(1)-(2).
Foundation for the Lien: The Underlying Agreement
In some states, such as Delaware, the “brokerage agreement” must meet certain requirements for the lien right to apply: it must state the amount or calculation of the broker’s compensation; that it is a binding contract under state law; and identify the real estate by description or tax parcel number. Del. Code Ann. tit. 25, § 2603. This could be a stumbling block for brokers wishing to claim liens, so brokers in those states should dust off their brokerage agreements to make sure they are in correct form.
Some jurisdictions also require disclosure of the lien rights in the commission agreement. In Arizona, for example, the agreement must state above the owner’s signature “that the failure to pay the agreed upon commission or compensation may give rise to lien rights as provided by this article.” Ariz. Rev. Stat. Ann. § 33-1071(A)(1). Florida specifies exact language for a two sentence disclosure. Fla. Stat. §§ 475.703(5), -.803(6). Other states are not so exacting and basically leave the contents of the underlying agreement up to the parties.
Mechanics and Timing of Lien Filings
The commercial broker’s lien is established in most states by recording the required form of affidavit and notice in a public record in the county where the commercial real estate is located. Typically this is the same place where deeds of real estate are recorded (for example, in Delaware it is the county office of the recorder of deeds, Del. Code Ann. tit. 25, § 2604(a)), though in some areas the notice is filed where a lis pendens or a contract suit to collect the commission would be filed (in Pennsylvania this is the county prothonotary, 68 Pa. Cons. Stat. § 1056(a)(2)).
Some states require more than the filing of a notice and affidavit. In Maryland the broker must instead commence a legal action to establish the lien. Md. Code Ann., Real Prop. § 14-304(a). The broker’s lien is not entered immediately there; instead, it attaches when the court issues an interlocutory order or final order at a show cause hearing within 15 days of service on the owner. Id. § 14-305(b).
A commercial broker’s lien generally attaches to the commercial real estate that is the subject of the agreement under which the payment is earned and not to other real estate. E.g., Ohio Rev. Code Ann. § 1311.86(C)(5). Some states where the lien attaches to that real estate have additional statutory provisions that can further define the physical scope of the lien. See, e.g., 68 Pa. Cons. Stat. § 1054 (owner can petition court to limit the boundaries of real estate subject to the lien). In a few states, however, a seller’s broker’s lien does not attach to the real estate itself; instead, it attaches to the owner’s personal property interest in the net proceeds of the sale. E.g., Fla. Stat. § 475.703(1).
When the lien can and must be filed depends on whether the lien is for a seller’s broker, buyer’s broker, landlord’s leasing broker, or tenant’s leasing broker. In all cases, the lien cannot be filed until completion of the broker’s duties (which means the performance of the duties of the broker per the brokerage agreement except for completing settlement) or when the commission is otherwise due under the agreed-on payment schedule. E.g., Del. Code Ann. tit. 25, § 2603. The other filing deadlines are specific to the role of the party responsible to pay the commission and are designed to ensure that the lien attaches only to property owned at the time the lien is filed by the party obligated to pay the commission.
Specifically, in most states, a selling broker’s lien has to be recorded before the actual conveyance of the real estate to the buyer, e.g., Ohio Rev. Code Ann. § 1311.87(B)(3), but a few states require recording even earlier, such as 30 days before the conveyancing deed is recorded. Wash. Rev. Code § 60.42.010(5). Some states add an overlay time deadline of a certain number of days after the selling commission has been earned. E.g., Del. Code Ann. tit. 25, § 2605. In Pennsylvania, if a sales commission is involved, there is also a prerequisite step to the filing of the lien itself: a notice of intent to claim a lien must be provided to the owner and buyer at least three days before the conveyance. 68 Pa. Cons. Stat. § 1056(f).
In contrast to the selling broker’s lien, a lien for a buyer’s broker is filed after the deed of the commercial real estate is recorded and therefore does not attach to the seller’s interest in the property. In most states the lien for the buyer’s broker’s commission must be filed within 90 days after recording of the deed. E.g., Ind. Code § 32-28-12.5-6(a)(2)(B).
Liens for leasing commissions payable by the owner as landlord when the lease is executed generally must be recorded within 90 days after the tenant takes possession of the leased premises. E.g., Ariz. Rev. Stat. Ann. § 33-1072(A)(3)(a). Tenant brokers in most jurisdictions are subject to this same 90-day deadline. E.g., Fla. Stat. § 475.807(1)(a)(1). The lien for tenant brokers attaches only to the tenant’s interest in the property, not to the landlord’s title. E.g., Del. Code Ann. tit. 25, § 2604(b). Liens for leasing commissions due from lessors or lessees on renewal of lease terms (which, in the author’s experience, are the commissions least likely to be paid) have a different filing deadline, before the end of the 90-day period following the contractual due date of the required compensation. Id. § 2605. These 90-day periods, however, are not uniform throughout the states with statutory liens for leasing commissions. In Maryland, the lien proceeding must be commenced within 180 days after the commercial leasing commission becomes due and payable. Md. Code Ann., Real Prop. § 14-304(a).
