YES
VIRGINIA, THERE IS A BROKER'S LIEN ACT
- BUT IT ISN'T WORTH MUCH!
by Paul A. Bellegarde*
Yes, Virginia's commercial real-estate brokers actually have their very own enforcement mechanism for unpaid leasing commissions -- The Virginia Broker's Lien Act, which can be found at Va. Code Ann. §55-526 & 527 (the "Lien Act").
Scarcely more than a single page in the Virginia Code, the Lien Act allows a broker to file a lien against the landlord's rent stream from any tenant, when the broker has not been paid his commission for procuring that tenant, provided that there was a written agreement between the broker and the owner/landlord for payment of that commission in consideration of the broker's services. Although the lien is not on the fee simple estate, it must still be recorded in the land records for the county where the real estate is situated. Until 1998, failure to record the lien was fatal to any claim against subsequent purchasers of the real estate, even where those purchasers had actual notice of the broker's unrecorded claim. But by a 1998 amendment, the legislature made subsequent purchasers with
actual knowledge of the terms of any lease agreement that provides for the payment of any brokerage fees . . . liable for payment thereof, unless otherwise agreed to in writing by the parties at or before the time of the sale regardless of whether the real estate broker has perfected the lien in accordance with [the Lien Act].
See Va. Code Ann. §55-527(B).
The 1998 amendment came about after the Supreme Court's decision in Harrison & Bates, Inc. v. Featherstone Associates, L.P., 253 Va. 364, 484 S.E.2d 883 (1997), which held that a broker's lien filed after the property transferred to a new owner did not "relate back" to the date services were performed, thereby precluding enforcement of the lien right against the new owner. In that case, the Court rejected the broker's claim that a lien under the Lien Act is an inchoate lien, arising at the time the brokerage services are performed. 253 Va. at 369, 484 S.E.2d at 886. The Court also rejected the broker's contention that the lien attached to the rents in question because the purchaser had actual or constructive knowledge of the broker's claim prior to its acquisition of the property. 253 Va. at 371, 484 S.E.2d at 887.
By eliminating the Lien Act's recording requirement in instances where purchasers have actual notice of the broker's claim, the 1998 amendment was obviously intended to enhance the Lien Act's protection for brokers. Nonetheless, the legislature would have done the brokerage community a far better service by creating an effective procedural process for enforcing the rights that the Lien Act is intended to bestow. This article will highlight the Lien Act=s enforcement flaws and suggest some potential solutions for consideration.
YOU HAVE A LIEN - SO WHAT!
Although the Lien Act gives brokers a lien right, it is entirely bereft of any enforcement procedural guidance, which renders it of little practical use to potential claimants. Over the years, I have had many broker clients who have asked me to "file a broker's lien" so they could "get their money" from the deadbeat owner/landlord. In most instances, these clients really believed that mere filing of the lien was all they needed to do to force the landlord to pay up. How wrong they were. In my first experience, I expeditiously complied with the Lien Act's perfection requirement by filing a memorandum of lien under oath (signed by my client, not me) in the County Land Records. "Now what?" asked the client. "I am not sure," I felt like replying (but did not). "I guess we should give the landlord notice that we have filed a lien," I thought. So I went ahead and did this. But since the landlord was ignoring its payment obligations in the first place, notice of the lien filing did nothing to alter the status quo (of no payment to my client).
Next I thought, "let's send notice to the tenant, which will also include a demand that the tenant pay its rent to the broker instead of the landlord." After all, this notice to the tenant would have the power of the Lien Act behind it along with proof that the appropriate lien memorandum had been filed. Predictably however, the tenant balked at our demand for direct rent payment to the broker; indeed, were the tenant to pay such amount to the broker, the tenant would be subject to suit for unlawful detainer, as the Lien Act does nothing to shield the tenant from such result.
This left us with no alternative other than to file suit. But this was no alternative at all, because I could have filed suit against the landlord at the beginning of this whole process, without the Lien Act. Because of this frustrating process, my client was left to conclude -- we have a lien, but so what! And I was left to postulate: What if the Lien Act contained enforcement provisions that would address these problems?
SOME ENFORCEMENT SOLUTIONS
The Lien Act needs a self-effectuating enforcement mechanism that can be set in motion by the claiming broker, with a burden-shifting procedure between the landlord and broker, as well as a prevailing-party attorney's fees provision to discourage abuse and frivolous litigation related to this intended out-of-court payment remedy. Here are some thoughts on Lien Act modifications that would provide such a mechanism.
1) After filing the memorandum, the broker shall be required to send copy of lien memorandum to both the landlord/owner and tenant, with a notice letter advising the tenant to begin paying the rent directly to the broker (the "Lien Notice"). The Lien Notice shall be served in accordance with Virginia Code service requirements for suits and 5-day pay-or-quit notices.
