by Lisa Tomiko Blackburn
Most lawyers know that the statute of frauds applies to real estate conveyances. However, many are not aware that the statute of frauds also extends, by statute, to real estate sales commissions. This article will discuss case development in 2011 applicable to brokers, a statutory amendment in 2011 applicable to lawyers, and general guidance that is critical to ensuring that attorneys and clients can enforce real estate commission agreements and get paid.
The Statute of Frauds has royal origins, deriving from “An Act for the Prevention of Frauds and Perjuries” under the reign of King Charles II of England in 1677. The Statute of Frauds was enacted by the Congress of the Republic of Texas in 1840. An iteration of the statute appeared in the Texas Revised Civil Statutes in 1925, and was later codified in Texas’ Business and Commerce Code in 1967. In 2003, the Texas Real Estate License Act (RELA) incorporated a version into Texas Occupations Code (TOC) Section 1101.806(c) to prevent “frauds” in the context of real estate sales commissions.
With its longstanding history, one might assume that interpretation of the statute of frauds, as applied to “dirt law,” is well established. Perhaps surprisingly, this area continues to evolve.
In May 2011, the Dallas Court of Appeals interpreted RELA’s statute of frauds provision in Neary v. Mikob Properties, Inc. 340 S.W.3d 578, (Tex. App.—Dallas 2011, no pet.). The case reinforced a strict constructionist trend in interpreting Section 1101.806(c). To fulfill the requirements of RELA, an agreement for commission should:
(1) be in writing, and be signed by the person charged with the commission. Notably, Texas courts have largely refused to extend equitable statute of frauds exceptions—such as part performance—to the interpretation of Section 1101.806(c). In Neary, the Court declined to enforce a term sheet (that both identified “Seller” as the commission obligor and was signed by the property-selling defendant), in part because the defendant was not explicitly defined as “Seller.” The commission obligor should execute a written commission agreement and be clearly identified as the party responsible for paying commission.
(2) promise that a definite commission will be paid or refer to a written commission schedule. If the evidence supporting a commission enforcement action is comprised of a non-binding term sheet, the plaintiff’s prospects are grim. A commission agreement should include (or incorporate) unequivocal commission terms.
(3) state the name of the broker to whom commission shall be paid. Neary underscored a factor critical to numerous Texas decisions: the commission-earning party identified in the agreement must be a licensed broker when services commence. This means if a person is a broker, that person’s designee (who is not a broker) may not be listed as the broker in the commission agreement. A party who is not licensed at the time the services commenced, but who later becomes licensed, also does not qualify for commission under RELA.
(4) either itself or by reference to another existing writing, identify with reasonable certainty the land to be conveyed. While precise metes and bounds descriptions are unnecessary, the location of the property must be clear for a commission agreement to be enforced.
Through August 31, 2011, TOC Section 1101.005 provided the following exemption from RELA: “This chapter does not apply to . . . an attorney licensed in any state.” After that date, RELA’s exemption applies merely to “an attorney licensed in this state,” meaning that only Texas licensed attorneys may conduct Texas real estate brokerage activities without complying with RELA.
However, this exemption does not mean that a Texas attorney attempting to collect commission will avoid the court’s scrutiny. In fact, attorneys seeking real estate commissions often navigate even more complicated issues, including avoidance of:
(A) conflict of interest issues, if the attorney’s self-interest in pursuing a real estate commission compromises his or her fiduciary duty to a legal client;
(B) compliance issues, where an attorney is exempt from RELA, but the broker on the other side of the transaction must still comply with RELA’s prohibition on the fee-spitting by brokers with non-licensed parties (including attorneys); and
(C) violations of other states’ real estate licensing statutes, in the event real estate brokerage activities (as defined in the applicable brokerage statutes) take place, in whole or in part, outside of Texas.
An attorney seeking a real estate commission would be well advised to adhere to all guidelines—for brokers and attorneys—above. In addition, full disclosure of the attorney’s functions and capacity, and the commission-paying client’s voluntary and knowing consent, should be memorialized in writing.
Lisa Tomiko Blackburn is General Counsel at Cypress Equities. She handles real estate and corporate transactions and litigation across the United States and Caribbean. Lisa is a member of DBA’s Publications, Speakers, and Media Relations Committees, and can be reached at Lisa.Blackburn@cypressequities.com.