The World of Finder's Fees After <i>Futersak v. Perl</i>

Protection

In jurisdictions where a finder's fee is currently permitted, finders should always protect themselves by doing the following:

• Put it in writing. The agreement should always be in writing to eliminate statute of frauds issues. Note, however, that in some states, oral finder's fee agreements are enforceable. ( Grant v. Marinell, 112 CA3d 617 [1980]).
• Act as an independent contractor. The agreement should carefully set forth that the finder fully understands and agrees that he or she will be conducting work as an independent contractor at the finder's own expense and risk.
• Specifically limit finder activities. The agreement should state that the finder's work is limited to obtaining information about various real estate properties. It should list the addresses of the properties and names and contact information of the owners. These should be submitted to the finder's client as “sales leads.” If any additional responsibilities are added to this list, a finder may be considered to be acting as a real estate broker.
• List prohibited finder activities. In addition to stating the affirmative duties of a finder, prohibited activities should be noted as well. All finder's fee agreements should generally state that the finder will not, under any circumstances, discuss the details of any such transaction or provide any services that require a real estate license. Prohibited activities of a finder should also include, but not be limited to: 1) negotiating with any party on behalf of a client; 2) partaking in any activities that will bind the client; 3) serving in a fiduciary capacity to the client; 4) discussing the amount of rent or any terms or conditions of a transaction; and 5) soliciting loans in connection with any transaction connected with the agreement. It would be prudent to check the definition of “real estate broker” within any jurisdiction where a finder may be practicing (and any pertinent case law) to be sure none of the finder's activities are later construed as those of a real estate broker.
• Limit finder obligations. The finder's fee agreement should state that the finder understands that the finder's client is under no obligation to lease property from any leads that the finder may introduce to the client.
• Differentiate finder's fee entitlement from that of a broker. Unlike a brokerage fee arrangement where the broker may be entitled to a commission when a lease is executed, the finder's fee agreement should state that the fee is earned once the finder has solicited, located, placed, and then introduces or “delivers up” the names and contact information of prospective tenants to the client. The agreement should specifically state that the fee is earned in this manner even if the parties agree that the actual payment will be made at some later date. Further, it should be understood that once the potential lead and the client are brought together by the finder, the potential lead and the client are left to negotiate the real estate related arrangements apart from the finder.

Unlicensed Broker

Although a finder's fee may not be illegal in many jurisdictions, anyone looking to be paid under a finder's fee arrangement should be very wary that they may be deemed to be practicing as an unlicensed real estate broker. First, as stated above, a finder's fee agreement should be written so as to make it very clear that the finder has made a valid attempt to prevent the finder's activities from being characterized as a broker's undertaking. Second, it is imperative that anyone acting as a “finder” not only utilize a carefully written finder's fee agreement, but also refrain from actually performing any activities that could cause the finder to be considered as acting as an unlicensed real estate broker.

Even if the finder's fee agreement is ultimately found to be valid and enforceable, if a finder with such a valid finder's fee agreement undertakes any activities that are within the realm of a brokerage function, the finder may be sanctioned for partaking in unlicensed brokerage work. A finder should be aware that those who violate the law could be subject to criminal sanctions and civil penalties. Third, venturing over the line into what is considered “brokerage activities” can easily happen if a finder is unaware of the law regarding finder's fees in the relevant jurisdiction. For example, in certain jurisdictions (including New York, Texas and Ohio), unless the finder is a licensed broker, a finder may not recover any compensation for the finder's services even where the only service rendered is the introduction of a lead to their client. Finders who step over the line do so at their own risk.

