Broker Lien Laws

Have you ever had a closing held up due to a brokerage lien? Perhaps you are (or represent) a broker who has a brokerage agreement, but the landlord refuses to pay a commission, notwithstanding the fact that the tenant executed a lease for which the broker was the procuring cause. Today, 34 jurisdictions have some form of statute that specifies whether, how, and for what a broker may file a lien for the non-payment of a commission in connection with the sale or lease of commercial real estate. A few states simply give brokers the right to file liens under mechanics' lien statutes, but more than 30 have enacted broker-specific lien laws. These laws have gained a lot of traction in recent years, with Mississippi and New Mexico as the two most recent adopters in 2014. Knowledge of the broker lien laws in your state is important to understand a broker's respective rights and obligations.

Requirements

Written Agreement

The first prerequisite to enforcement in virtually all jurisdictions in which a broker lien right is found is the existence of a valid, written agreement between the broker and the property owner. In some states, such as Texas, specific notice of the broker's lien rights must be included in the agreement itself. See Tex. Prop. Code ' 62.021(e) (“The broker' s right to claim a lien based on the commission agreement must be disclosed in the commission agreement.”). The type of transaction at issue also matters for the availability of lien rights, as a number of jurisdictions (such as Colorado and Virginia) allow commercial real estate broker liens only in the context of a lease transaction, though most statutes apply to both leases and sales.

Once the conditions to file a lien have been satisfied, brokers generally must provide a notice of lien to the property owner and record the lien with the county clerk within a specific timeframe established by statute, often within 90 days. In Ohio, for example, a broker in a lease transaction must file a lien affidavit with the county recorder's office: 1) within 90 days after a default by the owner in the payment due under the applicable commission agreement; or 2) within 90 days after the conveyance of the property if the commission is being paid by the buyer in a sale transaction. Where a seller is paying the fee, however, the affidavit must be recorded prior to the conveyance of the property. The broker is required to provide a copy of the affidavit to both the owner of the property and, in the case of a sale, to the prospective buyer. See ORC ' 1311.87.

To be valid, a notice of lien (or affidavit, as in Ohio) typically must contain: 1) the name, contact information, and real estate license number of the broker; 2) the name of the owner of the property; 3) a legal description of the property; 4) the amount of the lien; and 5) a sworn statement that the lien claimant has read the notice, knows its contents, and believes the statements are true and correct. Some states have other technical requirements as well such as confirmation from the broker that certain disclosure obligations have been met. Almost all states require the broker filing a lien to attach a copy of the brokerage agreement establishing the right to payment. See, e.g., R.C.W. ' 60.42.010 (requiring that a copy of the commission agreement be attached to a notice of claim of lien in Washington state).

Recording

Like mortgage liens, mechanics' liens, and other statutory liens, a brokerage lien is recorded in the county land records where the property is located to put any purchaser of the property on notice of such rights. The general rule for priority of liens ( i.e. , who gets paid first in a foreclosure proceeding) is “first in time, first in right.” In other words, priority of liens often depends on which is recorded earlier in the county records. With brokerage liens, however, that is not always the case. Many states grant priority over a broker's lien to a mortgage lien or mechanic's lien, even if they are not first in time. In Louisiana, for example, “all mortgages, whether recorded prior or subsequent to, shall have priority over a broker's privilege.” La. R.S. 9:2781.1. Moreover, broker liens in some states (including Arkansas and Nevada, among others) only apply to personal property, not real property, which means that the protected interest is only in the proceeds the owner derives from the property, not in the property itself. Florida has a combination of both, establishing a lien on personal property in a sale context, but a lien on real property in a lease context. See Fl. Stat. ” 703 (establishing lien upon “the owner's net proceeds from the disposition of commercial real estate” for sale) and 803 (establishing lien upon “owner's interest in commercial real estate” for lease).

Enforcement

Once the lien is properly noticed and recorded, a broker generally has one to two years to file a lawsuit to enforce the lien unless the owner demands that suit be brought earlier. In Kansas, for example, such a demand compels the broker to commence a suit within 30 days or face extinguishment of the lien. See K.S.A. 58-30a15 (“If a broker claiming a lien pursuant to this act fails to file suit to enforce the lien within 30 days after a properly served written demand of the owner, the lien shall be extinguished.”). The contents of a complaint to enforce or foreclose upon a lien typically are set forth by statute and generally all parties with an interest in the subject property (mortgage holders, for example) must be named as defendants in the action. The Illinois Commercial Real Estate Broker Lien Act, which is the model upon which many other states' laws are based, expressly states that failure to issue proper summons and notice to all interested parties “shall be grounds for judgment against the plaintiff with prejudice,” meaning that there will be no opportunity to refile if an error is made. 770 ILCS 15/10(g).

