By Harvey S. Jacobs, Published: May 10, 2014 in the Washington Post.
In a surprising ruling, the United States District Court for the Eastern District of Virginia decided last month that international real estate broker Jones Lange LaSalle Americas (JLLA) was not entitled to a $6.6 million real estate brokerage commission because a key employee involved in the transaction was not licensed as a real estate salesperson. JLLA has appealed this ruling, however, appellate courts are typically reluctant to overturn the fact-findings of the trial court unless there was legal error.
Although arising from a commercial leasing transaction, the case has implications in the residential market. The court’s ruling is a wake-up call to every real estate broker, landlord, tenant, homebuyer and home seller: Before you engage in real estate brokerage in Virginia, you had better possess all the requisite licenses. In addition, if you are a broker you had better police your employees to make sure that anyone performing real estate salesperson tasks is appropriately licensed.
If homebuyers/homesellers deal with unlicensed real estate agents, they will not have any recourse to file a claim with the client protection funds administered by the various state real estate commissions. These funds have been established to compensate buyers/sellers who lose money as a result of dealing with real estate licensees who violate state regulations, such as failure to safeguard client funds in an escrow account.
The court analyzed three essential elements required for all real estate brokerage agreements: first, whether the listing agreement contains a definite termination date; second, whether the tasks performed by the broker’s employees require those employees to be licensed; and third, whether the broker’s actions in bringing about the closed transaction were the “procuring cause” – spurring the events leading to the purchase or lease.
Everything in a listing agreement, including the commission, is negotiable. Virginia and the District require listing agreements to be in writing and to contain a definite termination date or termination event. In those jurisdictions, if no termination date is specified, the law provides that the agreement shall terminate in 90 days.
Virginia law requires every employee or independent contractor who acts as a salesperson for a brokerage firm to hold a real estate salesperson or broker’s license. Real estate salespersons are defined as “any person, who for compensation is employed by a real estate broker, to sell or offer to sell, or to buy or offer to buy, or negotiate the real estate purchase, sale, or exchange, or to lease, rent or offer for rent any real estate, or to negotiate leases.” This broad definition includes virtually anyone who is involved selling or leasing real estate.
You can check online to see if a person is properly licensed in the District by visiting www.pulseportal.com.
In Maryland, license verification can be done online at www.dllr.state.md.us.
In Virginia you can verify if someone has a license and also see if there are any open or closed complaints filed against them by going online at www.dpor.virginia.gov/LicenseLookup.
With minor exceptions, the District and Maryland also prohibit anyone but real estate licensees from receiving real estate commissions. In the District, the following persons do not need a real estate license: broker’s clerical staff; property owners representing themselves; administrators, executors, guardians, conservators acting under a court order; auctioneers; and trustees acting under the power of sale authority in a mortgage or deed of trust.
Attorneys also do not need to be licensed and can earn real estate brokerage commissions in the ordinary practice of their profession, so long as they are not regularly engaged in the real estate business and do not purport to be real estate brokers, salespersons or property managers.
In the Virginia case, the court carefully analyzed the exact tasks that the unlicensed employee performed for the landlord. It concluded that when the employee identified tenant prospects, brought them to the landlord’s attention and developed the successful leasing strategy, he crossed the line and was therefore required to be licensed as a real estate salesperson.
In order to receive a real estate brokerage commission, the broker must be the transaction’s “procuring cause.” Contrary to popular belief, mere tangential, isolated or sporadic involvement, such as merely showing the client the property, with nothing more, does not cause a broker to have earned his commission. In order to be the transaction’s procuring cause, the broker needs to cause a series of events, which, without break in their continuity, accomplish the client’s prime objective, which in most cases is the procurement of a purchaser/lessee ready, willing and able to buy/lease the real estate on the owner’s terms and the transaction actually closing.
In Maryland, the broker can earn his commission even if the transaction has not closed; however, most listing agreements supersede that code and stipulate that the commission shall only be paid upon settlement.
Whether you are the buyer, seller or broker, when signing and performing under a brokerage agreement, make sure that all real estate licenses are in place; that you know when and how the agreement terminates; and that you maintain continuous communication among all parties until the deal closes.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Harvey at 301-300-6252, Jacobs@Jacobs-Associates.com or Ask@thehouselawyer.com.