The Michigan Broker Lien Act: The Benefit to Brokers Comes at a Significant Cost

As published in March 2011 issue Oakland County Bar Association issue of

The Broker Lien Act: The Benefit to Brokers Comes at a Significant Cost

By Steven S. Samona

    On October 5, 2010, Michigan joined the list of nearly 30 states allowing real estate brokers the right to record liens on real property for unpaid commissions. The newly enacted Michigan Commercial Real Estate Broker Lien Act ("Broker Lien Act" or "Act")1 provides brokers with a powerful weapon to collect commissions but may have the unintended effect of complicating real estate transactions.

    The Act grants an additional remedy to brokers similar to that granted to contractors, architects and others under the Construction Lien Act.2 It attempts to help brokers experiencing problems collecting on unpaid commissions, and seeks to prevent further lawsuits.3 The legislation has been long-sought by brokers.4 In the past, brokers could only pursue collection of commissions through breach of contract actions. The Act is similar to other states’ broker lien acts, and applies to licensed real estate brokers in both the sale and lease of commercial property. The broker must (1) have a written commission agreement signed after October 5, 2010, (2) be entitled to payment under the agreement, and (3) timely and properly have recorded a lien with the register of deeds of the county in which the property is located. The property owner and the party who signed the commission agreement must be provided notice within 10 days by registered or certified mail, or by personal service. The lien is subordinate to (1) all prior recorded liens or mortgages, (2) construction liens recorded after the broker lien but relating back to a date prior to the broker lien, (3) and liens securing revolving credit and future advances of construction loans recorded before the broker lien. The court may force a foreclosure sale in an action to recover on the lien. The Act also allows the prevailing party to recover all incurred attorney fees.

    There are also various time requirements for recording. Generally, the lien must be recorded prior to the conveyance and attaches when recorded. For leases, the lien must be recorded within 60 days of lease signing and the lien attaches when both the lien is recorded and the tenant takes possession. The Act also accounts for other situations such as commission installments owed after the sale or lease, future commissions for an extension of the lease or expansion, or a commission on an option to purchase. The Act even provides for the buyer's agent to put a lien on the property. Brokers intending to use the Act must be conscientious of the recording timelines.
   
    The rights afforded under the Act can presumably be waived by agreement. There is no express provision in the Broker Lien Act barring or restricting waiver of the rights afforded in the Act, unlike the Construction Lien Act.5 By implication, the lack of such provision indicates the Legislature intended to allow parties to freely waive the rights by agreement. Property owners and brokers may waive the rights under this Act in a listing agreement.

Legal Issues

    The constitutional issues with the Act are the same as those with the Construction Lien Act and its predecessors. The Broker Lien Act allows a lien prior to any determination as to the validity of the claim. The lien rights are equivalent to a preliminary injunction or temporary restraining order. In Michigan courts, these are reserved for extreme circumstances. Both require showing irreparable harm would occur to the defendant if not granted.6 The notion of any party being entitled to an interest in property prior to any judgment is contrary to our usual concept of due process.7 Parties have challenged the constitutionality of various mechanics' liens, which afford very similar rights to the broker liens, arguing they were deprived of their right to freely alienate the property.8 The Due Process Clause of the 14th Amendment to the Constitution of the United States prevents states from depriving any person of life, liberty or property without due process.9 Due process challenges raised to prejudgment seizure invoke the procedural due process requirements of notice and hearing prior to deprivation of rights.10
   
