Legal
Ignoring License Laws of Other States Can Cost You Referral Fees or Commissionsby Robert D. Butters
There are over a dozen major metropolitan areas in the United States where the central city and suburbs cover more than one state. For this and other reasons, many real estate brokers participate in interstate transactions, either on a transaction-by-transaction basis, or through national referral networks or franchises. It is also common for large national, or even multi-national, corporations to appoint a single real estate firm to manage all of their real estate holdings located in several states or countries.
As a result, the real estate brokerage and management profession is no longer (if it ever was) a local business dealing solely with customers and clients in the same city or metropolitan area. But despite the interstate characteristics of the real estate profession, it is still regulated by the individual states, territories, and the District of Columbia. Each of these jurisdictions reserves the power to determine for itself how real estate brokerage will be practiced within its borders.
Compliance with applicable real estate licensing requirements is a prerequisite to any lawsuit brought by a real estate broker to collect a commission. By the same token, a failure by a real estate broker licensed in one state to observe the licensing requirements of another state where the broker did business will result, at a minimum, in that broker's inability to compel payment of a commission.
This lesson proved costly to a North Carolina real estate firm who sued in the Virginia courts to recover a commission owed to it by a Virginia brokerage firm. The provisions of the Virginia Real Estate License Law that the Virginia Supreme Court construed to bar recovery to the North Carolina firm are nearly identical to provisions found in the Illinois Real Estate License Law, as well as the license laws of many other jurisdictions.
In Harrison & Bates, Inc. v. LSR Corporation, 385 S.E. 2d 624 (Va. 1989), a Virginia real estate brokerage firm, Harrison & Bates ("H & B"), secured a listing to sell a parcel of commercial property in Richmond. A principal of H & B sent a letter to a principal of LSR, a North Carolina real estate brokerage firm, inviting LSR to procure a buyer for the property and offering to pay LSR one half of the gross commission if LSR's efforts resulted in a consummated sale. In the ensuing months, the principals of LSR formed a corporation for the purpose of acquiring the Richmond property. A sale to the corporation occurred shortly thereafter.
After the sale closed, LSR demanded one half of the gross commission paid by the seller to H & B. In its letter to H & B seeking payment, LSR stated that it "brought the purchaser, helped to negotiate the purchase price, and also assisted the purchaser in negotiating financing for the property."
H & B refused to pay LSR any commission. LSR sued, and H & B defended on the grounds that neither LSR nor any of its principals were licensed as real estate brokers by the State of Virginia. A jury returned a verdict for LSR, which H & B appealed to the Virginia Supreme Court.
Reversing the lower court, the Virginia Supreme Court cited provisions of the Virginia Real Estate License Law that requires all persons acting as a real estate broker to have a license issued by the Virginia Real Estate Commission. The Court then cited the provision of the real estate license law that defines the phrase "acting as a real estate broker." The Court noted that, in its letter to H & B demanding a share of H & B's commission, LSR claimed to have done things expressly defined by Virginia law to constitute acting as a real estate broker; namely, procuring a purchaser, negotiating a purchase price, and assisting the purchaser in securing financing. The Court then concluded that LSR had in fact acted as a real estate broker in Virginia without a Virginia license, and, therefore, was not entitled to enforce a right to a commission.
The Court then considered LSR's assertion that a regulation promulgated by the Virginia Real Estate Commission validated its commission claims against H & B. The regulation provided that:
"referral fees and shared commissions may be paid to any real estate broker licensed in this or any other jurisdiction, provided full disclosure of such payments are [sic] made to all principals...."
Rejecting LSR's claim that the regulation was an express authorization for H & B to share its commission with LSR, the Court interpreted the regulation to authorize Virginia brokers to pay referral fees or share commissions with brokers licensed in other states provided that the out-of-state brokers did not engage in any act within Virginia for which a real estate license is required. The Court commented that if LSR's interpretation were accepted, the regulation would effectively nullify the fundamental provision of the Virginia license law that requires persons acting as real estate brokers in Virginia to have a Virginia license.
The Harrison & Bates case illustrates the pitfalls for real estate brokers who participate in transactions in states in which they are not licensed. Referral fees may be paid and commissions shared across state lines so long as each broker is careful not to "act as a real estate broker" in a state where they are not licensed. "Acting as a real estate broker" would ordinarily include marketing efforts intended to induce offers to purchase, estimates of fair market value, contract preparation or negotiation, and assisting in arranging financing. So long as real estate brokers undertake these activities from offices in states where they are licensed, they will be entitled to enforce compensation agreements with sellers or brokers in other states. Conversely, if a broker, on behalf of a customer or client, performs these activities in a state where the broker is not licensed, they will be operating in violation of that state's license law, and will not be able to enforce any right to be paid.
In summary, real estate brokers participating in interstate transactions should be exceedingly careful not to conduct any brokerage activity outside of the state in which they are licensed. All communications, negotiations and document preparation by the broker should occur or originate in the broker's state of licensure. Failure to observe these requirements will put in grave jeopardy your income from these increasingly frequent interstate transactions.
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Robert D..Butters. All right reserved. For information contact Frog Pond at 800.704.FROG(3764) or email susie@frogpond.com.
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