The most recurring question I receive from readers has to do with real estate commissions; specifically, finders fees, referral fees, who may and who may not receive them, and variations on these questions.
The subject is addressed in New York State’s Real Property Law beginning with Section 442.
In sum it states that in order to make a claim in court for a commision related to the sale or lease of real property, residential or commercial, the claimant must be the holder of a New York State real estate broker’s license. An associate broker or licensed salesperson can only receive a commission from their sponsoring broker, never directly from a seller, buyer, landlord, tenant or a broker not their sponsoring broker. An exception would be when the associate broker or salesperson leaves the employ of their sponsoring broker before the commission has been paid to the broker. In that event the broker may pay the commission to the associate broker or salesperson whether they are in the employ of another sponsoring broker or the person is no longer active in the real estate business and no longer the holder of a real estate license.
In a recent article published by the New York State Association Realtors, Anthony Gatto, Counsel, and Liz Celeone, Associate Counsel discuss the New York State Supreme Court case, Sagacity Int’l Real Estate Advisors, Inc. v. Wiggins (NY 2020) which involves a commission dispute between two real estate salespersons and raises the question as to the enforceability of commission split agreements between real estate salespersons who are licensed under the same real estate brokerage. The court ruled against the salesperson claiming the commission.
This also applies to associate brokers and salespersons within the brokerage firm that operate as “teams.” Any commissions earned by the “teams” must be distributed to each member of the “team” individually by their sponsoring broker. A commission may not be paid to a “team leader” to be distributed to the other members of the team. According to Anthony Gatto and Liz Celeone, this is a common question that comes to them through N.Y.S.A.R.’s Legal Hotline.
New York State allows associate brokers and salespersons to individually form an L.L.C. (limited liability company). The broker may pay a commission to an L.L.C.
Competing real estate brokers may pay and receive referral fees for referring sellers and buyers, landlords and tenants to other real estate brokerage firms, but the fees may only be exchanged between brokers, never directly to the other firms’ associate brokers or salespersons. Should the referral involve an out-of-state party, the commission may be paid or received if the out-of-state party is authorized to collect and pay commissions by their state regulatory agency.
The most common question pertains to “finder fees,” the payment of fees to an unlicensed person who refers a seller, buyer, landlord or tenant to a real estate broker who subsequently receives a commission as a result of the referral. That question was answered on May 31, 2011 by the New York State Appellate Division, 2nd Department in the matter of Futersak v. Pearle.
The Court ruled that in order to receive a commission for a sale or rental of real estate, the claimant is required to hold a real estate broker’s license. The New York Board of Realtors and the New York State Association of Realtors filed amicus curiae briefs with the Court.
An exception is an attorney licensed to practice law in the State of New York who may conduct any activity related to real estate without a real estate broker’s license and receive compensation. It is not true that attorneys are automatically real estate brokers. If an attorney licensed to practice law in New York wishes to employ licensed associate brokers and salespersons, the attorney would first have to acquire a real estate broker’s license from the New York Department of State. The New York Bar Association has special rules that apply to the attorney’s role in these situations.
Another subject that is addressed in The New York Real Property Law pertains to the payment of “rebates,” parts of commissions paid to sellers, buyers, landlords, and tenants represented by a real estate broker in these transactions. These payments are lawful, provided the broker has earned a commission from the transaction and the payment of the rebates must be disclosed in the closing documents.
John is a St. John’s University graduate, licensed Real Estate Broker, DOS Certified Instructor, and real estate consultant. He previously taught at NYU, LIU, and The Cook Maran Real Estate School, which he helped found. www.johnaviteritti.com