2) After the effective service date for the Lien Notice the tenant shall be required to begin paying its rent directly to the broker, beginning with the next due date that is at least one month away from the date the Lien Notice is delivered. This one-month time lag will give the landlord time to consider whether it wants to contest the claim by filing suit as set out below.
3) All payments made to the broker shall be credited to the rent that tenant owes to the landlord, and the tenant shall not be in default under its lease with the landlord as consequence of paying rent to the broker instead of the landlord.
4) After the effective service date for the Lien Notice the owner shall have a set period of time (e.g., 30 days) by which to contest the lien's validity by filing a complaint with the Circuit Court in the county where the lien is recorded. Since the Lien Act is in place for the benefit of brokers, the burden-shifting mechanism here should favor the brokers. Thus, while the original burden will be on the broker to both file the lien memorandum AND serve the Lien Notice on tenant and landlord, the burden of filing any suit to oppose the lien should shift to the landlord.
5) A prevailing-party attorney's fee provision will apply only if a suit is actually filed.(1) This way, although the broker gets the initial leverage (by being required merely to file the lien and send the Lien Notice), the broker should get no attorney-fee recovery for this limited action in an uncontested enforcement process. But if the lien is frivolous, the landlord will have the ability to take back leverage by filing suit, which will put the broker at risk of being liable to pay the landlord's fees if he loses, but will also allow the broker to recover all of his fees if he prevails in the suit. The obvious intent here is keep both sides honest. Like many of my fellow litigators, I use these provisions religiously in executory settlement agreements and never have enforcement problems.
6) If the landlord fails to timely contest the lien and the tenant fails to pay the broker directly, the broker shall be permitted to sue the tenant directly, again with the prevailing-party attorney's fees provision applying. Given the Lien Act's express protection to the tenant (shielding tenant from any landlord suit for default based upon failure to pay rent), the tenant has no reason to not comply and make direct payments to the broker as the Lien Act will provide. The prevailing-party attorney's fees provision shall also apply to any suit that landlord might file against the tenant.
POTENTIAL PROBLEMS AND FURTHER SOLUTIONS
Under the foregoing scenario, a landlord will be prejudiced by not receiving rent from tenant during the pendency of any suit filed to contest a frivolous lien claim. One solution could be to require the tenant to pay rent into court during the pendency of the lien case, with the Owner given the option to post a bond for the amount of the expected rent to be paid during the suit, plus potential attorney's fees as set by the judge.
There is also a potential problem with lenders, who would likely make certain (to the extent not done so already) that their loan instruments provide that any Lien Act filing will trigger a default. To be fair, such instruments should limit instances of default to only those situations where the lien filing results in an enforceable (i.e., ultimately paid by the landlord) claim. To ensure such fairness between landlords and their lenders, the Lien Act itself could contain a provision that notwithstanding any contrary language in any lender contract or instrument, no such default will exist in any instance where the landlord timely files suit and successfully defeats any lien filed.
CONCLUSION
The bottom-line issue here is whether the legislature wants the Lien Act to be relevant. Assumedly, the answer is yes because the legislature enacted the Lien Act in the first place and later modified it to favor brokers. That said, the Lien Act's only real present advantage lies in the 1998 amendment, which secures an obligation for payment against a new owner who has no original privity with the broker. Without the amendment, the Lien Act is of little or no practical use to a potential broker claimant because the broker's enforcement rights to recover the commissions owed are the same rights that the broker has outside the Lien Act - i.e., to pay an attorney to file suit against the landlord. This hardly provides any benefit to brokers, especially regarding small-dollar commissions.
If the modifications discussed above were implemented, the Lien Act would be far more user friendly because it would contain a self-effectuating mechanism for enforcement. And even though such claims could still end up in court, the prevailing-party attorney's fees provision should greatly discourage frivolous filings, which will motivate the parties to resolve such claims without suit after performing their own good-faith assessment of their respective positions. The result will be a Lien Act that accomplishes the legislature's original intent and is thus far more relevant to commercial-leasing brokerage practice in Virginia.
*Paul Bellegarde is a presently a principal in the law firm of Shulman, Rogers, Gandal, Pordy & Ecker, P.A., a 75-attorney firm headquartered in Rockville, Maryland. As of June 2, 2003, he will be leaving that firm to become Executive Vice President and General Counsel of Zalco Realty Incorporated, a commercial/residential real-estate brokerage/property management and investment company headquartered in Silver Spring, Maryland. He is also the author of Real Estate Brokerage Law, Chapter 17 of the Virginia State Bar's Continuing Education Manual on Real Estate Transactions, as well as an area representative and member of the Real Property Section.
1 For example, such a provision could be modeled after Va. Code Ann. §55-79.53, which provides for such attorney-fee recovery in any action between condominium unit-owners' associations and their respective condominium declarants, regarding compliance with condominium instruments. (back)