COMMISSION PROTECTION ACT

 

As of January 1, 2009, Section 294-b of the NYS Real Property Law will be amended regarding commission disputes which will impact real estate brokers and salespersons.  Currently, licensees have the right to file an Affidavit of Entitlement if there is a question as to the payment of real estate brokerage commissions; however, this so called protection has no bite nor does it place an affirmative obligation upon the seller who refuses to pay a commission. The new amendment will provide the broker with the ability to change all this. Although this amendment is considered a positive step toward the protection of brokerage commissions, the statutory requirements must be strictly adhered to in order to obtain the full protection.  Should the broker utilize the statute, be aware that time periods normally found in litigation are sacrificed.  It is for this reason and others that a broker must understand these provisions before proceeding.

WHAT THE AFFIDAVIT OF ENTITLEMENT CAN DO:

  • It applies only to one to four family dwellings, an individual condominium or cooperative unit.
  • Dwelling must be used partially or wholly as a residence, not for investment.
  • If brokerage commission is not paid at closing and the Affidavit of Entitlement has been filed with the county clerk, the seller is to deposit the "lesser of the net proceeds of the sale or the amount of the unpaid portion of the compensation agreed to in such written contract or brokerage agreement…with the recording officer in whose office the affidavit was recorded…”
  • The monies will not be released until the case is determined by court of competent jurisdiction or by agreement of the parties.

WHAT THE AFFIDAVIT OF ENTITLEMENT CANNOT DO:

  • It applies only to Sellers and not Buyer-clients who agree to pay a commission.
  • It shall not invalidate any transfer of real property.
  • It shall not create a lien on the real property.
  • It shall be discharged 1 year from filing of the affidavit.
  • It shall not apply to properties of 5 families or greater, commercial or vacant land.
  • It shall not apply to short sales, since the provision is to apply the lesser of the commission owed or the net proceeds of the sale, and with a short sale, there are no proceeds available for distribution.

 

WHAT MUST BE CONTAINED IN THE LISTING AGREEMENT:

  • You must have a written listing agreement; verbal agreements are not covered, which agreement must contain the mandatory disclosure language in clear and conspicuous type. See below for the language to incorporate in all listing agreements.
  • You must file an Affidavit of Entitlement in order to get the benefit of the protection.  Once the affidavit is filed, you still must initiate a legal proceeding.  The principal broker is the only one who can take action under the law, not a salesperson or associate broker.
  • If the listing agreement contains specific performance terms, the agent must have complied with all the terms of the agreement.
  • If the listing agreement is signed prior to 1/1/09, it can contain the mandatory language about the new law only if it clearly states that it does not go into effect until 1/1/09, and the broker will not have any rights under the new law until after the effective date.
  • Any attempt to have a seller re-sign a new listing agreement or extension to include this language prior to an existing agreement’s natural termination for the sole purpose of including this language will be looked upon unfavorably by the Department of State.

WHAT MUST BE CONTAINED IN THE AFFIDAVIT OF ENTITLEMENT:

  • Cannot be filed until after the buyer and seller have both signed a contract of sale.
  • The affidavit must contain specific information including the listing agreement, a description of the property, the amount of the commission, the name of the seller or the seller’s representative, and a description of the brokerage services performed. 
  • The affidavit must be signed by the principal broker only, and must be notarized.
  • The signed listing agreement must be attached clearly showing that it contains the appropriate mandated language about the Act.
  • The affidavit must be filed in the County Clerk’s office accompanied by the required filing fee which will vary by county.  You must bring at least 3 copies of the affidavit:  1 will be filed in the clerk’s lien docket (even though it does not create a lien on the property); the other 2 will be stamped as filed with one copy for your records, and the other copy to be “served” on the seller.
  • You must serve the seller with a copy of the affidavit within five business days of filing.  If this does not occur, then the provisions of the act will not apply.
  • You may serve the affidavit to the seller in person, or by registered & certified mail with a return receipt.
  • You can also serve the seller’s attorney, though it is not necessary nor does it replace having to serve the seller directly.
  • You must include a $25 check with the affidavit you serve to the seller, since it is the broker’s responsibility to pay the seller’s fee for depositing funds into the county clerk’s escrow account.

WHAT HAPPENS AT THE CLOSING IF THE AFFIDAVIT HAS BEEN FILED:

  • The disputed funds must be deposited with the county clerk upon delivery of the deed (or the stock certificate in the case of a co-op).
  • The amount of the funds deposited must be the lesser of the commission owed or the net proceeds of the sale.
  • If 2 affidavits are on file (i.e. if 2 brokers make a claim for commission), then the deposit must be for the greater of the 2 amounts claimed.
  • Once the seller deposits the disputed commission amount with the county clerk, two time frames are activated:

a) The broker has sixty (60) days to initiate a legal proceeding.  If no proceeding is initiated within that time frame, then the seller can petition the court to release the funds, therefore, you must initiate a lawsuit or the deposited monies can be returned. Note that this time frame commences upon the depositing of the monies, NOT the filing of the affidavit.
b) If the broker does not initiate a lawsuit within six (6) months, then any claim to the funds is lost.  The normal 6-year statute of limitations for commencing a lawsuit does not apply once this commission escrow provision has been utilized.

WHAT HAPPENS IF THE SELLER REFUSES TO DEPOSIT THE MONEY:

  • The broker can then sue the seller not just for the commission amount but also for attorney’s fees and other expenses.
  • The sixty day time frame to initiate a lawsuit or threaten the release of the deposit monies is not activated.
  • The six month time frame to initiate a lawsuit or forfeit the action entirely is not activated.
  • The legal proceedings using this process take a normal amount of time, there is no expedited process.
  • You still have the right to negotiate and settle the claim outside of the court if you choose.
  • If you go through with the full legal process, the case will be heard by a judge who must order disbursement of the funds in one party’s favor.

WHAT ARE DRAWBACKS IN USING THE PROTECTION OF THE STATUTE:

  • Under this provision, there is a shorter statute of limitations to commence lawsuit, six months instead of six years.
  • If the description of the brokerage services provided in the affidavit is not accurate or erroneous, the broker can be subject to charges by the Department of State for untrustworthy or incompetent conduct. Remember, the affidavit is signed and notarized under penalty of perjury.
  • The Seller is to be paid $25 when he/she is served with the affidavit.
  • The statute refers to the commencement of a lawsuit, not arbitration; therefore, there is a question as to whether the broker can commence an arbitration proceeding in order to recover the commission.  This application will be tested as the provisions of the statute are utilized in the coming months.

THE REQUIRED LANGUAGE FOR LISTING AGREEMENTS:

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AT THE TIME OF CLOSING, YOU MAY BE REQUIRED TO DEPOSIT THE BROKER’S COMMISSION WITH THE COUNTY CLERK IN THE EVENT THAT YOU DO NOT PAY THE BROKER HIS OR HER COMMISSION AS SET FORTH HEREIN.  YOUR OBLIGATION TO DEPOSIT THE BROKER’S COMMISSION WITH THE COUNTY CLERK MAY BE WAIVED BY THE BROKER.

 

Submitted by Alfred M. Fazio, Esq. of Capuder Fazio Giacoia, LLP. Visit our website at CFGNY.com for copies of recent articles as well as other areas of interest to the real estate community.