Michigan Court of Appeals Decides Important Broker Lien Case
The Michigan Court of Appeals recently decided a case interpreting Michigan’s Commercial Real Estate Broker’s Lien Act. The case contains mixed results for Brokers. On the one hand, the Court acknowledged that the law was enacted to protect the right of commercial real estate brokers to collect their contractually negotiated commissions. The Court also found that the Broker complied with the Act by placing a lien against the property for which it had entered into an exclusive listing agreement. However, the Court found that the Broker wrongfully failed to release its lien once the Buyer and Seller funded an escrow account with an amount sufficient to cover the Broker’s lien claim. The Broker’s refusal to release the lien constituted the tort of slander of title, exposing the Broker to liability for Buyer’s resulting money damages.
Broker executed an exclusive listing agreement with property owner, providing Broker the exclusive right to sell, lease or exchange the property. Broker located a potential buyer for the property and introduced the buyer to the property and property owner. The potential buyer and property owner then engaged in secret negotiations in an attempt to avoid paying Broker’s commission.
During the period of secret negotiations, property owner defaulted on its mortgage and its lender secured the appointment of a receiver to continue the sale of the property. The Buyer ultimately agreed to lease the property with an option to purchase. The Buyer then exercised the purchase option and promised to pay $1.2 million. Once the Broker learned of the pending purchase transaction, the receiver offered to pay the Broker something, but was unwilling to pay the full 5% commission per the listing agreement. Broker then recorded a lien against the property for $60,000 (5% of the purchase price).
Unbeknownst to Broker, the receiver and Buyer proceeded with the sale. At closing, the Buyer and receiver created a $75,000 escrow account with the title company, to cover the Broker’s claim. Once Broker learned of the sale, it filed suit, intending to foreclose upon its lien. Broker sued the Buyer but did not name the property owner who signed the listing agreement or the receiver. The Buyer defended by advising Broker, for the first time, that the parties had escrowed $75,000 with the title company at closing and demanded that Broker release its lien. Buyer also filed a counterclaim to quiet title, accused Broker of slandering its title and sought money damages.
Broker Lien Act
The Commercial Real Estate Broker’s Lien Act permits a Broker to record a lien against the property before the property is conveyed, if the Broker is entitled to a commission under a written agreement. Therefore, the Court upheld the Broker’s right to record the lien to secure payment of its commission. In addition, although the property owner signed the listing agreement, the Court stated the appointed receiver became bound by the agreement. The Court further stated the Broker was entitled to a commission under its listing agreement because it had the exclusive right to broker a sale, and actually found the ultimate purchaser. Broker perfected its lien by recording it before the sale was complete. This part of the case is good news for commercial real estate brokers.
The news, however, is not all good. The Act also addresses escrows. If a recorded claim of lien would prevent the closing of a transaction, the Act states the parties to the transaction shall establish an escrow account from the proceeds of the transaction in an amount sufficient to satisfy the lien. A Buyer or Seller shall not refuse to close a transaction because of the requirement of establishing an escrow account. The money shall remain in escrow until the rights to the money have been determined by a written agreement of the parties, a judgment or order by a court of competent jurisdiction, or any other method agreeable to the parties.
The Act further provides that, if an amount sufficient to satisfy a broker’s lien is escrowed, the lien is extinguished and the real estate broker shall provide a release of lien.
The broker has one year after the lien attaches to bring a circuit court action to enforce the lien. Failure to commence an action within such time frame extinguishes the lien.
In this case, the Broker argues that the escrow account was not established pursuant to the Act, because the Broker was one of “the parties to the transaction,” yet the Broker was not a party to the escrow agreement. How else could the Broker –the statutory intended primary beneficiary of the escrow account–determine that the amount escrowed was sufficient to satisfy its lien, or that the terms and conditions of the escrow agreement were sufficient to protect the Broker once the lien was discharged?
The Court of Appeals disagreed. It concluded that the Buyer and Seller were the only “parties to the transaction,” and therefore, the Broker had no right to agree to the terms or conditions of the escrow. The Buyer and Seller were not required to confer with the Broker before creating the escrow account or, apparently, notify the Broker that the account was established. The Court was unmoved by the fact the parties may have intentionally kept the Broker in the dark, hoping the Broker’s one year statute of limitations to bring an action under the Act would expire before Broker learned of the secret closing and filed suit Since the Broker recorded a lien for $60,000, the Court reasoned that Buyer and Seller property concluded that escrowing $75,000 was an amount sufficient to satisfy the lien. Therefore, once the escrow account was established, the lien was extinguished and the Broker was required to provide a release.
Slander of Title
The Buyer next claimed that the Broker’s refusal to discharge its lien after learning of the escrow account constituted the tort of slander of title, and the Court agreed. Slander of title claims have both a common-law and statutory basis. To establish either, a party must show falsity, malice and special damages. Malice implies bad intent. The party must knowingly file an invalid lien with the intent to cause injury. A person does not commit slander of title if the lien is asserted in good faith upon probable cause or prompted by a reasonable belief that the party filing the lien had rights in the real estate in question. The malice necessary for a slander of title action does not exist when the offending party’s actions rest on a rational, yet incorrect, interpretation of law.
Here the Broker clearly had a right to record the lien. However, the Broker failed to release its lien after learning of the escrow account, and after the Court ordered it to do so. Broker alleged it refused to release the lien because it was relying on a rational, good faith interpretation of law – a law which has never been interpreted by a Michigan court before – and Broker had a reasonable belief grounded in rational legal argument that it might win on appeal. Notwithstanding this, the Court found the Broker’s failure to discharge the lien under these circumstances demonstrated malice and constituted slander of title. The Broker was liable to the Buyer for special damages in the form of Buyer’s attorney fees and other litigation costs.
The final issue on appeal before the Court: whether or not the Broker was entitled to amend its complaint to add as defendants the receiver (seller) and possibly the title company holding the escrowed funds. The law provides a party may amend its pleadings only with the court’s permission, but such permission shall be freely given when justice so requires. All persons may be joined in one action as defendants if their presence will promote the convenient administration of justice.
The Broker did not initially name the property owner, the receiver (seller), or the title company holding the escrowed funds, as defendants in the lawsuit. The Broker did not know there was a title company holding escrowed funds when it filed suit. Very late in the process, Broker moved to amend its complaint to add the receiver as a defendant. The Court denied Broker’s motion because the Broker failed to submit the amendment in writing. The Broker would have to file a separate new action to adjudicate its right to receive all or part of the escrowed funds and/or file a claim for breach of contract against the receiver (and possibly property owner) for failure to pay its commission under the listing agreement.
If Broker had discharged its lien after first learning of the escrow account, it would not have been liable for slander of title and resulting damages. It is unknown whether the Court would have permitted the Broker to amend its complaint to add the receiver and title company as defendants if the Broker had sought to do so earlier in the litigation.
Moral of the story: The Broker Lien Act can be a powerful tool to help commercial real estate brokers collect their rightful commission, but the Act must be followed carefully to avoid unintended negative consequences for brokers.
The information contained herein does not attempt to give specific legal advice. For advice in particular situations, the services of a competent real estate attorney should be obtained. These materials are the exclusive property of Gregg A. Nathanson, Esq., and no reprint or other use of the information contained herein is permitted without Mr. Nathanson’s express prior written authorization. Gregg Nathanson may be contacted by email: email@example.com, telephone 248-489-8600, or regular mail: Couzens Lansky, 39395 W. 12 Mile, Suite 200, Farmington Hills, Michigan 48331.
©2015 Gregg A. Nathanson, Esq.