A Summary of the Commercial Real Estate Broker Lien Act
Article Date: Tuesday, September 25, 2012
Written By: Garth K. Dunklin
On June 17, 2011, Governor Perdue signed into law House Bill 174, the Commercial Real Estate Broker Lien Act. Passage of the bill, sponsored primarily by Representative Darrell McCormick (a commercial real estate broker from Yadkin County), made North Carolina the 29th state to afford lien rights to real estate brokers. In addition to establishing a lien right for brokers providing services with respect to commercial real estate, the bill also made an important change to the North Carolina Real Estate License Law regarding enforcement of agreements for brokerage services.
The Commercial Real Estate Broker Lien Act establishes a right to file a lien upon commercial real estate, establishes the conditions prerequisite to filing a lien, sets forth the manner of filing and enforcement of a lien and establishes the means of terminating or cancelling a lien. Practitioners should be mindful of the fact that the Commercial Real Estate Broker Lien Act was effective on Oct. 1, 2011 but applies only to written agreements signed on or after that date. Accordingly, lien claims cannot be filed with respect to brokerage service agreements executed and dated prior to Oct. 1, 2011.
Prerequisites For Filing A Lien Pursuant To The Commercial Real Estate Broker Lien Act
The statute sets forth a number of requirements which must be met in order for a broker to have a right to file a lien.
First, only a “broker” which is defined in NCGS §44A-24.2(1) as “a real estate broker licensed pursuant to Chapter 93A of the General Statutes”, may file a lien. An out of state broker who obtains a Limited Non-Resident Commercial License would qualify and be eligible to file a lien pursuant to the statute because they would be a “broker licensed pursuant to Chapter 93A”. However, an out of state broker who may list a property and never enter the state or obtain a license here would not be eligible to file a lien because they would not be licensed pursuant to Chapter 93A (even though they may legally take the listing and conduct the sale if they are licensed in their state of residence and do not enter North Carolina). Clearly, an unlicensed person (even if acting pursuant to a valid exemption from the license requirement) will not be able to file a lien, because they are not a “broker”.
Second, the lien is only permitted to be filed upon and in connection with services rendered with respect to commercial real estate, as commercial real estate is defined in NCGS §44A-24.2(3) (which is essentially the same definition of commercial real estate used in the Statute in connection with the Limited Non-Resident Commercial License). Commercial real estate is defined as property or an interest therein which is used “primarily for sales, office, research, institutional, warehouse, manufacturing, industrial or mining purposes or for multifamily purposes involving five or more dwelling units” or property which is zoned to permit such use, or which is subject to a petition for rezoning for such use or which is in good faith intended to be immediately used for such purposes. This last category of good faith intention is applicable only in areas of the state where there are no land use regulations controlling the use of property and should not be applied or relied upon otherwise to classify a property as commercial real estate.
NCGS §44A-24.3(a) requires a broker to have a “written agreement for broker services signed by the owner or signed by the owner’s duly authorized agent”. This requirement means that typically only listing agents will be entitled to a lien. The language “signed by the owner’s duly authorized agent” contemplates circumstances where broker services agreements might be signed by officers acting on behalf of a business entity, where someone might act pursuant to a power of attorney or where someone might be specifically authorized to sign a brokerage services agreement on behalf of an owner. Even though a listing agent might be viewed as a “duly authorized agent” of an owner, this language does not contemplate split agreements as they are agreements to share compensation between brokers, not agreements for broker services “signed by the owner or the owner’s duly authorized agent”.
NCGS §44A-24.3(a) (1), (2) and (3) require, before a lien may be filed, that
• The broker must have performed pursuant to the terms of the
written agreement referenced above;
• The duties which must be performed by the broker must be
clearly set forth in the agreement; and
• The agreement must set forth: (i) the conditions to be met by the
broker to be entitled to compensation, and, (ii) the amount of such
The essence of these requirements is that a broker must have earned the commission pursuant to the agreement, and the right to receive the commission and the amount thereof must be clear in the agreement. A broker cannot file a lien as soon as a listing agreement is signed, but must wait until the commission is actually earned pursuant to the terms of the agreement. Therefore, a close examination of the “when the commission is earned” provisions of a brokerage services agreement is necessary for counsel to assure that the stated requirements have been clearly established.
