The North Carolina Association of REALTORS® supports House Bill 174 (Commercial Real Estate Broker Lien Act)

REALTOR® Position:The North Carolina Association of REALTORS® supports House Bill 174 (Commercial Real Estate Broker Lien Act) introduced by Representatives Darrell McCormick, Pryor Gibson, Leo Daughtry and Tom Murry because of the following:

· Commercial brokers specialize in income-producing properties, such as apartment and office buildings, retail stores and warehouses, shopping centers and industrial parks.

· Commercial real estate transactions are extremely involved and complicated processes which take a very long time to complete. Brokers invest a great deal of time, effort and upfront costs in securing properties for their clients.

· Commercial brokers add a great deal of value to property transactions as they must understand and explain why properties are good investments. Thus, they must understand various businesses needs, the marketplace and locations, planned or possible growth where the property is located, current income tax regulations and purchasing arrangements that give the buyer a greater return on investment. Commercial brokers may also assist investors in arranging financing.

· Commercial brokers are typically paid after all the work has been completed and the transaction has closed. HB 174 will protect a broker's ability to receive payment for their hard work by granting brokers the ability to file a lien upon commercial real estate in the amount that the broker is due under a written instrument with the owner, buyer or tenant (or their authorized agent).

· Lien attaches to the commercial real estate or interest when the broker files notice of the lien with the Clerk of Court if the lien is filed:

o prior to the actual conveyance or transfer of property when the broker represents the seller;

o within 90 days after the tenant takes possession of a leased property; or

o later in the tenancy of a lease situation if the broker was to be paid in installments based on renewals of the rental contract.

· HB 174 establishes procedural and substantive rights for all parties:

o Subordinates to mechanic's liens.

o Notice of a lien must be mailed to the owner of the commercial property by certified mail or return receipt requested, or a copy of the notice of the lien must be served in accordance with civil litigation proceedings.

o Unless the claim is based upon an option to purchase, the broker shall commence proceedings within 18 months after filing the notice of lien or the lien is extinguished.

o The broker shall acknowledge satisfaction or release of the lien in writing upon written demand of the owner within 30 days after the demand if the claim has been paid in full or if the lien claimant fails to institute a suit to enforce the lien.

o Any valid prior recorded liens or mortgages shall have priority over a commercial broker lien.

o The non-prevailing party is responsible for the costs of any proceeding brought to enforce a commercial broker lien, including reasonable attorneys' fees and prejudgment interest due.

• Finally, HB 174 provides a mechanism for deals to close despite the filing of a notice of lien prior to conveyance. An escrow account or a surety bond can be established with the clerk of the superior court in an amount equal to 125% of the amount that is sufficient to release the claim of lien. Upon deposit, the broker must release the claim for the lien on the real estate in exchange for a lien on the escrowed/bonded funds.

Commercial Real Estate Broker Lien Act

Common Objections

1. Commercial Liens should be added to the mechanic's lien statute.

a) This would allow commercial liens to relate back which is unnecessary and more costly to insure.

2. 18 month window to bring suit is too long.

a) Commercial transactions take a very long time and there are reasons for delay (environmental, mortgage requirements, title issues) that justify a longer period

b) There is a "fish or cut bait" provision which allows the property owner to demand the suit be filed within 30 days or the lien is extinguished. Therefore, it can be shortened by the action of the parties.

c) There is no relation back in the legislation like in mechanic's liens therefore people could string out the transaction to avoid the lien.

d) Most states with lien laws allow for a 1-2 year window.

3. 125% escrow is too high.

a) The 125% is intended to act as a deterrent. Remember - a broker cannot file a lien without a written contract.

b) The first line of the remedy section would allow the parties to decide otherwise.

c) This is the same amount allowed for bonding mechanic's liens.

d) The legislation allows the prevailing party to be awarded attorneys fees and costs. This amount would be more than just the commission.

· Example: One lien foreclosure that went the whole distance for a commission of $62,000. When they obtained a judgment, the owner had to post a bond in order to appeal (i.e. no escrow). In reality, when the dust settled and all appeals were done, and the lien claimant's attorney claimed post judgment interest and attorney fees, the claim had reached $192,000, more than 300% of the original commission.

4. The number of filings will be too much for the clerks and registers to handle.

a) Given the number of recorded documents in all counties (deeds, mortgages, etc.,) we have no evidence the other 28 states have seen this as a problem.

b) Lien rights preclude lawsuits because threat heads of litigation by forcing the parties to pay or negotiate prior to that point.

5. The seller's duty to the agent will interfere with the buyer's rights and ability to complete the transaction.

a) When an owner breaches a contractual duty to his broker and requires that a notice of lien be filed, then: (i) the broker's filing a lien isn't a breach of a fiduciary duty, it is simply the broker exercising a contractual right and statutory remedy; (ii) this argument was NEVER raised by any other real estate commission; and (iii) no state with lien rights has requested changes to the law because of an increase in failed closings due to the filing a of a broker's lien. The escrow provision allows a seller to address a broker's claim that he will oppose, and still allow the deal to close.

b) The broker does not breach their duty to the client by enforcing their rights under the contract between them and the landowner.