Moreover, if the law in some jurisdictions states that only licensed brokers can be compensated in deals involving real estate leases, a finder may have an unenforceable contract, even if the finder does not perform functions typically performed by real estate brokers. Finally, some states, such as Texas, Massachusetts and Ohio, have broadened the definition of real estate broker to include the activities of a finder, i.e., they include the act of procuring or assisting in procuring a prospect to effect the sale, exchange, or lease of real estate (see Texas Real Estate License Act Section 1101.002(1)(A)(ix), Mass. Gen Laws Ann. Ch 112, Sec. 87PP). Therefore, in those states where a broad definition of “real estate broker” is used, a finder may need to obtain a broker's license before the finder can be compensated for his/her involvement in the deal.

Futersak v. Perl

Futersak v. Perl (84 A.D. 3d 1309, [2011]), a New York Appellate Division, Second Department case, held that an unlicensed broker or finder is not entitled to be compensated for any service that violates Section 442-d of the New York Real Property Law. Section 442-d states:

[n]o person ' shall bring or maintain an action in any court of [New York] for the recovery of compensation for services rendered ' in the buying, selling, exchanging, leasing, renting or negotiating a loan upon any real estate without alleging and proving that such person was a duly licensed real estate broker or real estate salesman on the date when the cause of action arose. (Emphasis added.)

The court held that “this prohibition applies even if the services rendered are characterized as those of a 'finder'” (see also Dodge v Richmond, 5 A.D.2d 593, 595-596 (1958); Sorice v Du Bois, 25 AD2d at 521; Feldbau v Klarnet, 109 Misc.2d 32, 35-36 (1981)). Thus, what other states, such as Massachusetts, Texas and Ohio have done through statutory means, the New York appellate court apparently has done through judicial decision, i.e., the court has essentially broadened the definition of “real estate broker” to include the activities of a finder and made it illegal to be compensated as a non-licensed finder.

Note, however, that some may argue that the court intimated that its ruling applied because the subject property was the “dominant feature of the transaction at issue.” So perhaps, in limited circumstances if the subject property is not the dominant feature of a transaction, finder's fees may be upheld. For example, where the finder's fee is connected to an asset purchase agreement and the real estate aspect of the deal (whether it relates to the leasing or sale of real estate) is merely a minor component thereof; the court may enforce a finder's fee agreement. In any event, even if this limited exception was to be permitted, the use of finder's fees should be severely curtailed in New York.

Even though the Futersak case dealt with a purchase agreement, since Section 244-d covers “the buying, selling, exchanging, leasing, renting or negotiating of a loan upon any real estate,” the decision should now be seen as a clear signal that the ruling will be applied to leasing and other real estate transactions as well (at least in the jurisdiction covered by the Second Department in New York). Further, even though the Futersak ruling is only an intermediate appellate court determination (and New York's highest court, the Court of Appeals, may very well weigh in on this issue at some later date), this case may influence how other state courts view finder's fee issues around the country. It will be interesting to see the “fallout” from this decision.'

Conclusion

Since the Futersak decision in New York has ruled that finder's agreements are unenforceable in real estate transactions (and other large states such as Texas, Ohio, and Massachusetts, through their broad definition of “real estate broker,” have statutorily prohibited unlicensed finders from operating in their states), many other state courts may interpret their laws in a similar fashion. Other states may have their legislatures enact new laws to allow their state courts to prohibit the use of unlicensed finders. Finder's fees, as we know them, may very well find themselves on the endangered species list.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is an attorney in Hartsdale, NY. His practice is focused on all aspects of office and retail leasing. He can be reached at [email protected]. Visit his website: www.morfopouloslaw.com.

Anyone drafting a finder's fee agreement should be aware that they may be walking into a minefield that is waiting to explode if he or she makes a wrong move. The real estate brokerage community throughout the country, together with various citizen watchdog groups, has fought long and hard to make it very difficult for those who do not have a real estate broker's license to be compensated for their involvement in bringing about a real estate deal. These groups claim that unscrupulous individuals who do not have a real estate broker's license (and who may thus not be regulated by state laws and licensing boards) could take advantage of the general public.'

