BARRISTER'S BRIEFING: Failed to Get Your Commission? You Can’t File a Lien, but Your Listing Agreement May Help

Have you ever run into a situation where your homeowner tells you that they’re not going to pay your commission? When I first became involved in the real estate world, I would hear these stories and how brokers would march down to the local courthouse to file a lien on a client’s property. This raised a red flag to me. Later, when I became counsel to HGAR and its Professional Standards Administrator, this issue became far more disconcerting.

Under the Code of Ethics, Article 1 states, “When representing a… client as an agent, Realtors pledge themselves to protect and promote the interests of their client. This obligation to the client is primary….” Simply stated, a Realtor cannot put his/her interests above those of the client. Filing a lien on a client’s property is clearly putting the agent’s interest in getting paid above those interests of the client selling their property and is a blatant violation of the Code of Ethics. What’s worse, with a lien on the property, the agent may cause serious impediments for the homeowner and their transaction, and, in some cases, the homeowner may not be able to close.

Not only is filing a lien a violation of the Code of Ethics, but it’s not even permissible by law. In 2012, the Supreme Court of New York County held that, In the Matter of the Application of 1564 SECOND REALTY LLC, that a broker could not place a mechanics lien on a property. The court, in dismissing the broker’s lien cited Lien Law § 2 (4) and noted that a “real estate broker may only lien a property when it has performed an improvement… on Petitioner’s property.” Lien Law § 2 (4) defines “improvement” as, inter alia: “the performance of real estate brokerage services in obtaining a lessee for a term of more than three years of all or any part of real property to be used for other than residential purposes pursuant to a written contract of brokerage employment or compensation.” That means a broker in a residential transaction can never file a lien on the homeowner’s property. It’s simply not permitted.

Contract Provision One: Attempted Resolution of Commission Disputes

So, if filing a lien on a homeowner’s property is impermissible and a violation of the Code of Ethics, what can a broker do to ensure they get paid their commission? Well, the first line of defense is the OneKey MLS Exclusive Right to Sell Agreement (“OneKey Agreement”). In its current form, under paragraph 14, the contract requires that the homeowner shall deposit the commission monies into an escrow account and then try to resolve the matter through agreement, through arbitration, through a court order, or some other process which the parties agree to in writing. If the parties fail to resolve this matter, then the broker can look to the Commission Escrow Act for support.

Contract Provision Two: Commission Escrow Act

The Commission Escrow Act was signed into law in 2009. Its purpose is to protect brokers when a client refuses or indicates that they are not going to pay their commission and it makes things a little easier for the broker to collect. The act’s necessary language required under the law is in the OneKey Agreement (currently under paragraph 14). It reads as follows in bold typeface:

At the time of Closing, you may be required to deposit the broker’s commission with the county clerk in the event that you do not pay the broker his or her commission as set forth herein. Your obligation to deposit the broker’s commission with the county clerk may be waived by the broker.

Under the Commission Escrow Act, after the party’s failure to amicably resolve the matter, the broker must file an affidavit (which requires specific information such as commission owed, broker license number, property address, etc.) with the clerk of the county where the property is located before the deed is delivered to the buyer. The broker then provides notice of the filing to the homeowner and the homeowner’s attorney (if known) within five (5) days of the filing. The homeowner is then required to deposit the commission money with the county clerk. If the homeowner fails to deposit the money and the broker brings an action and it is determined that the broker is entitled to the commission, the broker will also be awarded costs and attorney’s fees; this is an incentive to compel the homeowner to deposit the money with the clerk.

Thereafter, the broker must bring suit within sixty (60) days of the money being deposited. However, keep in mind that if neither the broker nor the homeowner commences an action within the required time period, then the homeowner will be entitled to an order directing a return of the deposit.

Finally, it’s important to note that this process neither places a lien on the property nor impedes the transaction from taking place; therefore, the broker avoids violating the Code of Ethics and is not filing an invalid lien on the property.

Conclusion

The OneKey Agreement provides various provisions that assist a broker in obtaining their well-earned commission, including arbitration, possible court involvement, and finally the Commission Escrow Act. A broker must ensure that when the listing agreement is being reviewed by the homeowner (and possibly the homeowner’s attorney), these provisions are not crossed out; they are there to protect the broker. Short of an amicable resolution, the Commission Escrow Act serves as a backstop to provide some leverage to a broker whose commission was wrongfully withheld by temporarily diverting a portion of sales proceeds due to the homeowner to the county clerk’s escrow account.

To ensure that the provisions of the Commission Escrow Act are followed correctly and timely executed, you should consult with an attorney at the earliest possible opportunity.