In most states the broker must send a copy of the affidavit and the notice of broker’s lien to the owner by certified mail, return receipt requested, within 10 days of recording the lien. E.g., 770 Ill. Comp. Stat. 15/10(f). In some states the broker can instead use a process server for notice. E.g., Del. Code Ann. tit. 25, § 2606. In states that allow the lien to be established by the mere filing of the affidavit and notice, such as Delaware, no legal action must be commenced immediately unless the owner demands that the broker file suit. Id. § 2613(b). In most of these states the lien is deemed released if the broker does not file the requisite action to collect the commission or appear in court for a show cause hearing within a short period after such demand. E.g., id. Also, in most states the lien is automatically released after a period of time, such as two years from filing, if the broker does not file a court proceeding to establish the lien. E.g., 770 Ill. Comp. Stat. 15/10(g).
Releasing That Pesky Lien
To enable the sale or financing of property subject to a broker’s lien, as an alternative to paying the broker the amount of the lien, many states specifically provide in their commercial broker’s lien act that the owner has the right to release the lien from the real estate by depositing funds in escrow. E.g., Del. Code Ann. tit. 25, § 2609; Ind. Code Ann. § 32-28-12.5-18. The lien then attaches to the funds in the escrow account. Id. Some states require the funds to be deposited in court instead of allowing private escrows. E.g., N.C. Gen. Stat. § 44A-24.13(b). Illinois, Michigan, and Missouri are examples of states that encourage the transfer of real estate by requiring the parties to release the lien and place sales proceeds in escrow if the lien “would prevent the closing of a transaction or conveyance,” 770 Ill. Comp. Stat. 15/20, Mo. Rev. Stat. § 429.627, or “would otherwise prevent the closing of a transaction involving commercial real estate,” Mich. Comp. Laws Serv. § 570.585(1).
The lien acts specify that the deposit into escrow or a court must equal the full amount stated in the notice of the lien, e.g., Mo. Rev. Stat. § 429.627, or such full amount plus a cushion of 10%, e.g., Ind. Code § 32-28-12.5-18, or 25%, e.g., N.C. Gen. Stat. § 44A-24.13. Delaware’s lien act goes on to clarify that the conditions for the release of such funds in escrow can be agreed on in the brokerage agreement or otherwise; if not, the disposition of the escrow is determined by a court interpleader action. Del. Code Ann. tit. 25, § 2609.
To protect lenders and those creditors that already had statutory lien rights from a historical perspective, the priority of the broker’s lien is based on when the notice of lien is recorded, e.g., Mich. Comp. Laws Serv. § 570.584(2), except the lien is subordinate to and payable after all mortgages (whenever recorded), mechanic’s liens, other liens imposed or created by statute, taxes, and similar liens of the federal government, state government, and political subdivisions. The acts do put the broker’s lien ahead of judgments subsequently entered against the owner.
Most broker’s lien acts specifically provide that the broker cannot waive its right to claim a broker’s lien, under written agreement or otherwise, 68 Pa. Cons. Stat. § 1061(a), and the lien is effective only for a period of one year following the date of filing and during any active litigation regarding the lien, Del. Code Ann. tit. 25, § 2605. The broker can enforce the lien by filing a debt action. Id. § 2610.
Despite the widespread adoption of commercial broker’s lien acts, such special lien rights still do not exist in a majority of jurisdictions. There is also no uniform act related to commercial broker’s liens being promulgated by the National Conference of Commissioners on Uniform State Laws. This is most likely because of legitimate policy concerns rather than inaction. The right of any party, including a broker, to file a lien on real estate and therefore cloud the title of that real estate preventing subsequent conveyances or refinancings, before proving the right to receive the claimed commission, is an extraordinary right. It is certainly a right not held by other creditors of the property owner in general, including creditors under contracts that do not fall within the narrow definitions of the broker’s lien acts, victims injured on the premises as a result of tortious conduct, or holders of defaulted loans obtained by the owner that do not have a mortgage on the particular real estate in question. The leverage that a broker has at the commercial settlement from the ability to file a lien to protect legitimate claims also permits the broker to push aggressively for payment even if the right to the commission or amount of the commission is disputed. In most states there is little protection against spurious filings of liens or the notice of intent to claim a lien under the acts; however, Delaware has attempted to minimize unfounded broker’s liens by requiring that the lien be filed by an in-state licensed attorney, Del. Code Ann. tit. 25, § 2604(c), and North Carolina imposes a criminal misdemeanor for furnishing a false statement of the sums due, N.C. Gen. Stat. § 44A-24. States adopting a broker’s lien act have apparently found that the benefit of ensuring that legitimate commissions are paid outweighs the risk of unscrupulous filings delaying or preventing settlements.
Supporters of the commercial real estate broker’s lien acts have said that the acts “level the playing field” for commercial brokers encountering last-minute pre-settlement pressure to renegotiate their commissions. Though experience with these acts, and the eagerness of more and more states to adopt such legislation, indicate that the lien rights achieve that goal, the debate remains over whether the goal is achieved in a way that does not unduly interfere with the sale or leasing of real estate or unfairly prejudice the rights of other judgment lien creditors.