• Real Estate Commission Key Issues
  • October 17, 2014
  • Law Firm: Lerch Early Brewer Chartered - Bethesda Office
  • A recent U.S. District Court for the Eastern District of Virginia decision highlighted the need for real estate sales professionals to be aware of real estate licensing laws in the Washington, DC metropolitan area. In the three local jurisdictions, Washington, DC, Maryland and Virginia, all real estate professionals who participate in a transaction must be licensed in order to receive a commission for the sale or lease of real estate. Simply stated, this means that each individual who brokers a transaction must be licensed either as a real estate broker or as a real estate salesperson.

    In the court’s decision in Jones Lang LaSalle Americas, Inc. v. The Hoffman Family, LLC, the court held that the “failure [of the individual who brokered the lease transaction] to have a license precludes JLLA, as well as [the agent], from receiving any commission with respect to the NSF Lease.” The individual who brokered the transaction believed that the fact that JLLA was licensed as a real estate brokerage firm in the Commonwealth of Virginia was sufficient to entitle the firm to receive a commission. However, the individual who advised the tenant and “brokered” the transaction did not have the required salesperson’s license in Virginia. The Court concluded that for a real estate professional to be entitled to a brokerage commission, he or she must have the requisite license.

    Must Be Licensed in Property’s Jurisdiction

    The licensing laws in the three local jurisdictions allow virtually no latitude for a real estate professional not licensed in the jurisdiction where a property is sold or leased to receive a commission for brokering the transaction. One common misconception is that a real estate professional licensed in one jurisdiction, working “cooperatively” with a professional in an affiliated office who is licensed in the jurisdiction where the property is located, assumes that because the brokerage firm has a licensed individual working on the transaction the real estate brokerage firm is entitled to receive a commission. If the person who brokers the transaction also is not licensed in the jurisdiction where the property is located, the licensing laws prohibit the real estate brokerage firm and the individual broker or salesperson from receiving a commission.

    Commission Agreement Must Be in Writing

    Another common error is that the broker or the salesperson assumes that anyone who facilitates the transaction is entitled to receive a brokerage commission. In the absence of a clear written agreement setting forth that the broker or the salesperson will receive a specified commission arranging the sale or lease of real property, the property owner need not pay a commission. Frequently, a broker or salesperson assumes that because he or she knows the property owner, he or she will receive a commission for arranging for the transaction. However, if there is no written commission agreement and the property owner refuses to pay the commission, the broker or the salesperson has no claim for a commission. In many instances, the property owner and the broker or salesperson don’t want to confront the issues of whether a commission will be paid - and, if so, how much the commission will be and when it will be deemed earned and payable.

    Multiple Brokers Often Results in Disputes

    Frequent disputes also arise when multiple salespersons or brokers show a property to a prospective purchaser or tenant. A purchaser or tenant may see a property on a number of occasions, often with different salespersons - sometimes returning even months after originally seeing a property. If the property originally was subject to a commission agreement with one real estate brokerage firm and the term of the agreement expires and another real estate professional (after entering into a proper commission agreement) shows the property to the prospective tenant or purchaser, in the absence of clear language in both of the commission agreements, there is likely to be a dispute as to which brokerage firm is the “procuring cause” for the real estate transaction. Disputes over procuring cause frequently end in litigation, which is likely to be costly for the property owner and the real estate professionals involved. On occasion, if the documents are not drafted to protect the property owner, the property owner could be liable to more than one firm for a sales or leasing commission.

    The moral of the story: It is far better for the real estate professionals to ensure that they have the necessary licenses before becoming involved in a sale or lease transaction. Also, they should have a clear written commission agreement with the property owner that states (i) when a commission will be deemed earned, and (ii) whether and when a commission will be paid for transactions arranged both during the term of the commission agreement, as well as in the ensuing months after the expiration of the commission agreement.