New Broker Lien Act Provides Tool for Brokers to Get Paid…But Is It Being Used?
By Benjamin H. Hammond
In October of 2010, the Commercial Real Estate Broker’s Lien Act was enacted. This Act provides a mechanism for commercial real estate brokers to secure commissions earned by placing a lien on the real estate being sold. In order for the lien to attach, there must be:
1. A written commission agreement;
2. The broker must be entitled to a commission under a written commission agreement; and
3. The lien must be recorded before the conveyance of the real estate.
The broker must serve a copy of the lien on the owner of the property and the person who signed the written commission agreement within ten (10) days after the lien was recorded. If the lien is not served timely, it will be void and unenforceable.
Interestingly, a broker lien can be recorded if the broker is owed a commission as a result of a lease as long as the lien is recorded within sixty (60) days after the lease is signed. Also, a broker may record a lien if the broker is owed a commission in the future as a result of an option to purchase commercial real estate.
The statute provides that in the event a lien is recorded, the closing of the transaction involving the real estate shall proceed except that an escrow account shall be established from the proceeds in an amount to satisfy the lien. The statute provides that neither the buyer nor the seller are permitted to refuse to close the transaction because of the requirement to establish an escrow account for this purpose. The money remains in the escrow account until the rights have been determined with regard to the parties and the commission owed.
Lastly, similar to the Construction Lien Act, the broker has one (1) year to file a lawsuit to enforce its lien. Failure to commence such a lawsuit within one year after the lien is recorded will result in the extinguishment of the lien.
However, should a court ultimately find that the broker lien is valid, that court may enter a judgment ordering the sale of any interest in the commercial real estate or part of the commercial real estate to which the lien attached by way of a foreclosure sale. The court may, in its discretion, award costs to a prevailing broker, including attorneys’ fees, litigation costs, and pre-judgment interest. However, if the court determines that the action by the broker was frivolous, the court may, in its discretion, award these same costs to the defendants.
A final interesting section of the statute provides that the owner of commercial real estate, upon receipt of the broker’s lien, may make a written demand that the broker file a lawsuit to enforce the lien or that an answer be provided to the owner essentially substantiating the lien. If the broker does not commence an action or an answer is not filed within thirty (30) days of the demand, the lien is extinguished.
Practically speaking, relatively few, if any, broker’s liens have been recorded in West Michigan. This is likely due to the fact that many brokers insist and confirm that their commissions are included on the proposed closing statement prior to the closing. So far, the enactment of the statute has not resulted in broker liens being filed in every transaction simply to preserve the right to collect commissions. However, this Act has impacted title companies, many of which now require the buyer and seller of commercial real estate to provide a representation and warranty that they have not signed any written commission sales agreements with any other brokers.
An interesting scenario may arise where a broker lien is recorded on the day of closing, after the title company last ran its title search, but before the recording of the new deed. This may leave title companies open to exposure under this new Act.