Daily Development for Tuesday, August 24, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

BROKERS; LICENSING; UNAUTHORIZED PRACTICE OF REAL BROKERAGE: Where the dominant feature of a sale is the transfer of real property, a “consultant” who arranges the sale must have a real estate license in order to collect a fee.

Panarello v. Segalla, 776 NYS 2d 360 (A.D. 2 Dept. 2004)

Owner of a country club entered into an agreement to pay a consultant a fee upon sale of the club property to a buyer secured by the consultant.

Consultant contacted a real estate broker who introduced him to potential buyers in exchange for a split of the fee. The buyers eventually bought the property for $14.25 million and consultant and his broker friend agreed to reduce the fee to $500,000. The country club occupied only 170 acres of the 640 acre property sold. The deal closed, but the seller stiffed the consultant and his friend. They sued for the fee.

The trial court found for the consultant, but the appeals court reversed. It held that the seller owed no fee, because the consultant was not licensed and, under New York law, therefore not entitled to collect a commission for services in furtherance of a real estate sale transaction. Although a license is not required for a party to perform a function as a consultant to a sale of a business, it is required if the transaction involves the sale of real estate.

The court concluded that the primary asset involved in the sale was the real estate. It emphasized that the listing agreement that is was for the sale of “ real estate and property consisting 700+ acres” and the sale agreement allocated no value to the personal property or intangible assets of the country club business. The same was true of the Real Property Transfer Tax return. Even the consultant’s own marketing plan emphasized the development value of the land, rather than the operating value of the country club.

Although the case is vague, it appears that the broker also lost out because he had no separate fee agreement with Seller.

Comment 1: Certainly a painful lesson here for our consultant and his friend, but one that they should have learned in real estate school. New York’s rule is tougher than many other jurisdictions’. In many states, the court will not uphold a commission agreement, but will recognize an action in quantum meruit if the unlicensed party’s efforts in fact result in a successful sale. Usually the award in such cases is a market rate commission.

Comment 2: Many unlicensed parties attempt to act as “finders, ” arguing that if their sole function is simply to introduce the parties, they do not fall within the licensure statutes. This actually works in a few places, but more often the scope of the real estate licensure statute elminates any argument that “finders” aren’t included.

Comment 3: In fact, many lawyers try to hide behind one of the two exceptions set forth above, at least when cornered. They may have performed brokerage style services in the misapprehension that the exception in real estate licensure statutes for legal services permits them to take a commission for promoting a sale. In fact, the largest number of jurisdictions has ruled that the “legal services” exemption is available only when lawyers are performing as lawyers, which usually requires that they pay a fee commensurate with the nature of their lawyer’s services. Typical sales commissions can rarely be justified on this basis.

The editor wrote about all this in a (now somewhat outdated) article entitled “Thinking About Being a Lawyer/Broker?” Think Again.” http://dirt.umkc.edu/files/art2.htm The article was inspired by ethical rules then existed or were being considered that have seen been abandoned. The editor still thinks that serving in both capacities is a bad idea, and certain to lead one into ethical quagmires.

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