    Although there is no precedent for a challenge to the constitutionality of a state’s broker lien act for Michigan, the State has ruled with respect to other pre-judgment attachments. In William & Works, Inc. v. Spring Corporation,11 the Michigan Court of Appeals ruled that the Mechanic's Lien Act, the predecessor to the Construction Lien Act,12 did not violate the Due Process Clause of the Constitution. The Michigan court relied on the United States Supreme Court case of Spielman-Fond, Inc. v. Hanson’s, Inc.13 as precedent. Spielman affirmed a lower court ruling that an Arizona statute creating a mechanic’s lien was not a violation of the Due Process Clause of the 14th Amendment. No reasons were provided for the ruling since the U.S. Supreme Court only offered a summary affirmance. The Michigan Court of Appeals attempted to figure out the reasons. The lower court in Spielman discussed two very influential Supreme Court rulings declaring statutes a violation of due process: Sniadach v. Family Finance Corp and Fuentes v. Shevin.14 Sniadach declared a Wisconsin statute allowing a pre-judgment wage garnishment a violation of due process. Fuentes held Florida and Pennsylvania statutes allowing pre-judgment replevin were a violation of due process. The lower court in Spielman distinguished the Arizona statute stating those instances involved a "direct and total prohibition on the right to alienate" whereas a mechanics' lien is not "a taking of a significant property interest." Therefore, the lower court ruled the statues did not violate the 14th Amendment.15 The Michigan court in William & Works stated that they were bound by the ruling in Spielman that the filing of a lien is not a significant taking. Notably, they expand on the lower court’s reasoning in Spielman asserting "the amount of the lien is equivalent to the increase in value … so that there is no actual deprivation overall."16 The Michigan courts will likely look to Spielman if there are challenges to the Broker Lien Act's constitutionality.

Criticism of the Act

    The Real Property Law Section of the State Bar of Michigan voiced its opposition to the Broker Lien Act.17 Among other reasons cited, the Section felt brokers were being treated as a preferred class without reason, and the Act interferes with basic property rights. The Section also argued the act would add further complication, delay, litigation and risk to real estate transactions. The Building Owners and Managers Association of Metropolitan Detroit ("BOMA") voiced their disapproval of the Act on record with the Senate citing similar reasons and arguing that brokers' previous remedies at law were adequate.18 Proponents of the Act feel brokers enhance real estate values by increasing demand and cash flows. They argue liens are necessary to procure payment since the cost of litigating a breach of contract action may be more than the actual commission owed. Consequently, this may result in the parties accepting less than they are owed. With the Act, brokers now have gained significant leverage in commission disputes.
   
    One way the Act may complicate transactions is by negatively affecting the marketability of title. There are interferences with property rights prior to a determination of the claim. Liens may be recorded prior to the owner even being obligated to make payment. Prior liens may not have been discharged. There is potential for the Act to cloud an owner's property rights in multiple ways. The mandated procedures may not properly address the problems that arise. The Broker Lien Act allows a lien to be discharged to complete the sale or lease of property by escrowing the amount of the lien. The parties are prohibited from refusing to close as a result of the escrow. This varies from the Construction Lien Act, which allows a discharge at any time by simply providing a bond posted for twice the amount of the lien.19

The procedures of the Broker Lien Act put the burden on the property owner. In order to complete a sale when a lien exists, the seller is deprived of its property, consisting of part of the sale proceeds. The statute requires lienholders to bring an enforcement action within one year of attachment in the circuit court. If not commenced within a year, the lien is extinguished. The property owner can also provide written demand to file suit against a lienholder, and if the lienholder fails to file within 30 days the lien is extinguished. The property owner must have a lien on the property for one year, or be prepared to incur legal expense in defending suit or instituting its own action to remove a lien.

The statute even accounts for situations where the sale proceeds are not enough to satisfy the broker lien. Presumably, the buyer would purchase the property subject to the broker's lien if not satisfied at closing. If the commission is not paid at closing, the broker may have the power to kill the deal. A buyer likely would not purchase the property subject to a lien for a commission it is not responsible to pay. The escrow, although not required, would probably be necessary to complete the sale. The seller must come up with the escrow funds out-of-pocket to sell the property in this instance. Overall, there is the potential to cloud title and the procedures to address the issues may not sufficiently negate the effects on real estate transactions.

