Your Seller Won’t Pay Your Commission — Now What?  

“Whoever has the gold makes the rules” is a familiar saying with particular relevance to real estate transactions. With hundreds of thousands—or even millions—of dollars flying across the closing table, the best time to be paid is at the closing, not after. But what can a real estate broker do when a seller flexes their muscles and tells the broker that they will not pay their commission at closing?

One answer may be filing an RPL §294-b affidavit of entitlement to commission for completed brokerage services. 

What Is It? 

An RPL §294-b affidavit of entitlement to commission for completed brokerage services (often shortened to “affidavit of entitlement”) is a filing recorded in the lien docket against the property subject to a written brokerage agreement. In the affidavit, a broker asserts entitlement to commission from the owner of the property on the basis of procuring the purchaser pursuant to a brokerage agreement with the seller. If filed timely and correctly, the affidavit can significantly increase the seller’s exposure and potentially push them off their strong-arm position of refusing to pay the commission at closing.

The rub is straightforward — a seller who fails to pay the claimed commission at or before closing must instead deposit the disputed commission “with the recording officer in whose office such affidavit of entitlement had been recorded” before or simultaneously with the transfer of title (i.e., not after). RPL §294-b(5)(a). Failing to timely make the deposit will result in an award of attorneys’ fees in favor of the broker in a subsequent action to enforce the underlying brokerage agreement. RPL §294-b(5)(h).

As an added bonus, undiscerning attorneys may believe that the affidavit—recorded and filed on the lien docket—is a cloud on title preventing the closing of title. It, of course, is not, as stated directly in RPL §294-b(2): “Recording such affidavit shall not invalidate any transfer of real property or lease there. Such affidavit shall not be deemed to create a lien and shall be discharged one year after filing”. Nevertheless, the reality is most attorneys involved in transactions are unfamiliar with the statute, and the recording, usually completed within days of closing when title has already been cleared and scheduled for closing, is just the type of sabotage that grinds a transaction to a halt until the “lien” is dealt with. 

Technically Demanding

To ensure the benefit of attorneys’ fees in a subsequent enforcement action, a broker’s filing must comply with the demanding technicalities outlined in the statute:

1. The contents of the affidavit must conform exactly to the requirements of RPL §294-b(2).
2. Personal service of the filed affidavit upon the seller is required before the closing occurs, either by certified mail or personal delivery depending on timing. RPL §294-b(4).
3. The broker’s underlying brokerage agreement must contain the disclosure required by RPL §294-b(5)(j). 
4. The broker must deliver, with service of the filed affidavit upon the seller, a $25.00 fee to cover the costs of depositing the disputed commission with the recording officer. RPL §294-b(5)(c).
5. An action for recovery of the commission must be commenced within 60 days from the deposit of the disputed commission with the recording officer — “which time limit shall not be extended”. RPL §294-b(5)(e). 

Given the fact that brokers usually don’t learn that the seller is going to stiff them until the last minute, hiring an attorney who will get the filing right the first time is critical. A rejected filing may mean the difference between properly serving the affidavit prior to closing and not. 

Limitations

While the affidavit of entitlement is a powerful tool, it does have limitations. 

1. Although the statute permits the filing of an affidavit of entitlement in commercial transactions, attorneys’ fees are not available in a subsequent action to enforce the brokerage agreement should the seller fail to deposit the disputed commission with the recording officer. This essentially renders the affidavit of entitlement toothless. RPL §294-b(5)(k).
2. Even though the statute mentions lease transactions, it is really only talking about the sale of co-ops. The statute requires service of the filed affidavit upon the seller prior to “delivery of the stock certificate and/or proprietary lease in connection with the sale of a cooperative apartment”. RPL §294-b(b)(a). For enforcement of a brokerage agreement relating to a traditional landlord-tenant relationship, a mechanic’s lien is the only recourse available (and only for commercial leases, not residential). Lien Law §10. 
3. If the seller does timely deposit the disputed commission with the recording officer, attorneys’ fees are unavailable in the subsequent commission lawsuit (unless already provided in your brokerage agreement). 
4. If the seller does not deposit the disputed commission with the recording officer, you may be compelled to undertake enforcement proceedings to satisfy your judgment. 

