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Commission Escrow Act Information

Apr 15, 2019

THE COMMISSION ESCROW ACT REQUIRES A CHANGE TO THE LISTING AGREEMENT AND STRICT BROKER COMPLIANCE

By Howard W. Goldson, Esq. and Doreen J. Spagnuolo, Esq.

 

By now I am sure you have heard the exciting news that Gov. David Paterson has signed into law the Commission Escrow Act.  The law is a giant step toward protecting brokerage commissions.  Under the Commission Escrow Act, if the seller does not pay the broker the full commission at the time of closing, the owner must deposit in escrow with the county clerk a sum of money equal to the amount of the broker’s unpaid commission or, if there is insufficient money from the closing proceeds, the balance of all monies after the payment of closing expenses.  Therefore, brokers should be aware of how to conduct their business in a way which would allow them to receive the benefits of this law when it takes effect on January 1, 2009.   

 

In order to take advantage of this law, brokers must strictly comply with certain requirements.   One such requirement necessitates a change to the listing agreement.  However, there are certain legal issues which must be resolved before the listing agreement can be revised.  MLS is hoping to have the new listing agreement available by the end of this year.  As soon as it becomes available, MLS will notify the brokers.  The revised listing agreement will satisfy that part of the law which requires that the listing agreement contain in “clear and conspicuous bold face type” the following language:

 

AT THE TIME OF CLOSING, YOU MAY BE REQUIRED TO DEPOSIT THE BROKER’S COMMISSION WITH THE COUNTY CLERK IN THE EVENT THAT YOU DO NOT PAY THE BROKER HIS OR HER COMMISSION AS SET FORTH HEREIN.  YOUR OBLIGATION TO DEPOSIT THE BROKER’S COMMISSION WITH THE COUNTY CLERK MAY BE WAIVED BY THE BROKER.

 

A broker should not waive his or her rights under this law without careful consideration.  It is also important to mention that this law will apply only to listings taken after January 1, 2009.  This law does not apply to any listing agreement entered into prior to the effective date of the law.  This means that if a listing agreement was taken prior to January 1, 2009, a broker may not renegotiate that listing agreement to include the required language for the purpose of subjecting the seller to the provisions of the law.  The Department of State has indicated that any broker who tries to apply this law to a listing entered into prior to January 1, 2009 may be subject to disciplinary action.   

 

Furthermore, there are additional requirements that brokers must comply with to protect their commission pursuant to the new law.  These additional requirements are as follows:

 

  • The listing agreement, whether an exclusive or an open listing, must be in writing and signed by the owner.  Brokers who enter into oral agreements with their clients cannot qualify for escrow protection.
  • The listing agreement should clearly state the address of the owner.  The address for the property to be sold should be set forth separately even if that address is the same address as the owner’s address.  It is important that the address at which the owner resides is clearly identifiable simply by looking at the listing agreement.
  • If the commission is renegotiated after the listing has been signed, it is recommended that a new listing be entered into with the owner identical in every way to the original listing except for the renegotiated commission.  The Act does not provide for modification of commissions by commission agreements.  In order to make sure you fully comply, it is thus recommended you modify commission arrangements by the execution of a new amended listing contract.
  • The broker must file an Affidavit of Entitlement for Commission.  Annexed to this Affidavit must be a copy of the written listing agreement.  The form for such an Affidavit is presently on the Realtors Only section of MLSLI.com, under the legal section of “Documents on Demand”.  It is suggested that you obtain a copy of that form and review it carefully.  If you have any questions about how to fill out the form, contact the Legal Helpline for assistance.
  • The Affidavit of Entitlement must be filed in the Office of the County Clerk, except in the City of New York where it is filed in the Office of the County Registrar.  This Affidavit must be filed after the contract is signed and before the closing.
  • Within 5 business days after filing the Affidavit of Entitlement, you must serve a copy of that document on the owner by registered or certified mail, return receipt requested, or by personal delivery.  The service must be made to the owner’s address set forth in the written listing.  If the closing will occur in 5 business days or less from the filing of the Affidavit, then service must be made by personal delivery.
  • Along with the Affidavit of Entitlement, you must mail or deliver to the seller a check in the amount of $25.00 payable to the clerk of the county in which the property is located (Nassau County or Suffolk County) or, if in the City of New York it must be payable to the Department of Finance of the City of New York (Kings County or Queens County).  The seller is to return this check to you at the time when you are paid at closing.  Make sure your file contains both a copy of the Affidavit of Entitlement and the check that you mailed to the owner, and also make sure you have a record of the date you mailed the documents and the address to which it was mailed.  Photocopying the fully addressed envelope with the postage affixed to keep for your file is probably a good idea. 
  • If the seller is represented by an attorney, and you have been given contact information for that attorney prior to the time that you file the Affidavit of Entitlement, you must also send a copy of the Affidavit to the attorney.  This can be done by ordinary mail, fax, e-mail attachment, or by personal delivery.  This also must be done within 5 days after the filing of the Affidavit of Entitlement.
  • If the seller has deposited monies pursuant to the law with the county clerk or registrar, the broker must commence their action or proceeding within 60 days from the time of the posting of that money by the seller in order to ensure that the money remains in escrow.  If the broker fails to commence such action or proceeding within 60 days, the owner can make an application to have the money released to them.  This means that the court would give the money back to the seller to hold until the dispute is resolved, instead of keeping the money in escrow.  This, in effect, would nullify the benefits of the Act because the money will no longer be safeguarded in escrow.  It is important to note that this provision is not a statute of limitations time period within which the broker must commence its lawsuit against the seller for the broker commission (see next bullet point).  The provision simply puts the onus on the broker to file suit within 60 days if the broker wants to make sure the money remains in escrow.  
  • Where the owner has deposited monies pursuant to this law with the county clerk or registrar, the Statute of Limitations within which the broker may bring an action or proceeding for its brokerage commission is reduced to 6 months.  If the broker does not commence such proceedings within 6 months, the broker shall not be able to collect said monies.  Indeed, the commission is, at that point, most likely lost. 
  • If the seller fails to make the deposit required by law, a successful broker is entitled to judgment not only for its commission, but for all costs, including reasonable attorneys’ fees. 

 

 

This law affects only residential transactions (1-4 family dwellings and individual coops and condos). 

 

The Commission Escrow Act will be a topic of discussion at NYSAR’s legal meeting this month.  We will keep you apprised of any additional information.