Lien law gives brokers ability to collect earned commissions
Michigan brokers are celebrating new legislation that makes it easier for them to collect earned commissions — and with good reason.
The Commercial Real Estate Brokers Lien Act, which went into effect in October, allows brokers to attach a lien to commercial real estate involved in a sale or lease transaction in certain circumstances. By placing a lien on the real estate, brokers can be more assured that their earned commission will be paid at the time of the closing of the transaction.
For years, contractors have had the ability to lien real estate improved by their services. Historically, however, brokers have not had the right to place liens on real estate to secure the payment of earned commissions, even if a broker’s efforts were primarily responsible for the sale or lease of the property.
As a result, brokers have been unable to demand payment as part of a closing and were often required to pursue litigation to collect earned commissions. Litigation is both costly and time-consuming, making it a poor substitute for lien rights.
Over the years, brokers have questioned why a deal should be allowed to go forward if the procuring agent is not properly compensated. Brokers recognize that the closing is often the best time to receive payment because the cash necessary to make the required payment is often available as net transaction proceeds. For brokers, the new law finally puts them in a strong position to collect payments to which they are entitled — without unnecessary costs or time.
Before brokers can place a lien on commercial real estate, they must meet certain requirements. Specifically, they must:
- Be a licensed real estate broker in the state of Michigan.
- Have a written, signed commission agreement.
- Be entitled to a commission under that agreement.
- In the case of a lease, file a lien within 60 days after the lease is signed.
- In the case of a sale, file a lien before the conveyance of the property in question.
If these requirements are met, the broker can file the lien on the real estate in question at the office of the register of deeds in the county in which the property is located. As the final step in the process, the broker must provide a copy of the lien to the owner of the property and the party who signed the commission agreement within 10 days of recording the lien.
The culture of commercial real estate transactions in West Michigan could go through substantial changes as a result of the new broker lien law. While we still need some time to see how things shake out, some changes have already been made, while others are likely on the way. These include:
Title insurance: Title companies have already responded to the new legislation by updating their affidavits to inquire whether the property in question is subject to a written brokerage agreement or brokers’ lien. Title companies, who do not want to pay claims, will look to sellers to provide representations regarding any existing brokerage relationships.
Due diligence: Purchasers of commercial real estate will need to examine (or have their title company examine) the public records for any recorded liens prior to the closing of the acquisition. Since brokers now represent another party who could potentially put a lien on a piece of property, purchasers will need to be more aware of the seller’s broker and potential commission obligations associated with the property.
Protection: Whether filing a broker lien will become standard operating procedure remains to be seen. Since the law requires liens on sales to be filed in advance of a closing, we may see a sudden increase in their number. As a purely practical matter, though, many brokers may be reluctant to file liens, as such filings may impact their relationship with their client.
The Commercial Real Estate Brokers Lien Act was a long time in the making. It will provide the brokerage community with a more effective, less expensive tool to use to ensure that they receive their due in commercial real estate transactions.
Jim Rabaut is a partner at Warner Norcross & Judd LLP. He concentrates his practice in real estate law with a focus on commercial construction projects, commercial lease negotiations, economic incentives and related areas. He can be reached at firstname.lastname@example.org