Filing liens can help brokers collect commissions

Real Estate Weekly, May 21, 2003 by Jay J. Gurfein, Mariam Anwarzai

One of the surest, but rarely used means by which a real estate broker can enforce its right to a commission is by filing a broker's lien.

Simply put, a broker's lien is a property right that imposes a charge or an encumbrance upon property for the amount of commissions owed to the broker. The lien attaches not only to the land but to buildings and improvements constructed on the land. A lien, like a mortgage, enables the broker to foreclose on the property if the owner fails to vacate the lien.

In creating lien laws, legislatures in the past provided protection for contractors, subcontractors, suppliers, and laborers who directly performed or furnished materials in the improvement of real property. In 1982, however, the New York State legislature amended the Lien Law to extend the protection of liens to real estate brokers.

Specifically, the amendment expanded the definition of "improvement to property" to include brokerage services provided by real estate brokers on commercial properties.

The broker's lien has become a powerful tool for brokers in that the lien has the same effect on property as a mortgage or the customary mechanics lien. Lenders generally demand that properties be kept lien-free. Moreover, an owner cannot mortgage or sell its property without discharging the lien.

This protection extended to real estate brokers is not without strict limitations. The Lien Law only protects a broker who procures a signed lease for a term of more than three years for any or part of real property intended for non-residential purposes. In addition, the law requires that the broker perform its services pursuant to a written brokerage agreement.

The Lien Law was executed to protect lienors and New York courts have applied the law with public policy in mind. It shall be noted that Section 34 of the Lien Law specifically renders void any agreement where a broker waives its right to lien a property.

When faced with a broker's lien on its property, an owner will usually select a method to discharge the lien. The most common method of discharging a lien is for the owner to bond the lien with the Supreme Court in the county where the property is located. The amount of the bond is fixed by the court, usually for 110% of the amount of the bond and the bonding company can require a cash deposit for the amount of the lien. The bond will then be substituted for the lien that was filed against the property and the broker is assured of collecting its commission if successful at trial.

Another method available to the owner is to petition the court to dismiss the lien because of a defect on its face. This method allows the owner to discharge the lien without committing the funds required for a bond. This method is available only when there is a fatal defect that is apparent on the face of the lien itself.

Such defects can include an incorrectly named owner, a mistake in the description of the property or a lien filed beyond the period of limitations prescribed in the lien law. A lien, however, is rarely defective on its face and this relief is not customarily used.

Another option available to the owner is to file a counterclaim against the lienor for willful exaggeration of the lien. An-owner successful with this counterclaim could ask the court to have the lien reduced to the proper amount or have the lien dismissed in its entirety.

In addition, the lienor may be compelled to reimburse the owner for costs expended by the owner in establishing the exaggeration. Accordingly, the broker must take every precaution of file a lien for no more than the amount to which it is entitled.

In this article we have tried to furnish general information on the Lien Law of New York as it is applicable to commercial real estate brokers. As we have indicated, there are technical problems and contingent liabilities that might arise. We urge any broker filing a lien to seek competent legal advice before undertaking that step.