Is It Worth It? 

The filing of an affidavit of entitlement to commission for completed brokerage services is potentially a powerful tool, particularly in cases where the availability of attorneys’ fees transforms an otherwise financially unviable commission lawsuit into one that will result in a net positive to the broker. 

In an industry that increasingly favors the consumers over the broker, broker’s would be remiss to ignore one of the few arrows in their quiver. When a seller thinks he makes the rules because he has the gold, the broker should fire back. 

Four Areas of Focus

The Division of Licensing Services has created a new enforcement initiative branded the “Internet Enforcement Unit” tasked with visiting real estate brokerage websites to detect violations and commence administrative proceedings against licensees. These investigations are low-hanging fruit that require minimal effort from the Department of State, yet result in easily prosecuted complaints.

The Internet Enforcement Unit has identified four areas of focus:

1. Fair Housing Disclosures

2. Standard Operating Procedures

3. Misidentification of License Types

4. Use of Unlicensed Aliases

Administrative Orders and Consent Orders Start To Roll In

The Internet Enforcement Unit is already achieving tangible results for the Department of State, with numerous administrative orders and consent orders already being entered. Examples include a $500.00 fine for misidentifying license types; a $1,000.00 fine for misidentifying license types; a $4,000.00 fine for misidentifying license types and failing to post the fair housing notice; a $2,000.00 fine for misidentifying license types and failing to post standard operating procedures; and a $2,000.00 fine for failing to post standard operating procedures and the fair housing notice.

What exactly are the requirements of these four areas of focus?

Fair Housing Disclosure

Pursuant to 19 NYCRR §175.29 “[a]ll websites created and maintained by real estate brokers, associate real estate brokers, real estate salespersons and any real estate team… shall prominently and conspicuously display on the homepage of such website a link to the Department’s notice as required by paragraph (a) of this section.”

A copy of the required notice is available on the Division of Licensing Service’s website. 

It is important to note that the posting requirement is not limited to the brokerage’s homepage. Any website created or maintained by an associate broker, salesperson, or real estate team is also required to post the notice on their homepage. Brokers are reminded of their duty to supervise their licensees.

Standard Operating Procedures

A new requirement for 2022, all websites and mobile apps maintained by real estate brokers, associate real estate brokers, real estate salespersons, and real estate teams are required by RPL §442-h(4) to post date-stamped, signed, and notarized standard operating procedures addressing, at the minimum: (i) whether prospective clients shall show identification; (ii) whether an exclusive broker agreement is required; and (iii) whether pre-approval for a mortgage loan is required.

Misidentification of License Types

19 NYCRR §175.25(c) regulates the content of real estate brokerage advertisements. More specifically, §175.25(c)(4) requires advertisements to “correctly and accurately state the type of license held by the real estate broker, associate real estate broker or real estate salesperson named in the advertisements.”

While the regulation permits licensees to abbreviate the type of license held, the abbreviation cannot be misleading. The Division of Licensing Services has specifically identified a number of colloquial titles used by licensees which are explicitly prohibited, including “sales associate”, “licensed sales agent”, and “broker”.

Regulations do allow use of additional titles or designations, such as Realtor. However, they cannot appear on their own without the correct license type.

Unlicensed Aliases

19 NYCRR §175.25(c)(3) requires all advertisements — including websites — to display the name of the real estate broker, real estate associate broker, and real estate salesperson as licensed with the Department of State. While nicknames are permitted, the full licensed name must also appear conspicuously.

For example, a real estate salesperson licensed as “Jonathan Doe” may not advertise their name as “John Doe”, but may advertise their name as “Jonathan ‘John’ Doe”.

Other Areas Ripe for Internet Enforcement?