    Another argument raised against the Act is that it elevates brokers as a preferred creditor without valid reason. The brokers' rights are no different than those of legal counsel, appraisers, inspectors, or title insurers. The rationale for providing contractors or laborers a lien under the Construction Lien Act is the physical improvements they created are part of the property they have a lien on. With a broker, there is no exceptional circumstance that justifies lien rights. The Real Property Law Section and BOMA voiced concern that this could lead to other groups seeking the same lien rights. Further, a mechanics' lien withstood a due process challenge because the Michigan Court of Appeals felt no deprivation occurred since the lien was equal to the value increase as a result of the work. Brokers have no physical improvement to the property relating to the lien. It is more difficult to argue that the broker's lien is equivalent to the value increase due to their efforts since there is no association with a tangible physical improvement. Opponents argue the remedies afforded at law prior to the Act are sufficient. A broker can file an action like any other party for breach of contract. The Act is deemed unfair and unnecessary in the mind of its critics.

Potential Impact

    The Act may also discourage real estate activity and increase the costs and risks associated with it. It will create additional costs, risks and labor for title companies. Title companies will require additional documentation and procedures. Additional documents may include a Release of Lien from the real estate broker(s), and affidavits and indemnifications from buyer and seller regarding the brokers employed.20 The title company, although not required to by law, may be asked to serve as the escrow agent if there is a dispute as to a lien. There is greater risk in underwriting because of the Act and the potential for undiscovered liens and claims. The costs of title may increase consequently.

The Act also provides another hurdle to the already-difficult task of obtaining financing and completing real estate transactions. Lenders' risk appetites are generally small to begin with. The added risk of a brokers' lien clouding title may inhibit the availability or cost of financing. Also, most standard loan documents require all liens to be discharged within a period of time or bonded against if in dispute. However, under the Act, liens may be recorded although they may not yet have attached. The lender will be in a difficult position of deciphering when the lien actually attaches to the property. This is not something they are equipped to deal with. The process can cause further administrative costs and risks to the lender.

Rather than reducing the number of suits, the Act may encourage litigation. An action must be filed within a year of lien attachment or it is extinguished. Escrows may be required to close sales, with the parties left to fight over the funds. Quiet-title actions may be required. The necessity and justification of the Act have been called into question. The Act comes at a difficult time in the commercial real estate industry and has the potential to deter commercial real estate activity.

     Nonetheless, all parties in real estate transactions will need to re-evaluate and refine their procedures. Listing agreements should be reviewed. Property owners and managers may refine the listing agreement to specifically exclude themselves from the Act. Lenders need to verify that their documents adequately account for the issues that can arise. Title insurers need to implement proper documentation and procedures to account for the additional underwriting risks. Attorneys in sale and lease transactions need to advise their clients of the risks and request that they obtain a lien release upon payment of commissions to brokers.

    There are many instances where a commission may reasonably be in dispute. Commission agreements may contain ambiguities or there may be factual issues in dispute. Although the Act seeks to address a legitimate and worthy cause, the Act appears to tilt the balance of power to brokers rather than level the playing field in commission disputes.

Steven S. Samona is a solo practitioner located in Royal Oak. His practice is focused primarily in real estate and corporate law. He is also a principal in Samona Weiss Land Development, which manages and develops commercial property throughout the state of Michigan. He is a graduate of Wayne State University Law School and is a member of the OCBA Real Estate Committee. He may be contacted at (248) 565-8582 or by e-mail at stevensamona@thebizattorney.com.

