Michael Albano, MacDermid, Reynolds & Glissman, PCIn my last article for this publication (Connecticut Section: July 15-21, 2016), I argued that commercial real estate brokers who were not REALTORS should consider adding arbitration provisions to their listing agreements to avoid costly and time-consuming court litigation. In this article, I will discuss what steps a broker may take to increase her chances of getting paid after she comes to learn that the party obligated to pay her commission under the listing agreement is not likely to do so.
A Connecticut broker has a statutory right to place a lien on real property that was sold or leased through the broker’s efforts. The amount of the lien is ordinarily the amount of the commission that was due, and – like a mechanic’s lien – the lien may be foreclosed if the placement of the lien does not encourage the contractually obligated party to pay up. As one might imagine, no property owner – and no mortgagee bank – would be happy to learn that a broker has placed a lien on her property. The property owner is, therefore, incentivized to reach an agreement with the broker.
The procedure for preparing, serving and recording a broker’s lien is – compared to litigation – relatively easy, quick and inexpensive. That’s the good news. The bad news is that it must be done correctly. To gain the protection of a lien, a broker must closely follow the statutory requirements regarding the timing, notice and recording of the lien. There are absolutely no second chances once the statutory deadlines have passed.
No broker’s lien will be enforceable unless the broker satisfies the requirements of Section 20-325a of the Connecticut Statutes. The first hurdle a broker must overcome is whether the underlying listing agreement is valid under the statute, which means that the agreement must either contain all of the elements noted therein (Section 20-235a(b)) or, in the case of commercial real estate, the agreement may contain a more limited number of critical elements (Section 20-325a(c)). If the agreement fails to meet these required elements, the broker may not enforce either the broker’s lien or the listing agreement. One critical element is that the listing agreement must contain language that plainly and boldly states that the broker may be entitled to certain lien rights pursuant to Section 20-325a.
If the listing agreement satisfies the requirements of the statute, a broker’s lien on a sale of real property (where the commission is due at the time of the sale) must meet the following requirements: (1) the broker must give written notice to both the property owner and the prospective buyer that the broker is entitled to a commission pursuant to the terms of the listing agreement and that the broker intends to claim a lien on the property; (2) the notice must be served on the owner and prospective buyer by an “indifferent person” (such as a state marshal); (3) the notice must be served not later than three days prior to the later of the date of the conveyance as stated in the sales agreement or the actual date of the conveyance; and (4) the lien is recorded prior to the actual conveyance.
When the transaction involves a lease and the commission will not be paid in installments, the notice must be served on the owner and the prospective tenant at least three days before the later of the conveyance date in the lease or the date when the tenant takes possession. Then, the lien must be recorded within thirty days of when the tenant takes possession.
Whether the lien involves an underlying purchase or lease, a copy of the lien must be delivered to the property owner by a state marshal or by registered or certified mail, return receipt requested. A broker can save time and expense by serving both the notice and the lien at the same time. The statute contains slight but important variations if a commission is to be paid in installments, or when a commission is triggered by the exercise of an option.
By now, the reader is likely to have noticed that the timing deadlines for serving the notice of lien may, depending on the particular circumstances of a deal, be difficult if not impossible to meet. How can a broker serve a notice of lien three days before the date of conveyance or before the date the tenant takes possession if the broker has no expectation of being paid until after the closing of the deal? That is a valid and critical question, which can perhaps be best answered by stating that a broker must keep her ear to the ground and, when she becomes the slightest bit concerned about payment, serve a notice and record the lien. If the broker is paid, there’s no harm and no foul, and the lien can be easily released. If the broker is not paid, she is protected.
The value of any lien can only be assessed by the degree to which it can be enforced. Once a properly drafted broker’s lien has been recorded, the broker has one year within which to bring a foreclosure action on the property. The property owner is not, however, without defenses. Should it become apparent that a condition occurs that would prevent the broker from receiving a commission, including but not limited to a defective listing agreement, the property owner may demand the lien be released or satisfied within thirty days, or face penalties including the reimbursement of legal expenses. A property owner may make a strategic move to force a broker’s hand by demanding that the broker either file a foreclosure action within forty-five days or release the lien.
Although I wrote this article from a broker’s perspective, I must emphasize that I do not advocate that a broker undertake the process of serving a notice of lien and filing the lien on the land records without the assistance of an attorney. I have been approached more than once by a broker who attempted to serve the notice and record the lien but misread or did not fully understand the statute, thereby rendering the lien unenforceable and worthless. Although such a broker still has the option to file a lawsuit for breach of the listing agreement, a properly crafted and timely served and filed broker’s lien can lead to payment without the time and expense of litigation.
Michael Albano is the chair of the real estate brokerage group at the law firm of MacDermid, Reynolds & Glissman, PC, Hartford, Conn.