The Unlicensed Real Estate Broker in New York: Beware

The court and the defendants agreed that elements one, two and four of New York's requirements for recovery in quantum meruit had been shown by the plaintiff, but the defendants argued that element three — that the plaintiff had an expectation of compensation — could not be proven, since the plaintiff admitted that it did not expect the defendants to pay it for finding the properties, but instead expected the sellers of those properties to pay the plaintiff upon sale to the defendants. In fact, according to plaintiff's own pleadings, it “anticipated such compensation would be in the form of real estate commissions paid by the owners of the sites identified for the defendants when the defendants actually acquired the sites.” Thus, according to the defense, plaintiff could not make a valid claim for compensation on the theory of quantum meruit in this action.

The court disagreed with the defendants on this point, noting that two analogous cases had already been decided in those plaintiffs' favor. One case, Curtis Props. Corp. v. Greif Cos., 628 N.Y.S.2d 628 (N.Y. App. Div. 1^st Dep't 1995) involved a realtor who contracted with three clothing companies for the exclusive right to renegotiate their retail leases. It was agreed by the parties that the realtor's compensation would be paid by the eventual seller or lessor of the properties once the transactions were completed. However, even though the realtor conducted extensive efforts to secure the leases, the apparel companies ultimately negotiated leases directly with the lessors, bypassing the realtor. The realtor brought suit under a theory of quantum meruit and the court refused to dismiss, noting that the clothing companies had indeed received some benefit from the realtor's efforts to find them retail locations.

New York's Appellate Division reached a similar conclusion in Joseph Sternberg Inc. v. Walber 36^th St. Assocs., 594 N.Y.S.2d 144 (N.Y. App. Div. 1^st Dep't 1993), a case in which a real estate broker worked with a prospective buyer of an office building based on that buyer's promise that the seller of the property would pay the broker if a deal was consummated. Instead, the buyer ultimately negotiated directly with the seller then refused to pay the broker a commission. The broker sued the purchaser in quantum meruit and the appeals court allowed the case to proceed.

With these two precedents in mind, the Howard Carr court determined that dismissal of the claim in quantum meruit was not warranted, even though the defendants had never been the ones expected to pay the broker's commission under the terms of the parties' agreement. “After all,” stated the court, “quantum meruit is a doctrine focused on a plaintiff's reasonable reliance on a defendant's representations.”

No License, No Forum

The above might have come as good news to the Howard Carr plaintiff but for one big fly in the ointment: New York's Real Property Law (RPL) §442-d. That statute states as follows:

No person, copartnership, limited liability company or corporation shall bring or maintain an action in any court of this state for the recovery of compensation for services rendered, in any place in which this article is applicable, 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 alleged cause of action arose.

N.Y. RPL §442-d.

The court observed that section 442-d has been strictly construed by New York's courts and, as stated in PrinceRidge Grp. LLC v. Oppidan, Inc., 2014 WL 11510256, at 5 (S.D.N.Y. Feb. 4, 2014), “compliance is mandatory.” Thus, if a person acts in the capacity of a real estate broker yet does not have a real estate broker's or real estate salesman's license while doing it, the courts of New York will not hear any case they bring to recover compensation for any work they performed to facilitate a real estate transaction.

The Howard Group argued that section 442-d did not apply in this case because, as plaintiff, it was not seeking a real estate-based compensation, merely a fair amount of compensation for work it performed at the defendants' request. The court was unconvinced, noting that the Howard Group's complaint described work that could only be characterized as pertaining to a real estate transaction. Stated the court: “The pleading alleges that plaintiff sought out certain real estate based on defendants' representations about its own, specific requirements and then engaged in conduct aimed at facilitating defendants' ultimate purchase of a subset of those properties. Accordingly, §442-d applies to these facts.”

As the Howard Group was not a licensed real estate broker or real estate salesman, the court determined that it could not permit the plaintiff's case to go forward, because §442-d barred the suit in its entirety.

A Narrow Exception

As an aside, there is an exception to the rule in §442-d that a person not licensed as a real estate broker may not seek redress through New York courts for a real estate deal gone bad. That exception was illustrated in Kopelowitz & Co. Inc. v. Mann, 921 N.Y.S.2d 108 (N.Y. App. Div. 2d Dep't 2011), where the plaintiff's quantum meruit case was allowed to proceed over the defendants' objection because the plaintiff alleged that he was not acting as a broker but was trying to facilitate a real estate deal in which he himself would potentially invest. Alternatively, the Kopelowitz plaintiff asked to be characterized as a “finder” whose role was to introduce the real estate holding company to a buyer in exchange for a “finder's fee.”

The Howard Group cited to Kopelowitz in its argument against summary dismissal of its claim, but the court determined the two cases were not analogous. Not only had the Howard Group not alleged that it had planned to invest in any property it found for the defendants, but the payment it was demanding could not be characterized as a “finder's fee,” said the court. “To the contrary, plaintiff alleged that it expected compensation in the form of real estate commissions paid by the owners of the sites it identified, not some kind of a fixed sum paid by defendants in exchange for an introduction.”

Conclusion

The case of Howard Carr Cos. v. Cumberland Farms illustrates the folly of attempting to act as a facilitator of a real estate transaction in New York without first obtaining a broker's license. In such a case, if the buyer or seller reneges on a promise to pay the facilitator, that person or entity will likely have no way to seek compensation through New York's courts, unless he is also a potential investor in the property. The loss can be substantial, as it was for the Howard Group.

*****

Janice G. Inman is Editor-in-Chief of Commercial Leasing Law & Strategy.