Footnotes
1    Public Act 201 of 2010.
2    Construction Lien Act, Public Act 497 of 1980.
3    Senate Fiscal Agency Bill Analysis, SBS 610 (S-1), November 16, 2009.
4    Michigan Association of Realtors, “Commercial Broker Lien Legislation Signed by Governor Public Act 201 of 2010,” http://www.mirealtors.com/content/news.htm?page_id=7&inCtx13news=3,2,1&site_id=1&inCtx13view=4&inCtx13news_id=151&minor=3&major=2&inCtx13pg=0.
5    Construction Lien Act, Act 497 of 1980, Section 570.115.
6    MCR 3.310(B)(1) and (2); Barkau v. Ruggirello, 100 Mich. App 618, 200 NW 2d 342 (1980), Michigan Court of Appeals; Michigan Coalition of State Employee Unions v. Michigan Civil Service, 465 Mich. 212, 634 N.W.2d 692 Mich (2001) Supreme Court of Michigan.
7    U.S. Constitution, Amendment XIV.
8    Spielman-Fond, Inc. v. Hanson's, 379 F. Sup 997 at 998 (1973).
9    U.S. Constitution, Amendment XIV.
10    Fuentes v. Shevin, 407 US 67, 92 S. Ct 1983 (1974), Sniadach v. Family Finance Corp, 395 US 337, 89 S. Ct 1820 (1969).
11    Williams & Works, Inc. v. Springfield Corporation, 76 Mich App 541, 257 NW 2d 160 (1977).
12    MCL 570.1, 1891 PA 179.
13    Spielam-Fond, Inc. v. Hansons, 379 S. Supp 997 (1973).
14    Supra 10.
15    Id at 999.
16    William & Works at 365-366.
17    Michigan Real Property Review, Fall 2009, “Legislation Affecting Real Property,” pages 160-161.
18    Building Owners of Metro Detroit, http://www.house.mi.gov/SessionDocs/2009-2010/Testimony/Committee19-5-19-2010-2.pdf.
19    Construction Lien Act, Public Act 497 of 1980, Section 570.1116.
20    Stewart Title Bulletin, “RE: Commercial Real Estate Broker's Liens,” October 18, 2010, http://www.vuwriter.com/vubulletins.jsp?displaykey=BL128577135700000074.

   

Reprinted with the permission of the

Oakland County Bar Association
1760 S. Telegraph Rd., Suite 100
Bloomfield Hills, MI 48302-0181

(248) 334-3400 / FAX (248) 334-7757
www.ocba.org

Original Printing: LACHES, March 2011

Tough Requirements for Renewal of Michigan Smoke Free Law Exemptions

If your business has an exemption from the Michigan Smoke Free Law, you must file an application for a renewal this month to obtain an exemption for 2011. The deadline to file a renewal is January 31. Outside of casinos, the only exemptions existing are for cigar bars and tobacco specialty retailers.

The Michigan Department of Community Health is asking for a great deal of information to obtain the renewal. The documents necessary to renew your exemption are much more than required to procure the initial exemption. Documentation substantiating the business has a sufficient percentage of sales from tobacco products or cigars (depending on which exemption you have) needs to be attached. The application is rather vague as to what is necessary. This could range from daily sales receipt totals for the entire year, or monthly sales reports. That's not all. Believe it or not, there is the requirement that a Certified Public Accountant state his opinion that your sales meet the threshold. Even photos of the store from specific positions must abe attached, along with other documents.

All in all, the renewal is very complicated. Likely, this is to ensure that the exemptions are not abused. However, the requirements may be throwing out the baby with the bath water. Many business owners who legitimately qualify may fail to properly report or comply with the requests and lose the exemption.  Businesses may not break there sales out into categories and fail to have the necessary documents. They may use an accountant who is not a CPA. Nonetheless, it's unlikely a CPA here would be adding individual invoices or sales by department. This requirement does little to ensure compliance.

Be careful while filling out your application. I am familiar with the law and would be happy to assist you.  It is important that you properly apply for renewal to ensure that you do not lose your exemption and retain it for 2011.

A&P Stops Paying Rent in Michigan

A recent article published in Crain's Detroit Business revealed that 24 lawsuits were filed against A&P in the Michigan area for failure to pay rent. The article went along with a scathing editorial of A&P admonishing their actions. A&P long left the state of Michigan but was still obligated to pay rent under its leases for some vacant and sublet stores. Prior to ceasing rental payments for the properties, A&P's attorney sent a letter informing the landlords that they would be returning possession of the space.  The leases have payments remaining totaling $150 million. No explanation has been given as for the reason. Speculation is the failure to pay rent is a tactic to negotiate a settlement on the lease liability, or that they will simply go bankrupt. A local attorney stated that the move was unprecedented from what he has seen and heard in the real estate industry. I have only experienced and heard of situations like this where the tenant eventually went bankrupt.

