Daily Development for Wednesday, September 19, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BROKERS; LICENSING; OUT OF STATE BROKERS: Federal court invalidates KentuckyE2=80=9Cturf state=E2=80=9D law prohibiting out of state licensees from practicing real estate or sharing fees with Kentucky licensees.

River Oaks Management v. Brown, 2007 WESTLAW 2571909 (9/4/07)

"Turf state" laws prohibit cooperation between in-state real estate brokers and out-of-state real estate brokers. In addition to Kentucky, seven other states have such laws: Nebraska, New Hampshire, New Jersey, Oklahoma, Pennsylvania, Missouri and Utah.

Kentucky's turf state policy required anyone who brokers real estate transactions to possess a valid state real estate license. It further required out-of-state brokers representing clients who wish to purchase property in the state to refer those clients to a Kentucky broker, who must then handle all aspects of the transaction. The Kentucky broker could pay a fee for the referral, but could not share the commission. 

In essence, this regulation banned real estate brokers from cooperating with Kentucky brokers in the marketing, leasing and management of commercial property in the state, thereby excluding national brokerage firms from the Kentucky market. The plaintiffs here were customers and brokers in the Kentucky office of a national commercial brokerage firm.  They noted that many commercial real estate investors have buyers or tenants broker who regularly represent them and would prefer to continue to work with those brokers in evaluating Kentucky real estate opportunities.  They noted further that in marketing Kentucky property out of state, they would benefit greatly from access to cooperative fee splitting agreements with brokers in other states. 

The Kentucky court found that the policy's provisions effectively force both owners and purchasers of Kentucky real estate to work with only state licensed brokers. While this favored in-state interests by ensuring that virtually all commissions from the sale of Kentucky real estate remain with state licensed brokers, the court found that the burden on access to national markets was unacceptable.  It ruled that the prohibitions constrain interstate commerce in the purchase and sale of Kentucky real estate, isolating Kentucky from the national brokerage market, a result made unconstitutional by the Commerce Clause.

"The purchase and sale of real estate is often a costly and complex transaction.  A consumer who maintains a trusted relationship with a broker should not be compelled to accept the services of a stranger in order to make that transaction."

The state argued that consumer protection considerations supported the law, but  the court noted that in fact the statute was more likely to endanger many consumers:

"[T]he complete exclusion of a buyer's broker from the transaction may well render the foreign buyer/lessee more vulnerable to fraud. . . . [a client] should have the option of engaging the services of a real estate broker in whom one has confidence and trust. . . [but] that option does not exist for out-of-state consumers.

. . . While licensure protects the public from unscrupulous and incompetent brokers, the court cannot discern how prohibiting cooperation between an out-of-state broker and a Kentucky licensed broker reinforces this protection if the Kentucky licensed broker oversees the interstate transaction.   It appears that the prohibitions' main purpose is to ensure that virtually all commissions are kept in Kentucky. This is achieved, however, at an unconstitutional cost to interstate commerce."

Comment 1: Note that the ruling does not permit out of state brokers to do business in Kentucky without associating with a Kentucky licensed broker.   Rather, it permits fee sharing and other accommodations to out of state licensees to insure that customers get the benefits of both in state and out of state professionals.

Comment 2: Nothing in the opinion limits the application of the ruling to commercial brokerage, although the arguments that motivated the court largely related to the commercial context. 

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