Broker Beware: Michigan court ruling on escrow accounts and broker’s liens could change the way you do business

Mark Plaza

Mark Plaza

By Mark Plaza,
Maddin, Hauser, Roth & Heller, P.C.

Here’s a warning to Commercial Real Estate Brokers: “Two wrongs don’t make a right.”

Be sure to release your broker’s lien upon the establishment of an escrow account.  In a recent decision that should serve as a lesson for commercial real estate brokers in Michigan, the Michigan Court of Appeals ruled against a broker for failing to release a lien in a case analyzing requirements under Michigan’s Commercial Real Estate Broker’s Lien Act.

The case involved a seller of commercial property who sold property in breach of the terms of an exclusive listing agreement. In response, the broker recorded a broker’s lien and attempted to foreclose by bringing a lawsuit against the buyer (and not the seller). The buyer counterclaimed for slander of title when the broker refused to release its lien on the property despite the buyer having funded an escrow account with funds sufficient to cover the claim.

Upholding the circuit court’s decision, the Michigan Court of Appeals ruled against the broker. It held that the broker violated the CREBLA by not releasing the lien because the statute required that its lien be released upon the establishment of a fully funded escrow account. To add insult to injury, the Court even upheld an award of special damages against the broker for Slander of Title.

Background

The dispute arose after GAM Properties, L.L.C. (the “Seller”) entered into an exclusive listing agreement with Anton, Sowerby & Associates (the “Broker”). The listing agreement entitled the Broker to receive 5 percent to 6 percent of the sale price.

In papers filed with the court, the Broker alleged that the Seller (and, subsequently, a Receiver appointed for the Seller) entered into “secret negotiations” with Mr. C’s Lake Orion, L.L.C. (the “Buyer”) without the Broker’s participation.  The Seller/Receiver and Buyer then agreed to terms on a lease with an option to buy, which the Buyer immediately exercised for $1.2 million.  Upon learning of the anticipated sale, the Broker recorded a broker’s lien for 5 percent of the purchase price ($60,000) as permitted under the CREBLA.

The contemplated sale proceeded to closing. Anticipating litigation, the parties at the closing funded an escrow account in the amount of $75,000 to satisfy the lien.  However, when the Buyer requested that the Broker release its lien, the Broker already had filed suit to foreclose on its lien.

Despite funding an escrow account, the Broker refused to release its lien claiming that it needed to conduct discovery to determine the exact amount it is owed.  Interestingly, the Broker only sued the Buyer and its lender, but it did not bring suit against the Seller/Receiver for breach of the listing agreement.  The Buyer countersued for Slander of Title for the Broker’s refusal to release its lien despite the funding of the escrow account.

Legal findings

The circuit court summarily dismissed the Broker’s claim and granted summary disposition in favor of the Buyer on its Slander of Title claim.  In a subsequent hearing on damages, the circuit court found that the Buyer is entitled to special damages, including costs and attorney fees.  The Court of Appeals affirmed.

According to the analysis of the Court of Appeals, it found that nothing in the CREBLA required a commercial real estate broker to be a party to the sale or that the statute required a broker’s input for purposes of establishing an escrow account.  In this case, the Broker recorded a $60,000 lien, and the Seller and Buyer created an escrow account sufficient to cover this amount.

Pursuant to the CREBLA, once an escrow account is established in an amount necessary to cover the lien, “the lien is extinguished and the real estate broker shall provide a release of lien . . . .”  This required the Broker to release its lien.

The Court observed that “[t]he CREBLA was designed to only protect the broker’s right to collect the commission outlined in the brokerage agreement, not to allow the broker to punish the seller for shirking its contractual promises.”  For this reason, the Court held that:

Plaintiff subsequently violated the act’s clear directive to release its lien once the buyer and seller funded an escrow account with an amount sufficient to cover the broker’s claim. Plaintiff’s continued refusal to release the lien created an invalid cloud on the buyer’s title.

Furthermore, because the Broker “failed to demonstrate the validity of its continued lien, or to dispel the claimed malice in response to [Buyer’s] motion for summary disposition[,]” the Court upheld the trial court’s judgment against the Broker and the award to the Buyer for Slander of Title, including special damages permitted by statute.

Key Takeaways

So, do two wrongs make a right? Was the Seller right to violate the terms of the listing exclusive agreement? No. But did this violation give the Broker the right to continue an action to foreclose against the Buyer after establishing a fully funded escrow account? Also, no.

For a commercial broker, this result may seem harsh, but a broker should be able to avoid the pitfalls of this particular decision by taking the appropriate steps along the way. Among other things, here are a few lessons that a broker should take away from this decision.

First, when recording a broker’s lien against real property, be sure to identify an amount sufficient to cover your anticipated commission. This amount cannot be improperly inflated, but be careful not to shortchange yourself either. By taking the time to record a lien that accurately reflects your anticipated commission, you should be able to protect your right to recovery in most situations.

Second, if an escrow account is fully funded at the closing to cover your lien, you must release your lien. It does not matter that your actual losses are greater than what is stated in the lien. The requirements under the CREBLA are very clear. By pursuing litigation to foreclose on a lien under these circumstances, you risk exposure if a buyer seeks to recover against you for slandering title.

Third, if you incurred other damages relating to a breach of an exclusive listing agreement, consider bringing an action against the seller for breach of contract. While the remedies against a buyer may be limited, the seller still has obligations under a listing agreement. After all, it is a binding legal contract. Although terms may vary, an exclusive listing agreement should include protections for a commercial real estate broker if a seller tries to cut the broker out of the process.

As another old adage goes, “an ounce of prevention is worth a pound of cure.” In the end, the decision reached in this lawsuit does not spell doom for commercial real estate brokers, but it does highlight the important of knowing your rights under the law and to take the kind of steps necessary before filing a lawsuit to make sure your interests are full protected.

For more information about what this ruling means to you and for your other broker questions, please feel free to contact Mark Plaza, an attorney with Southfield, Michigan’s Maddin Hauser, at 248-208-0710 or mplaza@maddinhauser.com.

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