Daily Development for
Wednesday, May 15, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

The Reporter for today's item is Dirt member Professor Cy Fax of the University of Pittsburgh

BROKERS; COMMISSION; LICENSING: A business broker not licensed as a real estate broker may recover a commission for procuring a purchaser of a business but not a commission for the transfer of the real estate on which the business is located. Winthrop & Co., Inc. v. Milgrom, 668 A.2d 557 (Pa. Super. 1995).

Plaintiff entered into an exclusive listing agreement for the sale of defendant corporations' business and assets, including real estate. The business and the real estate were owned by separate corporations. Under the agreement, the defendants agreed to pay the plaintiff a transaction fee of $100,000 on closing a "sale." Plaintiff worked for four years to find prospective purchasers procured the sale. When the defendants failed to pay the compensation provided in the agreement, plaintiff sued for breach of contract and unjust enrichment. The trial court sustained defendants' preliminary objection that the plaintiff was not barred from receiving compensation by the Pennsylvania Real Estate Licensing and Registration Act, because plaintiff was not licensed as a real estate broker.

The ability of an unlicensed broker to recover compensation based on a single transaction involving both real estate and other assets of a seller is a question of first impression in Pennsylvania. Pennsylvania has held that the Act bars an unlicensed person from receiving compensation for the sale of real estate. Pennsylvania has also held that the lack of a real estate license will not defeat a right to compensation for the sale of a business or non real estate assets. The Pennsylvania Superior Court concluded that the Act was intended to protect "ordinary consumers" and not "sophisticated parties" involved in business transactions. "Knowledgeable professionals who make a living in the complicated and risky world of buying and selling businesses are not the intended beneficiaries of the [Act] and should not be able to avoid obligations they knowingly assumed based on the fact that a particular asset transfer happened to include real estate."

The agreement contemplated that the sale might take place in a single transaction or series of transactions involving all or a portion of the business, its assets, or the real estate. Plaintiff was entitled to the compensation "upon consummation or closing of a Transaction." Plaintiff's compensation claim was based on the fact that a "transaction" had occurred. Plaintiff was not seeking compensation because of the sale of real estate. Therefore, the trial court erred in granting the preliminary objection.

Reporter's Comment: It is not clear from the opinion whether, on remand, the trial court must (1) determine if the agreement provides for compensation on sale of the business alone, entitling plaintiff to the full $100,000, or (2) allocate the compensation between the sale of the business and the sale of the real estate and award only partial compensation based on the sale of the business. It does appears as if the Pennsylvania Superior Court has created a means for avoiding the Act by casting a transaction involving the sale of real estate and other assets as primarily a sale of the other assets with the real estate sale being only an incidental part of that transaction.

Editor's Comment: Everyone needs the protection of a licensing system for brokers. Even brokers need the protection. Perhaps the concept of "business broker" is so vague and uncertain that it makes sense to limit the application of the licensing concept to real estate deals. But in the real estate area, licensing is essential. It is not difficult to know when real estate is part of a deal. Of course, occasionally the real estate is not "significant." But, even in these cases, it would not be difficult to associate a licensed realtor to participate in that area of the transaction. Nevertheless, the recent cases reported in prior ABA Developments Volumes tend to follow the Pennsylvania court's decision: Business Brokerage Centre v. Dixon, 874 S.W.2d 1 (Tenn. 1994): Bottomley v. Coffin, 389 A.2d 485 (R.I. 1979).

Editor's Comment 2: With the new initiative of brokers' lobbying groups to free brokers from liability due to breach of fiduciary responsibilities, one could argue that licensing is all the more important, as this may be the only control over broker behavior. On the other hand, if all that the licensing boards do is discipline brokers for breach of duties that are established outside of the licensing statutes, licensing may be an anachronism, since brokers in the near future may have no duties other than to collect the commission as the property goes by.

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 five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.