The four areas targeted by the Internet Enforcement Unit is not the end of the road. Other easily enforced violations include: (i) websites maintained by salespersons failing to link-back to their broker’s website; (ii) inaccurate property descriptions; (iii) emails missing required advertising content; (iv) web advertisements missing the disclosure “this advertisements does not suggest that the broker has a listing in this property or properties or that any property is currently available”; and (v) unpermitted team names.

Brokers are well-served to review their website, and the websites of their supervised licensees, to fend off the inevitable visit from the Internet Enforcement Unit.

Mandatory Disclosures and Notices

Every year seems to bring a new disclosure or notice requirement for real estate brokers. But just what is required these days, and how do brokers comply?

Below are just a few of the disclosures and notices that real estate brokers should be mindful of. 

Agency Disclosure

RPL §443 requires brokers in residential transactions to disclose their agency status to the parties in a transaction. The Department of State publishes a compliant form in two variants:

1. For Buyer and Seller
2. For Landlord and Tenant

The form must be provided to a client before a brokerage agreement is signed (RPL §§443(3)(a) & (c)), and must be presented to the party on the other side of the transaction “at the time of first substantive contact” (RPL §443(3)(b)). 

Notification of Fair Housing Laws

19 NYCRR §175.28 requires brokers to provide prospective purchasers, tenants, sellers, and landlords upon first substantive contact a disclosure notice furnished by the Department of State containing pertinent provisions of the Human Rights Law. 

A copy of the notice can be found HERE.

19 NYCRR  §175.28 requires the display of a similar notice in every office and branch office operated by a broker. A copy of the display notice can be found HERE. 

Tenants’ Right to Request Reasonable Accommodations

9 NYCRR §466.15 requires brokers, in addition to housing providers and property managers, to provide prospective tenants, upon first substantive contact, with a notice regarding their right to available housing accommodations. The form of the notice is set forth in §466.15(e) and is reproduced HERE. “Housing Providers” are also required to post a copy of the notice on any website they maintain (9 NYCRR §466.15(d)(3)). Housing Providers are defined in §466.15(c)(1) and can include real estate brokers depending on their function.  

Notice of Rights As a Recipient of Housing Assistance

Newly adopted in August of 2022, 9 NYCRR §466.16 requires “Housing Providers” to provide recipients of public housing assistance a notice of their rights concerning discrimination on the basis of lawful source of income. The form of the notice is set forth in §466.16(e) and is reproduced HERE. “Housing Providers” are also required to post a copy of the notice on any website they maintain (9 NYCRR §466.16(d)(2)). Similar to the Notice of Tenants’ Right to Request Reasonable Accommodations, the definition of a Housing Provider for this section also can include brokers depending on their function. 

Standard Operating Procedures

Effective April 20, 2022, RPL §442-h(4) requires all brokers to create standard operating procedures addressing the following items:

1. Whether prospective clients shall show identification;
2. Whether an exclusive broker agreement is required; 
3. Whether pre-approval for a mortgage loan is required; and
4. Any other such standard operating procedures as the Secretary of State shall determine by regulation and upon notice and public hearing. 

The standard operating procedures must be date stamped, notarized and posted on any publicly available website and mobile device application maintained by the broker, with hard copies available upon request (RPL §442-h(4)(b)). As of the date of the blog, the Secretary of State has not instituted any additional standard operating procedure requirements, but regulations can change. 

Regulatory Compliance is Complicated

These notices just scratch of the surface of real estate brokerage regulatory compliance and risk management through best practice. If you are unsure of your company’s procedures, retain counsel experienced in this highly regulated industry.

Two Simple Words

Procuring cause. Two simple words that often dictate whether a broker is entitled to a commission. Real estate brokers and salespersons hear this phrase all the time and understand its importance, but what does it really mean? 