If a brokerage services agreement in a sales transaction provides that the broker earns the commission only upon closing, then there will be no ability for the broker to file a lien because NCGS §44A-24.4 provides that “a notice of lien is timely filed if it is filed after the claimant’s performance under the written agreement for brokerage services and before the conveyance or transfer of the commercial real estate which is the subject of the lien”. Since the earning of the commission and the conveyance would be simultaneous, a broker cannot timely file a lien after having earned the commission but before conveyance, since conveyance itself is what earns the commission pursuant to such an agreement.
Even where a brokerage services agreement provides that the commission is earned prior to closing or possession transfer, a broker still may not be entitled to file a lien immediately upon earning the commission because NCGS §44A-24.4 provides:
“When a notice of a lien is filed more than 30 days preceding the
date for settlement or possession set out in an offer to purchase,
sales contract, or lease which establishes the broker’s claim of per-
formance, the lien shall be available only upon grounds of the
owner’s breach of the written agreement for broker services.”
What this provision means is that a broker cannot file a lien until a point in time that is within 30 days of the closing date stated in a contract or the possession date stated in a lease. Only if the owner has breached the broker services agreement, can a lien be filed at an earlier point in time than 30 days preceding the closing or possession date. In most instances this will occur by way of anticipatory breach, that is to say, for instance, the owner tells the broker s/he is not going to pay them.
In a lease transaction, the statute does permit filing of a lien after transfer of possession. NCGS §44A-24.4 also provides that “in the case of a lease or transfer of a nonfreehold interest, the notice of lien shall be filed no later than 90 days following the tenant’s possession of the commercial real estate or no later than 60 days following any date or dates set out in the written agreement for broker services for subsequent payment or payments.” Thus, in a lease transaction, a lien can be filed at any time within 30 days before transfer of possession until up to 90 days after transfer of possession or 60 days after the due date of a payment pursuant to the brokerage services agreement.
Where payment of a commission is due in installments that are due after conveyance or transfer, NCGS §44A-24.3(c) provides that a lien may be filed during the period from 30 days in advance of the conveyance or transfer of possession until the date that is 90 days after the due date of a payment due.
So, for example, where a sales commission payment may be due half at closing and half on the date that is 30 days after closing, a broker could file a lien as early as 30 days prior to closing or as late as 120 days after closing. However, the statute limits the effectiveness of the lien in this circumstance as against the owner’s interest to any sum of funds due the owner.
Where a lease commission may be due half at lease execution and half 30 days after possession by the tenant, a broker could file a lien as early as 30 days prior to possession (which may or may not be prior to execution) and as late as 120 days after possession by the tenant.
The statute permits a single lien filing to cover all installments due if the lien is filed prior to the transfer or conveyance, provided that the broker is obligated to release the lien (essentially to amend it) to reflect the reduced amount due on account of any payments of installments.
Filing And Enforcement Of A Lien
NCGS §44A-24.3(b) provides that the statutory lien is available only to the broker named in the written brokerage services agreement. Since most firms name the firm in the brokerage services agreement (and the agreement typically belongs to the firm), it will likely be the firm (as opposed to the individual broker) who has the right to file a lien. This same section also makes it clear that the lien is available only against the commercial real estate which is the subject of the brokerage services agreement, so it is vitally important that the property covered by a brokerage services agreement be accurately and clearly described in the agreement.
NCGS §44A-24.5 requires that the lien notice include the name of the lien claimant, the name of the owner, a description of the commercial real estate upon which the lien is claimed, the amount claimed pursuant to the lien (and whether it is due in installments) and the basis for the lien (a reference to the brokerage services agreement that supports the claim of lien). The lien must also be signed by the claimant and attested by the lien claimant as “true and accurate to the best of the lien claimant’s knowledge and belief.”
Once prepared and signed, the lien is to be filed in the office of the Clerk of Superior Court in the county where the affected property is located. NCGS §44A-24.7 requires the lien claimant to send a copy of the filed notice of lien to the owner of the affected property by certified mail, return receipt requested, or by serving a copy of the lien in accordance with the rules for service of process pursuant to the Rules of Civil Procedure. The lien claimant is required to file proof of service with the Clerk of Superior Court. Failure to meet such notice and filing of proof of service requirements will render the lien void pursuant to NCGS §44A-24.7. So, simply filing the lien alone is not sufficient. Notice must be given in the manner prescribed for the lien to be effective.
