New law to help resolve commission disputes

Indiana Business Journal
May 29th, 2006
Jennifer Whitson
jwhitson@ibj.com

Commercial real estate brokers have a new weapon in disputes over unpaid commissions.

A state law that goes into effect July 1 gives them the right to file a legal claim against property, known as a lien, when they think they’re due commissions that haven’t been paid. Previously, their only option was to take the more drastic step of filing a lawsuit.

“Where it’s less than a $50,000 commission, it’s just not practical to file a lawsuit to recover fees,” said Jeff Abrams, a real estate attorney with Indianapolisbased Dann Pecar Newman & Kleiman PC. “Either they had to negotiate and reduce their fees or take a loss.”

The Association of Indiana Realtors and the affiliated Indiana Commercial Board of Realtors backed the legislation, which passed the General Assembly this year.

Indiana is the 23rd state to grant brokers lien rights as part of a nationwide push to get these laws on the books. Brokers in Indiana will be able to file liens if the promise of a commission was in writing and the deal was signed after June 30.

Drew Augustin, president of the Indianapolis chapter of the Building Owners and Managers Association, said his group was split on the law change. Augustin is also president of locally based NAI Olympia Partners, a commercial real estate brokerage firm.

He said brokers and property managers will both be able to file liens under the new provision and generally liked the bill. But even for brokers, Augustin said, the new law will mean following strict deadlines to protect their claim.

“It adds a new level of responsibility for all of us … to document our position,” he said.

Building owners, he said, are concerned it might complicate closings.

“It could delay closings, add to the cost of closing, or cause monies to be escrowed or interrupt or hinder the sale,” Augustin said, adding that liens might need to be lifted to keep all parties at the table.

Area experts agree that commission disputes are rare in the Indianapolis real estate scene. They say arguments are more common along the edges of the state and happen more when an out-ofstate landholder wants to sell a sole remaining parcel in Indiana.

Real estate attorneys say they’re reviewing the law and bracing for some large changes.
“It’s a significant departure from the law as it has been,” said Rory O’Bryan with local law firm Harrison & Moberly LLP. “It means at least one more headache for commercial real estate closings.”

The new law sets up deadlines for filing liens depending on a broker’s role in a deal.

According to Abrams, for a sale of commercial property, the seller’s broker must file the lien before closing, meaning the broker has to suspect ahead of time that the seller isn’t going to pay the commission.

Augustin said brokerage firms, like his, have a decision to make. To take advantage of the law, firms would have to routinely file a lien before closing for every deal in which they’re owed a commission, incurring extra expense and administrative hassle. Or firms can operate purely on faith that the commission will be paid after every closing.

To protect buyers from delays, the law includes a provision that would force the seller to close but would set aside 110 percent of the amount the broker is claiming as commission until the lien is resolved.

Brokers representing buyers have 90 days after the closing to file, and the lien attaches to the buyer’s interest, Abrams said.

For leases, the rules are slightly different. A broker for a landlord must file a lien on the property within 90 days after

the tenant takes possession unless the

landlord gives the broker written notice 10 days before the lease signing. With notice, the lien must be filed before the signing.

A landlord representative can also file a lien to collect commissions due when a tenant exercises lease terms dealing with expansions and renewals, which could lead to liens being filed years after a lease is originally executed, Abrams said.

For brokers representing tenants, most commissions are finder fees paid out of a landlord agent’s fees. Most are not written agreements, and therefore wouldn’t be subject to liens, according to the law’s provisions.

While several states have similar lien laws for commercial deals, lien rights for residential brokers are still rare.

According to the National Association of Realtors, only three states allow broker liens for residential transactions. Karl Berron with the Indiana Association of Realtors said he doesn’t think Indiana will head in that direction anytime soon because, with closings on residential property, “usually everyone’s at the table.”