Why It Matters

New York courts, citing back to the 1880s case Sibbald v. Bethlehem Iron Co., 83 NY 378 (1880), have long held that “in order to state a direct claim for a commission, a broker must prove:

1. that he or she is duly licensed; 
2. that he or she had a contract, express or implied, with the party to be charged with paying the commission; and
3. that he or she was the ‘procuring cause’ of the sale.” Buck v. Cimino, 243 AD2d 681, 684 (2nd Dept. 1997)(cleaned up). 

With the first two elements being fairly straightforward, the definition of “procuring cause” is often the gravamen of most disputes over a commission. 

A Meeting of the Minds 

Recognizing that a broker does not earn a commission until they were the procuring cause of a transaction, the 1880s Court of Appeals in Sibbald attempted to refine an already age-old debate — when exactly has a broker completed their job and earned a commission? When have they done enough to be considered the procuring cause? Boiled down to its most simple form, “[t]he duty [the broker] undertakes, the obligation he assumes as a condition of his right to demand commissions, is to bring a buyer and a seller to an agreement.” Id. at 381.

This general definition does little to inform the resolution of a dispute, so the Court of Appeals in Sibbald settled on a doctrine that has been the foundation of countless litigations since — “the fundamental and correct doctrine is, that the duty assumed by the broker is to bring the minds of the buyer and seller to an agreement for sale, and the price and terms on which it is to be made, and until that is done his right to commissions does not accrue.” Id. at 382. 

Essential Terms

It is obvious that there is no meeting of the minds if the parties cannot agree on price, but other terms can have equal importance to a transaction. In Nesbitt v. Penalver, 40 AD3d 596 (2nd Dept. 2007), the Second Department examined whether a napkin agreement was sufficient to form a contract for the sale of real estate. Referring to the statute of frauds, the court held the agreement must state all of the essential terms of a complete agreement, and that those essential terms include “price, the time and terms of payment, the required financing, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, adjustments for taxes and utilities, etc.” Id. at 598. All terms typically found in a real estate contract in New York, but not all typically negotiated by a broker. Is a broker really required to negotiate all the terms of a contract to earn a commission?

Amicable Atmosphere and Proximate Link

The Court of Appeals does not think so. “That is not to say that, in order to qualify for a commission, the broker in all instances must have been the dominant force in the conduct of the ensuing negotiations or in the completion of the sale. But, however variable the judicial terminology employed to express the requirement that the broker must be the procuring cause, it has long been recognized that there must be a direct and proximate link, as distinguished from one that is indirect and remote, between the bare introduction and the consummation.” Greene v. Hellman, 51 NY2d 197, 206 (1980). 

Following the Court of Appeals’ lead, the Second, Third, and Fourth Departments have formed the “Amicable Atmosphere” doctrine which states “[w]here the broker is not involved in the negotiations leading up to the completion of the deal, the broker must establish that he created an amicable atmosphere in which negotiations proceeded or that he generated a chain of circumstances that proximately led to the sale.” Dagar Group, Ltd. v. Hannaford Bros. Co., 295 AD2d 554 (2nd Dept. 2002). 

The First Department, despite having previously used an “amicable frame of mind” standard, now subscribes to the self-described more exacting “direct and proximate link” standard first expressed in Greene. See SPRE Realty, Ltd. v. Dienst, 119 AD3d 93, 99 (1st Dept. 2014). The First Department believes the “direct and proximate link” standard is less broad and less amorphous than the amicable atmosphere doctrine. Id. However, there is very little in the way of guidance from the Appellate Division, or the Court of Appeals, as to the distinction between the two. 

What Does It All Mean? 

A broker earns their commission when they are the procuring cause of a transaction. They are the procuring cause of a transaction when they bring about a meeting of the minds on the terms of a transaction. They bring about a meeting of the minds when they negotiate the essential terms of the transaction, create an amicable atmosphere, generate a chain of circumstances that proximately lead to a sale, or are the direct and proximate link between beyond mere introduction.

Confusing? Yes. There is no neat and simple legal definition a real estate broker can point to. Procuring cause is a fact intensive question unique to each transaction and typically left to the jury to decide. Sibbald, 83 NY at 388. 

