Daily Development for
Thursday, March 20, 1997

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

BROKERS; LICENSING; UNLICENSED BROKERAGE ACTIVITY: Although a person without a real estate license is prohibited from acting as a real estate broker for others, there is no prohibition from acting on one's own behalf, and a note given as a fee for release of a prospective interest in a real estate project negotiated by the payee is not necessarily a fee for brokerage services.

Hermitage House Square, L.P. v. England, 929 S.W.2d 356 (Tenn. App. 1996)

England owned a car lot across the street from Turner's motel business. The two had become friends over the years, and when Turner decided to retire, he offered the place to England. England couldn't afford to buy the place, but suggested that he participate with others in an acquisition scheme. Turner gave England a 30 day option on the place, which was extended during the course of negotiations. Ultimately, a limited partnership agreed to buy the motel and retain England as a salaried manager with an equity interest. There is no indication that England was to pay cash for this interest. The agreement was contained in a letter.

By time of closing, however, England was not interested in the opportunities of the project. The partnership paid him $5000 cash and gave him a $20,000 note "for value received." There was not writing documenting the purpose of these payments, and no formal release of the option.

Later, the parties "fell out" and the partnership would not pay the small amount remaining on the note. England sued, and the partnership defended on the grounds that the note amounted to compensation for England's services as a broker. The trial court found for England.

On appeal: held: Affirmed. Although England actively participated in the negotiations by which the partnership acquired the property, England at the time was acting pursuant to his option rights and operating on his own behalf, and not as a broker.

Comment: The court views as a question of fact for the trial court the issue of the real purpose of England's receipt of the 15% interest and management agreement. As the trial court concluded that the parties really were not rewarding England for negotiating the acquisition, but rather for contributing the option to the enterprise, the court concluded that England was negotiating on his own behalf.

Of course, to an extent this analysis begs the question of the purpose of the original option. Was it really to give England an opportunity to buy, or rather to give England a reward for finding a buyer? The parties knew when England got the option that England would never be able to exercise it himself. On the other hand, England later negotiated with Turner on behalf of the partnership, rather than negotiating with the partnership on behalf of Turner, so it appears that England did not receive the option to act as Turner's broker.

Given the posture of the case on appeal and findings below the result cannot be criticized. But it does seem to carve out a loophole that a clever (but unlicensed) party could exploit. Instead of coming in as representative of the acquisition group, the party comes in as a member of that group, and then later relinquishes its membership interest in exchange for a cash payment. But it would be difficult to carry out this artifice deliberately without the knowledge and consent of the acquisition group, so it perhaps is extending the matter too far to give the acquisition group the ability to recharacterize later the relationship in which it has been such an active participant.

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 Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

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.