Limited Circumstances

In many jurisdictions, finder's fees have been permitted in limited circumstances. For example, in California, brokers and principals can hire finders to provide leads in a real estate transaction. ( Tyrone v. Kelley , 9 Cal.3d 1 [1973]). Typically, if a finder's fee agreement provides that the activities of the finder, as set forth in the agreement, do not cross the line into what would be considered “brokerage services,” the agreement will be legally valid and, thus, enforceable. Moreover, state real estate licensing boards can only regulate people who are engaging in real estate brokerage activities. So long as a finder enters into a private contract that does not deal with any of the activities that regulate real estate brokers, the finder has, in most jurisdictions been permitted to do so, just as they would be allowed to enter into any other private contract.

Protection

In jurisdictions where a finder's fee is currently permitted, finders should always protect themselves by doing the following:

• Put it in writing. The agreement should always be in writing to eliminate statute of frauds issues. Note, however, that in some states, oral finder's fee agreements are enforceable. ( Grant v. Marinell , 112 CA3d 617 [1980]).
• Act as an independent contractor. The agreement should carefully set forth that the finder fully understands and agrees that he or she will be conducting work as an independent contractor at the finder's own expense and risk.
• Specifically limit finder activities. The agreement should state that the finder's work is limited to obtaining information about various real estate properties. It should list the addresses of the properties and names and contact information of the owners. These should be submitted to the finder's client as “sales leads.” If any additional responsibilities are added to this list, a finder may be considered to be acting as a real estate broker.
• List prohibited finder activities. In addition to stating the affirmative duties of a finder, prohibited activities should be noted as well. All finder's fee agreements should generally state that the finder will not, under any circumstances, discuss the details of any such transaction or provide any services that require a real estate license. Prohibited activities of a finder should also include, but not be limited to: 1) negotiating with any party on behalf of a client; 2) partaking in any activities that will bind the client; 3) serving in a fiduciary capacity to the client; 4) discussing the amount of rent or any terms or conditions of a transaction; and 5) soliciting loans in connection with any transaction connected with the agreement. It would be prudent to check the definition of “real estate broker” within any jurisdiction where a finder may be practicing (and any pertinent case law) to be sure none of the finder's activities are later construed as those of a real estate broker.
• Limit finder obligations. The finder's fee agreement should state that the finder understands that the finder's client is under no obligation to lease property from any leads that the finder may introduce to the client.
• Differentiate finder's fee entitlement from that of a broker. Unlike a brokerage fee arrangement where the broker may be entitled to a commission when a lease is executed, the finder's fee agreement should state that the fee is earned once the finder has solicited, located, placed, and then introduces or “delivers up” the names and contact information of prospective tenants to the client. The agreement should specifically state that the fee is earned in this manner even if the parties agree that the actual payment will be made at some later date. Further, it should be understood that once the potential lead and the client are brought together by the finder, the potential lead and the client are left to negotiate the real estate related arrangements apart from the finder.

Unlicensed Broker

Although a finder's fee may not be illegal in many jurisdictions, anyone looking to be paid under a finder's fee arrangement should be very wary that they may be deemed to be practicing as an unlicensed real estate broker. First, as stated above, a finder's fee agreement should be written so as to make it very clear that the finder has made a valid attempt to prevent the finder's activities from being characterized as a broker's undertaking. Second, it is imperative that anyone acting as a “finder” not only utilize a carefully written finder's fee agreement, but also refrain from actually performing any activities that could cause the finder to be considered as acting as an unlicensed real estate broker.

Even if the finder's fee agreement is ultimately found to be valid and enforceable, if a finder with such a valid finder's fee agreement undertakes any activities that are within the realm of a brokerage function, the finder may be sanctioned for partaking in unlicensed brokerage work. A finder should be aware that those who violate the law could be subject to criminal sanctions and civil penalties. Third, venturing over the line into what is considered “brokerage activities” can easily happen if a finder is unaware of the law regarding finder's fees in the relevant jurisdiction. For example, in certain jurisdictions (including New York, Texas and Ohio), unless the finder is a licensed broker, a finder may not recover any compensation for the finder's services even where the only service rendered is the introduction of a lead to their client. Finders who step over the line do so at their own risk.

