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Dow & Condon, Inc., v. Brookfield Dev. Corp.: Cobrokerage Agreement Ruled Illegal Contract

A Connecticut court has considered whether the state's license law allows a broker to bring a commission lawsuit when it entered into a commission splitting agreement with a broker licensed in another jurisdiction.

In 1996, Stein and Company, an out-of-state licensed real estate brokerage ("OSL"), and Dow and Condon, a Connecticut licensed real estate brokerage ("Brokerage"), entered into a cobrokerage agreement ("Agreement"). The Agreement covered the acquisition of a site for a Federal Express facility in Connecticut, and called for the OSL to receive 80% of the commission and the Brokerage to receive the other 20%. The agreement called for the OSL to handle all communications with Federal Express and negotiate with all potential landlords, while the Brokerage was to select potential sites for the facility.

In 1997, the OSL entered into a commission agreement with the Brookfield Development Corporation ("Landlord"). The agreement called for a commission of $408,000 to be paid in two installments, half due at closing and the other half at the time of occupancy. The Landlord and Federal Express entered into a build out agreement, but the Landlord was unable to finance the project and so the deal collapsed. Following the collapse of the build-out, the OSL sent the Landlord a letter seeking payment of one-half the commission amount. The Landlord made no payments at this time.

In 1998, the Landlord and Federal Express located another suitable property and so amended the lease agreement to reflect this location change. Following the amending of the lease agreement, the Landlord sent the OSL half of the commission, stating in a letter that the rest would be paid in accordance with the commission agreement. When the Landlord never paid the other half of the commission, the Brokerage filed a lawsuit seeking payment of the remainder of the commission. The trial court ruled that the Agreement was an illegal contract under Connecticut law and therefore ruled in favor of the Landlord. The Brokerage appealed.

The Supreme Court of Connecticut affirmed the ruling of the trial court. The court first considered whether the Brokerage had "standing", or the legal ability to bring a lawsuit for the commission, when the commission agreement was actually between the OSL and the Landlord. The court ruled that the Brokerage had standing because it was clear from the commission agreement that the Brokerage was an intended beneficiary of this agreement.

Next, the court considered whether the Agreement was an illegal contract. There were two sections of the state's license laws at issue. The first section bars the bringing of a lawsuit in the state's courts for a real estate commission by an unlicensed party. The second section bars a Connecticut real estate licensee from splitting a commission with an unlicensed individual. The trial court had ruled that because the Brokerage had violated the state's license law through its commission splitting agreement with the OSL, it was not entitled to recover the remaining commission from the Landlord.

The court agreed with the trial court that the Agreement was an illegal commission splitting agreement, and so affirmed the lower court's ruling. The Brokerage argued that the statute was intended to bar commission payments to individuals or entities who did not hold a valid real estate license anywhere, not a commission splitting agreement between two licensed brokerages, one of whom was licensed in Connecticut. The court rejected this argument, ruling that the statute barred commission splitting with any individual or entity who was not licensed in Connecticut. Since the Agreement was therefore an illegal contract, the court ruled that state law barred the Brokerage's commission lawsuit.

The court next addressed the Brokerage's argument that state's real estate commission had issued a policy statement explicitly allowing real estate licensees to pay referral fees to licensees in other jurisdictions. The court rejected this argument for a number of reasons, most importantly because a referral fee and a commission splitting agreement are two different types of agreements and the policy statement did not address the cobrokerage agreements. The court then stated in a footnote that "we do not decide in this case whether the payment of a referral fee by a licensed broker to an unlicensed person who has not engaged in the real estate business in this state would bar a recovery of a commission by a licensed broker" (emphasis in original). Therefore, the court affirmed the ruling of the trial court.

Dow & Condon, Inc., v. Brookfield Dev. Corp., No. 16774, 2003 WL 22474842 (Conn. Nov. 11, 2003). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].

Editor's Note: The Connecticut Association of REALTORS® filed an amicus curiae brief in favor of the Brokerage's position.

To learn more about what activities an out-of-state licensee can or cannot perform in the various United States jurisdictions, click here.