To illustrate the intensity of the factual inquiry, NAR provides its members with a 17 question worksheet to help arbitrators work through the question. 

If you find yourself in a procuring cause dispute, it is essential that you compile compelling written evidence and retain an attorney who knows how to litigate these unique lawsuits. 

Arbitration For Real Estate Brokers

Members of the National Association of Realtors (NAR), by virtue of their association with NAR and its local boards (LIBOR, HGAR, HANFRA etc.), are bound by a code of ethics and are subject to mandatory arbitration of disputes between brokers. The expansive “Code of Ethics” can be found on NAR’s website and includes rules that members are required to follow, and the procedure for arbitrating disputes between brokers who violate those rules. 

But what exactly happens at these arbitrations, and should you hire an attorney to represent you?

What is Arbitration?

Arbitration is a form of dispute resolution where the parties voluntarily agree (usually by contract) to submit their dispute to a third-party, the arbitrator, who renders a binding decision resolving the dispute. It is often seen as an alternative to litigation in a court of law where many view it as faster, more efficient, and potentially cheaper than an extended lawsuit. But there are downsides to this efficiency. Namely, arbitration can, but does not necessarily have to, contain less due process protections, e.g. less discovery, less right to appeal, looser rules. One important aspect of arbitration to remember — the decision of the arbitrator is final. A court will only intervene an undo an arbitrator’s decision in the most extreme examples of fraud, corruption, misconduct, violations of public policy, and irrational decisions unsupported by evidence. See Matter of Erin Cosntr. & Dev. Co., Inc. v. Meltzer, 58 AD3d 729 (2nd Dept. 2009). In fact, a court will not vacate an arbitration award “[e]ven where an arbitrator has made an error of law or fact” because the court must “give deference to the decision of the arbitrator… even if the arbitrator misapplied the substantive law in the area of the contract.” New York City Tr. Auth. v. Transport Workers Union of Am., Local 100, AFL-CIO, 6 NY3d 332 (2005). 

The takeaway is clear — treat the arbitration as seriously as you would a lawsuit. Your options are limited if you don’t like the outcome. 

What Happens at a NAR Arbitration? 

It is important to distinguish between the two types of hearings NAR conducts — Ethics Hearings and Arbitrations. Ethics Hearings punish members for alleged violations of the Code of Ethics. Arbitrations resolve disputes between brokers, typically, who is the procuring cause of the transaction. Both are technically arbitrations, but they follow their own procedures. This blog will focus on the Arbitration set forth in Part 10, et seq. of the Code of Ethics. 

Arbitration is commenced by filing a request for arbitration which details the alleged dispute and the evidence in support of the claimant’s position. Section 47(a). The Grievance Committee will review the request and determine if arbitration is appropriate. Section 47(b). The respondent is served with the request and supporting documents, and they submit a response. Section 48. At the hearing, both sides may present evidence and witness testimony, and both sides may question witnesses, including opposing witnesses. Section 51. The dispute will be heard by a panel of arbitrators who are also members of the local NAR board who may also ask questions of the parties and witnesses. Section 51(b). The chairperson leading the arbitration panel will govern the operation of the hearing, including making rulings on the admissibility of evidence and testimony. Once the hearing has concluded, a decision is rendered in writing and delivered to the parties. 

Critically, the parties have the right to be represented by counsel throughout the entire proceeding. Section 29. 

I Lost, Now What?

The decision of the arbitrator is final and binding. Unlike with an Ethics Hearing, in a NAR Arbitration, your right to appeal is limited only to a procedural review based on allegation(s) of procedural deficiency or other irregularities which may have deprived a party of due process. Section 55. Stated otherwise, you can’t appeal just because the decision was wrong. You are bound by the arbitration award, even if you think it is the dumbest thing you’ve ever read. The time to hire an attorney was before the arbitration, not after you lost.

When you receive that notice in the mail from another broker dragging you to NAR arbitration over a $30,000 commission dispute, take it seriously. Hire an attorney to give you the best chance of prevailing.