Author(s): Richard K. "Dick" Clark
Published: 06/16/2010
This August the playing field will be leveled for commercial real estate brokers who are owed lease commissions. For many years, commercial brokers have lost commissions because the cost to pursue litigation against a non-performing building owner can be prohibitive. With strong support of the Colorado Association of REALTORS®, the Denver Metro Commercial Association of REALTORS®, and REALTORS® across Colorado, the Commercial Real Estate Brokers Commissions Security Act ("HB-1288") ("Broker Lien Law") was recently passed by the Legislature and signed by the Governor. It will become effective August 11, 2010. Our firm was pleased to assist in revising the legislation to reflect amendments requested by interested groups.
The Broker Lien Law grants a lien right to a licensed real estate broker when a building owner fails to pay a leasing commission owed pursuant to a written listing or written compensation agreement between the broker and that building owner or his agent. The lien right applies only to commercial properties, not residential, and only to lease transactions, not sales. The lien may be recorded on the fee interest of the owner, and if the owner still does not pay the commission, the broker may file a judicial foreclosure to sell that property to satisfy the lien.
If it becomes necessary for a real estate broker to file an action to foreclose the lien, the broker lien will not have priority over prior recorded liens, mortgages and encumbrances, including mechanics liens that relate back to a date prior to the recording of the broker's lien. In other words, the Broker Lien Law is subject to Colorado's Race Notice Statute CRS 38-35-109 and does not replace it.
The new law includes protections for building owners:
- If the property is conveyed to a bona fide purchaser before the Notice of Lien is recorded, the broker has no right to a lien to enforce the payment of a lease renewal commission. CRS 38-22.5-103(3).
- An owner may seek a waiver of the broker lien right by paying consideration acceptable to the owner and broker. CRS 38-22.5-103(2).
- Should a broker record an invalid lien, the broker may be subject to penalties and damages under Colorado's Spurious Lien Law. CRS 38-35-204.
If a broker records a valid lien, properly perfected under the statute, the building owner can choose to file a corporate surety bond or similar financial assurance in the district court to get the recorded lien released. That corporate surety bond or similar financial assurance must be at least one and one-half times the amount of the lien plus any costs awarded in the case to date. If the judge approves the bond, the clerk of the district court shall issue a Release of Lien, which shall be recorded on the property. In this event, the remedy for the real estate broker is not the lien, but rather a claim against the surety bond or other similar financial assurance. CRS 38-22.5-111.
The Broker Lien Law is new and there are no court cases interpreting it. This means that it is incumbent upon brokers and building owners to strictly adhere to the requirements of the statute. For example, this statutory lien right is meaningless unless the broker satisfies the conditions precedent set forth in HB-1288 because this lien arises from statutory law, not common law. In other words, to be entitled to the lien right, the broker must follow the statutory process.
Here is an overview:
First Step: The broker must serve the Notice of Intent to Record Notice of Lien on the owner, or the agent for the owner, at least 30 days prior to recording the Notice of Lien. If the Notice is served on the owner's agent, a copy of the Notice must also be served on the owner of record by personal service or by registered or certified mail, return receipt requested. CRS 38-22.5-104(1).
Second Step: Either contemporaneously or before serving the Notice of Intent to Record, the Broker must send a written notice to the owner requesting mediation and make a good faith effort to mediate. The mediation obligation terminates 30 days thereafter and does not preclude the broker from recording the lien if a settlement is not achieved. CRS 38-22.5-105 and 106(C).
Third Step: The broker must record the Notice of the Lien on the real estate at least 30 days after serving the Notice of Intent to Record Notice of Lien on the owner. However, the Notice of the Lien may not be recorded earlier than 90 days after the tenant takes possession of the lease premises or 90 days after the compensation is due, whichever is later. CRS 38-22.5-106(d).
Fourth Step: Within 10 days following recording of the Notice of the Lien, the broker must serve a copy of the Notice on the owner or the owner's agent. CRS 38-22.5-107(1).
Fifth Step: Within six months following recording of the Notice of Lien, the broker must file an action to foreclose the lien and must record a notice that such action has been filed (Lis Pendens). CRS 38-22.5-107(2).
In situations where the listing broker has an agency relationship with the owner, presumably the listing broker would fall within the definition of an "agent of the owner" in the statute. CRS 38- 22.5-102(3). This raises the possibility that a cooperating broker (tenant's broker) would have a lien right if he or she has a written compensation agreement with the listing broker as "agent of the owner." However, no lien may be recorded by a cooperating broker if the owner has paid the listing broker the amount due under the written agreement between the listing broker and the owner, including any compensation owed to the tenant's broker. CRS 38-22.5-106(4).
Because of our familiarity with the new statute, we have training available for commercial brokers, building owners and title companies on the statute, the lien right, and the process. We anticipate that the Colorado Real Estate Commission and its Forms Committee may not promulgate forms under the statute; however, forms for the Notice of Intent to Record Notice of Lien and Notice of Lien are available through our firm. We are available to answer questions for real estate brokers, building owners and title companies, including presentations on the new law tailored to fit your needs.
Dick Clark is a senior partner at RJ&L, working in its Denver office. Since 1991, he and the firm have served as legal counsel for the Colorado Association of REALTORS ® and to the National Association of REALTORS® on select matters. Mr. Clark can be reached at 303-628-9531 or by email at rclark@rothgerber.com.