If a lien is not paid or otherwise satisfied, pursuant to NCGS §44A-24.8, a lien claimant has up to 18 months from the filing of the lien in which to file suit to enforce the lien. The suit must be filed in a court of competent jurisdiction in the county where the property subject to the claim of lien is located. NCGS §44A-24.9 sets forth the required elements of a complaint for foreclosure to enforce the lien. This section also requires that all parties who have an interest of record in the real property which is subject to the lien shall be made parties to the suit, provided that lenders are not required parties unless the lender “has willfully caused the nonpayment of the commission giving rise to the lien”.
Lien claims filed pursuant to the statute are effective only from the time of filing (there is no “relation back” to the time the agreement was signed or the time the commission was earned), and only if they are timely filed (meaning during the time periods outlined above as permissible periods within which to file the lien). Being effective as of filing means that valid prior recorded liens or mortgages have priority over the lien and any foreclosure sale will be made subject to such liens. Further, NCGS §44A-24.14 expressly provides that mechanics and materialmen’s liens are always superior to the broker lien claimant, no matter when they are filed, even if they are filed later or have an effective date after the filing of the broker lien. For example, if a broker seeks to enforce a lien against a property that has two prior mortgages, a prior IRS lien and two mechanics liens filed after the broker lien, at any foreclosure sale, the property will be sold subject to the two prior mortgages, the prior IRS lien and the two mechanics liens filed after the broker lien. Since this state of affairs means that any purchaser at the foreclosure of the broker lien will have to undertake the obligations of the two mortgages and will face possible foreclosure of the IRS lien and the two mechanics liens, it is highly likely there will be no bidders/purchasers other than the broker at the foreclosure sale. If the broker acquires the property at foreclosure, they acquire not only the property, but these same obligations as well. Accordingly, prior to pursuing enforcement of a lien via foreclosure, it is critically important that the broker understand what other interests affect the subject property and where the broker lien stands, priority wise, in relation to those interests.
Termination Or Cancellation Of A Lien
There are several provisions of the statute which can result in a termination or release of a properly filed lien:
• As noted above, a lien is rendered void for failure to give and file notice of the lien pursuant to NCGS §44A-24.7.
• Failure to file suit to enforce the lien within 18 months of the filing of the claim of lien will also extinguish the lien pursuant to NCGS §44A-24.8, NCGS §44A-24.11 and NCGS §44A-24.13(a)(3). NCGS §44A-24.11 requires a lien claimant to affirmatively satisfy/cancel a lien not more than 30 days after a written demand from an owner where a suit has not been timely filed.
• Pursuant to NCGS §44A-24.6 (and NCGS §44A-24.13(a)(7)), if a condition occurs that would preclude the lien claimant from receiving compensation pursuant to the brokerage services agreement, such as it being determined that the lien claimant was not properly licensed at the time the commission was earned, then the lien claimant is required to promptly record and serve upon the owner a release or satisfaction of the lien, which release or satisfaction must in any event be filed not later than 30 days after a demand for release or satisfaction based upon such condition.
• Pursuant to NCGS §44A-24.10 (and NCGS §44A-24.13(a)(7)), a failure to file an answer in a pending suit to enforce a lien within 30 days after written demand, which demand must be made by registered or certified mail or personal service (with proof of service to be filed with the Clerk of Court), will result in the lien being extinguished.
There are also affirmative actions which may be taken pursuant to the statute that result in discharge of the lien against commercial real estate:
• Pursuant to NCGS §44A-24.13(a)(1), the lien claimant or claimant’s attorney can acknowledge satisfaction of the claim of lien in front of the Clerk of Superior Court, whereupon the Clerk is to mark the lien satisfied and the lien claimant or claimant’s attorney shall sign the acknowledgement on the record.
• Pursuant to NCGS §44A-24.13(a)(2), the owner of the commercial real estate subject to the lien may exhibit to the Clerk an instrument of satisfaction signed by the lien claimant whereupon the Clerk is obligated to cancel the lien.
• Pursuant to NCGS §44A-24.11, where a claim pursuant to a lien has been paid in full, a lien claimant is obligated to cancel a lien not later than 30 days after demand by the owner.
• Pursuant to NCGS §44A-24.13(a)(4), a judgment dismissing an action to enforce a claim of lien, or adversely determining the lien claimant’s claim, may be filed with the Clerk, whereupon the lien is deemed cancelled.
