By: Julia Jensen Smolka
Regardless of COVID-19, the real estate market is hot. With money being cheap, there will be more and more real estate transactions. With more transactions, there will be more instances where sellers and brokers argue whether a commission was earned by a broker. With larger commercial price tags, a broker could be out tens of thousands of dollars—or significantly more if there is a dispute. Broker’s listing agreements are typically well written form contracts which address when a commission is earned by a broker. But there is even a more powerful tool in Illinois which allows brokers to attach a lien to a commercial property for earned, but unpaid commissions. The lien could halt a sale.
Illinois allows real estate brokers to place liens for earned commissions on commercial real estate as a way to force payment when a seller or buyer attempts to circumvent payment to the broker. The act is known as the Commercial Real Estate Broker Lien Act, 770 ILCS 15 et. seq. This article addresses the basics on how the act works.
Step 1: Does the Broker Have A Lien?
To know whether the act applies to you, first you have to determine if the property at issue is covered under this act. There are many instances where a property is being used for commercial purposes; however, the act specifically defines what properties are covered.
Under Section 5 of the Act, “Commercial Real Estate” is defined as any real estate located in Illinois other than (i) real estate containing one to six residential units, (ii) real estate on which no buildings or structures are located, or (iii) real estate classified as farmland for assessment purposes under the Property Tax Code.
Next, whether the broker has a lien depends on whether the broker has earned his or her commission under a written instrument signed by either the owner, buyer, or tenant. That written instrument is typically a listing agreement, lease, or sales contract. For the broker to have earned his or her commission, he or she has to produce a ready, willing and able buyer or tenant.
A prospective purchaser of realty will be considered ready, willing, and able to buy if he has agreed to purchase the property and has sufficient funds on hand or if he is able to command the necessary funds with which to complete the purchase within the time allowed by the offer. A broker who shows he produced a prospective purchaser who agreed to the sellers’ terms, who was continuously willing to purchase during the time of the relevant negotiations and became able to execute a contract upon the agreed terms at a reasonable time subsequent to the initial negotiations, has made a prima facie case for recovery of his commission.
Step 2: Perfecting the Broker’s Lien
If you have a right to record a lien, the statute describes what needs to be in the lien notice—names of the owner, description of the property, amount of lien and real estate broker’s license number. It has to be signed and verified. To perfect the lien, the client has to record a lien in the Recorder’s office of the county where the property is located. Thereafter, the broker shall send notice to the owner. Strict compliance is required, or the broker lien is not enforceable. So, ideally, if the broker sees the writing on the wall that the parties are trying to avoid paying the commission, he or she can record their lien prior to the closing. It forces the title company to holdback funds, as it would for any other lien.
Step 3: Foreclosing the Broker’s Lien
This statute operates similar to the Illinois Mechanics Lien Act. Like the Mechanics Lien Act, the broker has to strictly comply with the statute, and has to file a foreclosure complaint within two years after recording the lien. Similarly, like with a mechanics lien, an owner can make a 30-day demand to file suit. In the event the suit is not instituted within the 30 days of demand, then the lien will be extinguished as matter of law. If the broker is successful, the statue allows for his or her recovery of attorney’s fees and costs. If he is unsuccessful, the judge can award attorney’s fees and costs against the broker.
Having filed both broker lien actions and mechanics lien actions in my career, the procedural steps are very similar. So are the pitfalls if you fail to follow the statute precisely. Defending these actions are very similar. Strict compliance to the dates, notices, and forms of the documents in this statute is necessary, or the foreclosure complaint will be dismissed. If you are a commercial real estate broker, or if you have a commercial property and have questions, please feel free to call us.