This is obviously a huge blow to the landlords and lenders. The owners of the properties range from large companies to small local business people. Most small landlords are dependent on the rent from A&P to make their mortgage payment. They may be forced to default on their loans and face foreclosure of the property. They may not have the resources for a long, drawn out legal battle with a company the size of A&P. If A&P intends to negotiate a settlement on the leases, they are essentially putting a gun to the head of some landlords. If the landlord is in default or foreclosure, the lender may simply negotiate with A&P directly with the owner handing back the property. Either way, it is likely some of these properties will be on the market for sale as bank real estate owned property. In a tough real estate market, this is just another tough financial blow.

The spaces are so large and with the current real estate market in metro Detroit, the vacant locations will have a very difficult time finding tenants. The large size of the vacant A&P space extremely limits the potential tenants for that portion. Further, investment may be required to subdivide that space and the spaces still will likely be tough to rent. The size of the centers might need to be reduced. Even when rented, the rental will likely fall far short of what A&P was paying. Usually, the other space in the centers are dependent on the grocery store as an anchor tenant to draw traffic to the center. With a vacant A&P store, the other parts of the center are extremely less marketable. All in all, the properties will be a tough sell. The landlords who retain the property, will be stuck with little cash flow and a difficult to rent property.

Let's assume that the actions are a ploy by A&P to negotiate a settlement on their leases. In that event, I echo the sentiments of the Crain's editorial that it is low. They are forcing their way out a contract they are bound by and praying on the financial distresses and misfortunes of landlords who may not have the same financial wherewithal as them. The aggressive and callous actions of A&P show a disregard for the consequences that will be felt. It shows that A&P will use any means necessary to get out of Michigan. They may in the process take a significant hit to their relationship with various lenders and investment trusts, and their reputation in the real estate market may take a black eye. I, for one, am hoping that if this is a plan to get out of their leases, it will backfire.

Michigan Landlord/Tenant Law Basics

When property is leased, a tenant is entitled to certain rights under the lease and under the law. The landlord may want to remove a tenant if the tenant fails to pay rent or otherwise defaults under the lease. In the same way a bank must go through a foreclosure to take back secured property when a note is in default, a landlord must go through the proper means to recover possession when a lease is in default.

Failure to properly remove a tenant can expose a landlord to potentially large damages and may prevent them from recovering future rent owing under the lease. The law defines the process necessary to remove a tenant. The landlord must recover possession through the court if the tenant does not leave voluntarily. The Michigan court rules provide for certain procedures and proceedings at the district court level. This is often referred to as an eviction.

If a landlord takes matters into his own hands and forcibly remove a tenant, the landlord can be liable for substantial damages. The Michigan Anti Lockout Statute applies in those instances. Forcible removal could mean changing of locks, threat, or removal/destruction of property. If a landlord forcibly removes a tenant, he is liable for treble damages, or three times the actual damages incurred as a result of the removal. In a commercial lease, this could mean lost profits among other things.
Most leases allow the landlord to remove the tenant without terminating the lease. Recovering possession likely does not mean the tenant is let off the lease. The landlord is permitted to re-let the premises. Tenant may be liable for the costs of re-letting the premises as well as the difference between the rent paid by the new tenant and the amount the defaulting tenant was obligated to pay. However, if a landlord does not properly recover possession, landlord's right to recover any amount owing after the removal of tenant may be gone.

It is important that you retain counsel familiar with the entire eviction proceedings. I am experienced with the process and would be glad to assist you. If you should have any questions or wish to discuss this further, please contact me so we can arrange for a free consultation.