• Pursuant to NCGS §44A-24.13(a)(5), NCGS §44A-24.13(a)(6) and NCGS §44A-24.13(b), where a cash deposit or surety bond in an amount equal to 125 percent of the amount of the claim of lien is deposited with the Clerk, the Clerk shall release the claim of lien on real property and then the lien claimant has a lien on the funds deposited or the proceeds of the surety bond, as applicable. These provisions permit an owner who may believe a good faith dispute as to the commission obligation exists, to remove the lien from the property, thereby facilitating a transfer of the property, by transferring the lien obligation to a sum of money or a bond. The sum of money or bond provides “replacement” security for the payment obligation to the broker, in lieu of the security provided by the lien on real property. If the broker prevails in enforcing the claim of lien, the money or bond is available to satisfy the financial obligations of the owner.
As one can see from the foregoing, among other considerations, there are detailed preconditions to the right to file a lien accruing, time frames within which the lien must be filed in order to be properly filed, requirements for notice and actions to maintain the lien, obligations to act in certain circumstances or in response to certain demands and a need to acquire knowledge about the holders of other interests in the commercial real estate- all in all, a fairly complex statutory framework for a mere five-page act.
Further, the statute contains a “pay-to-play” provision. NCGS §44A-24.12 provides that the costs of any proceeding to enforce a lien, including reasonable attorneys fees, shall be paid by the non-prevailing party. This provision will be beneficial in covering the attorneys fees of a broker who properly files and enforces a claim of lien. On the other side of the coin, a broker who wrongfully files a lien will not get paid and also will have to pay the court costs and attorneys fees incurred by the owner of commercial real estate to defend against the broker’s lien claim. In addition, if it is determined that a lien was improperly filed, and there was a motive to interfere with a pending transaction simply to try to secure payment where payment was not clearly entitled, a broker may also be subject to a slander of title lawsuit. If slander of title is established, the owner can recover treble damages, in addition to attorneys fees.
A Statute Of Frauds For Brokerage Services Agreements
For many years, Rule A.0104 of the North Carolina Real Estate Commission Rules has required that brokerage services agreements be in writing. Taking this rule at face value, one might believe that no matter the type of transaction, one could not get paid unless one had a written agreement since absent a written agreement, one has not complied with the requirements of the rules. Many people view compliance with the rules governing one’s profession as a prerequisite to compensation. In sales transaction, the question seems to be clearly answered by Rule A.0109(c)(1) which provides that in a real estate sales transaction, a broker cannot be paid by their principal except pursuant to an agency agreement that complies with Rule A.0104.
Over the years, courts of various states have looked at rules similar to Rule A.0104 and their decisions have split roughly down the middle as to whether or not a regulation requiring a written agreement constituted a de facto Statute of Frauds (meaning an agreement was not valid and could not be enforced unless it was in writing). Some courts held that if the regulatory agency governing the profession requires a written agreement, a written agreement is required for any recovery to be had in court. Other courts held that if one did the work, they should get paid for it, even if there might be a technical violation of the rules.
North Carolina courts had not ruled squarely on this question until a recent Court of Appeals case where it was effectively held that, notwithstanding Rule A.0104 and Rule A.0109, a broker may recover a commission despite there being no written agency or services agreement.
Section 2 of the Commercial Real Estate Broker Lien Act expressly overrules this recent Court of Appeals case. The Section provides for a new section of the Real Estate License Law, NCGS §93A-13 which reads as follows:
“No action between a broker and the broker’s client for recovery under an agreement for broker services is valid unless the contract is reduced to writing and signed by the party to be charged or by some other person lawfully authorized by the party to sign.”
So now, by statute, the question is clearly answered in North Carolina. If a broker does not have a written agreement signed by the client, there is no action (legal, equitable or other) that can be maintained to recover any fee or commission. Put another way, if a broker files an action to recover a fee based upon an oral agreement, the client can have the case dismissed on summary judgment by simply pointing to this statute which says no such action is valid/can
be filed. •
Garth K. Dunklin practices with the Charlotte law office of Wishart, Norris, Henninger & Pittman, P.A. Garth received both his undergraduate and Juris Doctor Degrees from the University of North Carolina at Chapel Hill, where he was a Morehead Scholar and was elected to Phi Beta Kappa. He also has a North Carolina Real Estate broker's license and holds the CCIM designation. Garth is a North Carolina State Bar Board Certified Specialist in Real Property Law, Residential, Business, Commercial and Industrial Transactions. Garth is also active in numerous REALTOR® affiliated organizations and chairs the Committee which authors the Commercial Series of REALTOR® forms. Garth authored the Commercial Real Estate chapter of the Real Estate Commission’s North Carolina Real Estate Manual, and he handles legal matters before the North Carolina Real Estate Commission.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.