While brokers are often asked to waive their lien rights in a brokerage agreement, some jurisdictions will not recognize such waivers. For example, Indiana's broker lien law states that “[e]xcept for a waiver or release of a memorandum or lien provided in consideration of payment of the fees or commissions claimed by a principal broker under this chapter ' any waiver of a principal broker's right to a lien on commercial property under this chapter is void.” Ind. Code ' 32-28-12.5-16. Maryland similarly provides that a broker may not waive its right to claim or establish a broker's lien in its brokerage agreement because it violates the state's public policy. See Md. Real Prop. Code ' 14-311 (“Any waiver provision made in a commercial leasing brokerage agreement or any other contract, express or implied, between a broker and an owner made in violation of this section is void as a matter of public policy.”) Of course, it is permissible for the owner/landlord to require a broker execute a waiver of its lien rights if such a waiver is conditioned upon receipt of payment.

Conclusion

Owners and landlords should be aware of the rights a broker has before deciding not to pay a commission, as a lien can cloud title to property, breach an owner's loan covenants, and delay transfer of property or interest therein. And brokers should position themselves contractually and otherwise to take advantage of lien laws in their jurisdictions so they can take appropriate action if they are not paid when due.

States with Broker Lien Laws'

'Alabama”””””' Arizona

'Arkansas””””” Colorado””””

'Connecticut”””' Delaware

'Florida””””””” Georgia

'Illinois””””””” Indiana

'Kansas””””””' Kentucky

'Louisiana””””” Maine

'Maryland””””” Michigan

Mississippi”””””Missouri

'Nebraska””””” Nevada

'New Hampshire' New Mexico

'New York””””” North Carolina

Ohio””””””””” Oklahoma

Pennsylvania””” Rhode Island

South Carolina””Tennessee

Texas””””””””'Virginia

Washington”””” Wisconsin

Elizabeth Cooper , a member of this newsletter's Board of Editors, is an International Director and David Hitchens is Senior Counsel at JLL.

Have you ever had a closing held up due to a brokerage lien? Perhaps you are (or represent) a broker who has a brokerage agreement, but the landlord refuses to pay a commission, notwithstanding the fact that the tenant executed a lease for which the broker was the procuring cause. Today, 34 jurisdictions have some form of statute that specifies whether, how, and for what a broker may file a lien for the non-payment of a commission in connection with the sale or lease of commercial real estate. A few states simply give brokers the right to file liens under mechanics' lien statutes, but more than 30 have enacted broker-specific lien laws. These laws have gained a lot of traction in recent years, with Mississippi and New Mexico as the two most recent adopters in 2014. Knowledge of the broker lien laws in your state is important to understand a broker's respective rights and obligations.

Requirements

Written Agreement

The first prerequisite to enforcement in virtually all jurisdictions in which a broker lien right is found is the existence of a valid, written agreement between the broker and the property owner. In some states, such as Texas, specific notice of the broker's lien rights must be included in the agreement itself. See Tex. Prop. Code ' 62.021(e) (“The broker' s right to claim a lien based on the commission agreement must be disclosed in the commission agreement.”). The type of transaction at issue also matters for the availability of lien rights, as a number of jurisdictions (such as Colorado and Virginia) allow commercial real estate broker liens only in the context of a lease transaction, though most statutes apply to both leases and sales.

Once the conditions to file a lien have been satisfied, brokers generally must provide a notice of lien to the property owner and record the lien with the county clerk within a specific timeframe established by statute, often within 90 days. In Ohio, for example, a broker in a lease transaction must file a lien affidavit with the county recorder's office: 1) within 90 days after a default by the owner in the payment due under the applicable commission agreement; or 2) within 90 days after the conveyance of the property if the commission is being paid by the buyer in a sale transaction. Where a seller is paying the fee, however, the affidavit must be recorded prior to the conveyance of the property. The broker is required to provide a copy of the affidavit to both the owner of the property and, in the case of a sale, to the prospective buyer. See ORC ' 1311.87.