Moreover, if the law in some jurisdictions states that only licensed brokers can be compensated in deals involving real estate leases, a finder may have an unenforceable contract, even if the finder does not perform functions typically performed by real estate brokers. Finally, some states, such as Texas, Massachusetts and Ohio, have broadened the definition of real estate broker to include the activities of a finder, i.e., they include the act of procuring or assisting in procuring a prospect to effect the sale, exchange, or lease of real estate (see Texas Real Estate License Act Section 1101.002(1)(A)(ix), Mass. Gen Laws Ann. Ch 112, Sec. 87PP). Therefore, in those states where a broad definition of “real estate broker” is used, a finder may need to obtain a broker's license before the finder can be compensated for his/her involvement in the deal.

Futersak v. Perl

Futersak v. Perl (84 A.D. 3d 1309, [2011]), a New York Appellate Division, Second Department case, held that an unlicensed broker or finder is not entitled to be compensated for any service that violates Section 442-d of the New York Real Property Law. Section 442-d states:

[n]o person ' shall bring or maintain an action in any court of [New York] for the recovery of compensation for services rendered ' in the buying, selling, exchanging, leasing, renting or negotiating a loan upon any real estate without alleging and proving that such person was a duly licensed real estate broker or real estate salesman on the date when the cause of action arose. (Emphasis added.)

The court held that “this prohibition applies even if the services rendered are characterized as those of a 'finder'” (see also Dodge v Richmond, 5 A.D.2d 593, 595-596 (1958); Sorice v Du Bois, 25 AD2d at 521; Feldbau v Klarnet, 109 Misc.2d 32, 35-36 (1981)). Thus, what other states, such as Massachusetts, Texas and Ohio have done through statutory means, the New York appellate court apparently has done through judicial decision, i.e., the court has essentially broadened the definition of “real estate broker” to include the activities of a finder and made it illegal to be compensated as a non-licensed finder.

Note, however, that some may argue that the court intimated that its ruling applied because the subject property was the “dominant feature of the transaction at issue.” So perhaps, in limited circumstances if the subject property is not the dominant feature of a transaction, finder's fees may be upheld. For example, where the finder's fee is connected to an asset purchase agreement and the real estate aspect of the deal (whether it relates to the leasing or sale of real estate) is merely a minor component thereof; the court may enforce a finder's fee agreement. In any event, even if this limited exception was to be permitted, the use of finder's fees should be severely curtailed in New York.

Even though the Futersak case dealt with a purchase agreement, since Section 244-d covers “the buying, selling, exchanging, leasing, renting or negotiating of a loan upon any real estate,” the decision should now be seen as a clear signal that the ruling will be applied to leasing and other real estate transactions as well (at least in the jurisdiction covered by the Second Department in New York). Further, even though the Futersak ruling is only an intermediate appellate court determination (and New York's highest court, the Court of Appeals, may very well weigh in on this issue at some later date), this case may influence how other state courts view finder's fee issues around the country. It will be interesting to see the “fallout” from this decision.'

Conclusion

Since the Futersak decision in New York has ruled that finder's agreements are unenforceable in real estate transactions (and other large states such as Texas, Ohio, and Massachusetts, through their broad definition of “real estate broker,” have statutorily prohibited unlicensed finders from operating in their states), many other state courts may interpret their laws in a similar fashion. Other states may have their legislatures enact new laws to allow their state courts to prohibit the use of unlicensed finders. Finder's fees, as we know them, may very well find themselves on the endangered species list.

Mark Morfopoulos, a member of this newsletter's Board of Editors, is an attorney in Hartsdale, NY. His practice is focused on all aspects of office and retail leasing. He can be reached at [email protected]. Visit his website: www.morfopouloslaw.com.