Daily Development for Thursday, February 3, 2000

Daily Development for Wednesday, August 31, 1999 By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

BROKERS; COMMISSIONS: Although a tenant's parent company's receipt of part of a broker's commission in connection with a lease transaction might actually be "fee splitting," it might not violate any law if it merely served to effectively reduce the fee that the broker might otherwise have collected. MarkeimChalmers, Inc. v. Masco Corporation, 322 N.J. Super. 452, 731 A.2d 114 (App. Div. 1999).

A licensed real estate broker brought a declaratory judgment action to determine the enforceability of an agreement it had with a corporation which required the broker to pay the corporation a brokerage fee for the leasing of premises by one of the corporation's subsidiaries.

The corporation claimed that the money was also consideration for a guarantee that it gave for the underlying lease that the broker had obtained for the subsidiary. The facts, however, showed that the corporation had volunteered the guarantee and it was not made a condition by the landlord or by the broker during negotiation of the lease. Furthermore, the corporation received separate compensation for the guarantee in the form of a reduction of the rental. More telling, however, was that the amount of money claimed by the corporation was determined almost simultaneously with it having learned of the amount of the commission that the landlord had agreed to pay.

The landlord testified that its impression was that the agreement between the broker and the corporation was a "typical" attempt to split fees. The lower court held that it was an improper fee splitting arrangement because the corporation was not a licensed real estate broker, and therefore was not entitled to a portion of the commission. The Appellate Division agreed with the lower court's finding that the agreement was fee splitting, but had more difficultly with the contention that such an arrangement was precluded by New Jersey law.

The corporation, perhaps because it thought that the commission being paid by the landlord was too high, clearly used its guarantee as a sword to reduce the amount that the broker would keep for itself. This conduct might be reprehensible, but it was not clearly in the form of "compensation" for acts required to be performed by brokers. The acts ordinarily performed by licensed brokers and salespersons are referred to in the statute as "assist[ing] or direct[ing] in the ... negotiations or closing of any transaction which does or is contemplated to result in the ... leasing ... of any real estate ... ."

The Court held that one might consider the corporation's efforts as part of the negotiation process for the lease. Applicable New Jersey statute only closes New Jersey courts to suits by unlicenced persons for monies that are, in fact, real estate commissions. To determine whether the facts in this case were considered within the context of the entire scope of the statute, the Court looked to the primary objective of that statute which is to "protect consumers by excluding 'undesirable, unscrupulous and dishonest persons ... from the real estate business.'" Here, the Court believed that a reasonable juror could conclude that the corporation wanted part of the broker's commission because it thought that the commission was too much money for the deal and that the corporation used its guarantee to extract the sharing agreement.

Further, a broker may voluntarily reduce a real estate fee. Consequently, the agreement may have only represented strongarming by the corporation to reduce the amount of money the broker would get from the deal and to put some of the money into its own pocket. "Although not suggesting that this is how business people should deal with each other," the Court held that what happened in this case was far different from the broker and the salesperson activities engaged in by unlicenced persons. Consequently, while affirming that the lower court's view of the true nature of the agreement might be seen as an attempt to split commissions, the Appellate Division reversed the determination that the agreement was unenforceable and remanded the matter for further consideration of its actual nature.

Comment 1: Why is this law different from any other law? If they did the crime, let them "do the time!!" The fact that they have had motivations other than those that inspired the law in the first instance is relevant only if the law says so. To carve out loopholes based upon special intent that must be worked through by a trier of fact is not the behavior of a court committed to business regulated by a rule of law. Perhaps the court doesn't have confidence that the fee sharing prohibition actually is borne of concern for regulation of the profession, but the editor does not expect them to act on that belief, but to accept the promulgated rules and to apply them.

Comment 2: If we want to talk about public policy why does the money paid by the landlord to the broker transfer into the pocket of the tenant? Shouldn't the court have punished both the broker and the tenant for the breach of rules, leaving the landlord better off? Here, apparently, the landlord knew what was going on. But in other cases it might not, leading the landlord ripe to be fooled by an unscrupulous broker working both ends against the middle.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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