To be valid, a notice of lien (or affidavit, as in Ohio) typically must contain: 1) the name, contact information, and real estate license number of the broker; 2) the name of the owner of the property; 3) a legal description of the property; 4) the amount of the lien; and 5) a sworn statement that the lien claimant has read the notice, knows its contents, and believes the statements are true and correct. Some states have other technical requirements as well such as confirmation from the broker that certain disclosure obligations have been met. Almost all states require the broker filing a lien to attach a copy of the brokerage agreement establishing the right to payment. See, e.g., R.C.W. ' 60.42.010 (requiring that a copy of the commission agreement be attached to a notice of claim of lien in Washington state).

Recording

Like mortgage liens, mechanics' liens, and other statutory liens, a brokerage lien is recorded in the county land records where the property is located to put any purchaser of the property on notice of such rights. The general rule for priority of liens ( i.e. , who gets paid first in a foreclosure proceeding) is “first in time, first in right.” In other words, priority of liens often depends on which is recorded earlier in the county records. With brokerage liens, however, that is not always the case. Many states grant priority over a broker's lien to a mortgage lien or mechanic's lien, even if they are not first in time. In Louisiana, for example, “all mortgages, whether recorded prior or subsequent to, shall have priority over a broker's privilege.” La. R.S. 9:2781.1. Moreover, broker liens in some states (including Arkansas and Nevada, among others) only apply to personal property, not real property, which means that the protected interest is only in the proceeds the owner derives from the property, not in the property itself. Florida has a combination of both, establishing a lien on personal property in a sale context, but a lien on real property in a lease context. See Fl. Stat. ” 703 (establishing lien upon “the owner's net proceeds from the disposition of commercial real estate” for sale) and 803 (establishing lien upon “owner's interest in commercial real estate” for lease).

Enforcement

Once the lien is properly noticed and recorded, a broker generally has one to two years to file a lawsuit to enforce the lien unless the owner demands that suit be brought earlier. In Kansas, for example, such a demand compels the broker to commence a suit within 30 days or face extinguishment of the lien. See K.S.A. 58-30a15 (“If a broker claiming a lien pursuant to this act fails to file suit to enforce the lien within 30 days after a properly served written demand of the owner, the lien shall be extinguished.”). The contents of a complaint to enforce or foreclose upon a lien typically are set forth by statute and generally all parties with an interest in the subject property (mortgage holders, for example) must be named as defendants in the action. The Illinois Commercial Real Estate Broker Lien Act, which is the model upon which many other states' laws are based, expressly states that failure to issue proper summons and notice to all interested parties “shall be grounds for judgment against the plaintiff with prejudice,” meaning that there will be no opportunity to refile if an error is made. 770 ILCS 15/10(g).

While brokers are often asked to waive their lien rights in a brokerage agreement, some jurisdictions will not recognize such waivers. For example, Indiana's broker lien law states that “[e]xcept for a waiver or release of a memorandum or lien provided in consideration of payment of the fees or commissions claimed by a principal broker under this chapter ' any waiver of a principal broker's right to a lien on commercial property under this chapter is void.” Ind. Code ' 32-28-12.5-16. Maryland similarly provides that a broker may not waive its right to claim or establish a broker's lien in its brokerage agreement because it violates the state's public policy. See Md. Real Prop. Code ' 14-311 (“Any waiver provision made in a commercial leasing brokerage agreement or any other contract, express or implied, between a broker and an owner made in violation of this section is void as a matter of public policy.”) Of course, it is permissible for the owner/landlord to require a broker execute a waiver of its lien rights if such a waiver is conditioned upon receipt of payment.

Conclusion

Owners and landlords should be aware of the rights a broker has before deciding not to pay a commission, as a lien can cloud title to property, breach an owner's loan covenants, and delay transfer of property or interest therein. And brokers should position themselves contractually and otherwise to take advantage of lien laws in their jurisdictions so they can take appropriate action if they are not paid when due.

States with Broker Lien Laws'

'Alabama”””””' Arizona

'Arkansas””””” Colorado””””

'Connecticut”””' Delaware

'Florida””””””” Georgia

'Illinois””””””” Indiana

'Kansas””””””' Kentucky

'Louisiana””””” Maine

'Maryland””””” Michigan

Mississippi”””””Missouri

'Nebraska””””” Nevada

'New Hampshire' New Mexico

'New York””””” North Carolina

Ohio””””””””” Oklahoma

Pennsylvania””” Rhode Island

South Carolina””Tennessee

Texas””””””””'Virginia

Washington”””” Wisconsin

Elizabeth Cooper , a member of this newsletter's Board of Editors, is an International Director and David Hitchens is Senior Counsel at JLL.