One thing is certain about Colorado's new Commercial Real Estate Brokers Commissions Security Act (HB-1288, effective August 11, 2010, commonly known as the "Broker Lien Law"): only time will tell what its impact will be on the commercial real estate community. As discussed in Dick Clark's article, "Colorado Adopts Broker Lien Law," in the Summer 2010 issue of this newsletter, the new law provides licensed Colorado brokers with a statutory lien for unpaid leasing commissions due under a written agreement with an owner, or an agent of an owner, of commercial real estate, provided that certain statutory timelines and other requirements are met. As one might expect, the Broker Lien Law is likely to have a significant impact not only on listing brokers of commercial property, but also on other members of the real estate community, including owners, property managers, title companies, managing brokers, and tenant representatives. With the Broker Lien Law now a reality, here are some of the key issues these groups now face in the marketplace.
Owners and Property Managers
The new law specifically contemplates that prospective waivers of a broker's lien rights may be valid, provided that the consideration for the waiver is "acceptable to the parties to the waiver." CRS 38-22.5-103(2). In this context, a prospective waiver would mean a waiver granted by the broker at the time a contract (such as a listing agreement) is entered into, and prior to any compensation being due and payable. If owners or property managers require brokers to provide prospective lien waivers upon entering into a listing arrangement, they will want to be sure such waivers are enforceable, which raises several legal issues, including whether the consideration supporting the waiver has been appropriately negotiated and addressed in the engagement document. The concept of "acceptable consideration" was the subject of much stakeholder debate during the legislative process and it, and the enforceability of prospective waivers, may be the subject of court proceedings in the future.
As is the case with mechanics' liens and other statutory liens, title companies will now be sorting out the validity and priority of broker liens filed against commercial properties. Although many of the procedures for filing and perfecting a lien under the Broker Lien Law are similar to those under Colorado's mechanics' lien statute, there are important differences between the two, including when it comes to priority. First, there is no relation-back doctrine for broker liens as there is for mechanics' liens in Colorado, whereby lien priority can relate back to the date of first work on the subject property. Instead, the Broker Lien Law expressly follows the race-notice statute in Colorado (CRS 38-35-109), meaning there is no priority over prior-recorded liens and encumbrances. Also in contrast to the mechanics' lien statute, there is no trust fund concept whereby a broker who has received payment of a commission from the owner (such as a listing broker) may be subject to treble damages and other penalties for failing to pay another broker who is entitled to a commission (such as a tenant representative).
Notwithstanding the absence of a trust fund concept, brokers acting as tenant representatives stand to benefit from the new Broker Lien Law. Tenant representatives, who generally don't have direct contractual relations with the property owner, now have a new tool for obtaining payment of commissions owed, particularly on small and medium-sized commercial properties that would otherwise be too costly to litigate. However, there are a number of conditions that must be satisfied for lien rights to be available. As a result, there are now several factual inquiries that tenant representatives may want to make in connection with commercial lease transactions. These include: whether the listing broker's right to a commission arises out of a written agreement; whether the listing broker's relationship with an owner is agency; whether the listing broker has prospectively waived lien rights; whether, if there has been such a waiver, the tenant representative should take additional steps to protect its interests; and whether the listing broker has been paid or is operating under an alternate payment arrangement.
Whether or not the Broker Lien Law will prove to be an effective tool for listing brokers, tenant representatives, and others remains to be seen. In the meantime, as is the case with any new significant legislation, the Broker Lien Law presents the commercial real estate community with some degree of uncertainty as well as numerous intriguing questions:
- If a broker is eligible to file a lien, what are the potential benefits, or perils, of doing so?
- What notice and filing deadlines must be met in order for lien rights to be effective?
- Under what circumstances are lien waivers enforceable, and how should they be documented?
- If a lien is in dispute, what actions can owners and their agents take to clear title to the subject property?
- When are lien rights available for commissions due upon lease renewals and expansions, and what actions must be taken to perfect such lien rights?
- If a commission is based on a written agreement with an individual broker who works under the supervision of a managing broker, who has the right to file a lien?
- When lease commissions are due and payable in the future, how can potential purchasers and other third parties be put on notice of such obligations?
As is always the case, the answers in a particular situation will depend on the facts at hand, so as these and other questions arise, they should be addressed with the help of qualified counsel. This is particularly important given the newness of the Broker Lien Law and the lack of prior precedents. Our firm was pleased to have assisted in revising the Broker Lien Law as originally proposed to the general assembly to reflect revisions requested by various members of the commercial real estate community. We are also available to help that same community deal with the practical implications of the Broker Lien Law, now that it has become a reality in Colorado.