The Superior Court of New Jersey, Appellate Division, recently considered what type of payment constitutes an unlawful split of a real estate commission.
Markheim-Chalmers, Inc., ("Broker") is a licensed New Jersey real estate broker. It obtained a lease for American Shower and Bath ("Subsidiary"), a subsidiary of Masco Corporation ("Parent"). The lease called for the Broker to receive a $250,000.00 commission from the landlord. When the property manager for the Parent saw the lease, he demanded that the Broker pay the Parent half of the commission or he would refuse to sign the lease, thereby killing the deal. After some negotiation between the parties, the Parent’s property manager agreed to receive a third of the commission, or $83,333.33 ("Payment"). In return for the Payment, the Parent offered its guaranty for the Subsidiary’s lease.
Eventually, the Broker filed a lawsuit challenging the legality of its payments to the Parent. The Broker claimed that the Payment amounted to an illegal split of a real estate commission. The Broker argued that the Payment was drawn from its commission. New Jersey’s license laws make it illegal for anyone besides a real estate licensee to receive a commission, and so the Broker argued that the Parent could not receive the Payment. The Parent argued that the Payment was made in exchange for its guaranty and wasn’t a fee split. The Parent also brought a counterclaim against the Broker alleging fraud. The Broker argued that the Parent was barred from pursuing the counterclaim because only a licensee can bring a commission lawsuit.
The trial court ruled in favor of the Broker. It found that it was indisputable that the Payment was drawn from the Broker’s commission. Since, in New Jersey, only a licensee can receive a commission and bring a lawsuit seeking payment of a commission, the trial court ruled in the Broker’s favor and dismissed the Parent’s counterclaim. The Parent appealed.
The Superior Court of New Jersey, Appellate Division, reversed the trial court and sent the case back to the trial court for further proceedings. The court agreed with the trial court’s recognition that it was clear that the Payment was derived from the commission. The court also found that the Payment wasn’t made in return for the Parent’s guaranty, since the guaranty had been volunteered by the Parent after the parties had negotiated the lease.
However, the court disagreed with the trial court’s interpretation of New Jersey’s license law barring a nonlicensee from receiving a commission. The court found that the purpose of the law was to bar a nonlicensee from receiving a commission when it performs acts normally performed by licensees, namely real estate brokerage services and/or salesperson services. The court found that if the Parent was merely using a negotiation tactic and the Parent wasn’t performing any acts or services performed by real estate licensees, then no New Jersey laws would bar the Parent from receiving the Payment. The court sent the case back to the trial court to determine whether the Parent performed any real estate brokerage or salesperson services.
Markeim-Chalmers, Inc. v. Masco Corp., 322 N.J. Super. 452, 731 A.2d 114 (N.J. Super. Ct. App. Div. 1999).
Note: Following the posting of the above summary, NAR Legal Affairs received additional information about this case from the General Counsel for the New Jersey Association of REALTORS® ("NJAR"), Barry Goodman of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel, LLP. On remand, NJAR and the New Jersey Real Estate Commission filed amicus briefs in support of the Broker's position that New Jersey law prohibited the Broker from entering into a "fee-split" with the Parent. Rather than respond, the Parent agreed to dismiss the lawsuit with prejudice without receiving any payment from the Broker. Thus, whether such a fee-splitting arrangement is legal remains an open question in New Jersey.
NAR Legal Affairs would like to thank Mr. Goodman for this additional information.