As the New York City condo boom matures, no one wants to be left holding the bag. In a departure from practice in recent years, according to one New York City real estate attorney, the major brokerages are unwilling to function as listing brokers on new projects, a change in the way some commission agreements are handled that may have repercussions throughout the New York City new development community.
The change has to do with co-brokerage and may in part stem from a 2005 lawsuit, Fischer v. RWSP Realty, which basically indemnified property sellers.
According to Douglas P. Heller, a partner at Herrick, Feinstein LLP, in accepted practice prior to the lawsuit, when a firm, often the marketing firm, also functioned as the building’s listing broker, that firm was responsible when the time came to hand out commissions or police disputes between brokers.
Now, however, new development buildings are finding that the major brokerages are all unwilling to function as listing brokers.
The alternative arrangement can be complicated. The developer or sponsor hires a marketing firm that registers co-brokers as they bring their clients to their building. The process of registration generally involves signing a form and attaching a business card, but the form that co-brokers fill out is an agreement between the co-broker and the developer.
That agreement puts the developer on the hook to pay the commissions of any co-brokers who close sales, and puts the developer in the line of fire if a commission war breaks out.
It also means that if there is a problem with the deal and the developer decides not to pay the co-broker’s commission, only the developer can be sued by the co-broker.
The marketing firm and the co-broker never actually sign a contract with each other.
Limiting exposure
As a result, Heller, a former deputy attorney general with the New York State attorney general’s office, is asking the developers he represents to sign a specific commission agreement with each co-broker for each unit in a new development project before it is sold. In other words, “developer X agrees that co-broker A has brought in John Doe to buy penthouse B, and agrees to be responsible for the brokerage commission on unit penthouse B.”
Such an agreement would protect the sponsor, but would also create extra paperwork for the selling agents on the projects, who are being asked to facilitate the signing of each of the commission agreements. If a building has 500 units, that’s 500 commission agreements to be signed.
“The sales brokers hate this, not because of the liability, but because there’s so much extra work,” Heller said. “They’re saying, ‘I already registered this [co-broker], and now I have to have something else signed by him?’
“By now, am I making it so difficult on the outside brokers that they’re not going to bother with this project?’ ”
Heller said that he has used the commission agreements on three projects in recent months.
He said the co-brokers, who don’t get paid until they sign the commission agreements, appear to have no problem with the process, but the selling agents are not happy due to the extra work involved.
“But I haven’t really found a smooth, easy way to solve the problem,” Heller continued.
The problem, he said, is that the current brokerage agreements signed by the selling agents and the developer typically make the latter responsible for paying the commissions of any co-brokers who close sales.
While development marketers argue that the co-brokerage agreement protects the developer, Heller said he doesn’t agree.
“What’s scary to me, and I don’t know if this has happened or not, is that the developer is relying on the sales agent to monitor these [co-brokers], but the sales agent has no liability for doing it, so he could screw up,” he said.
“It seems to me likely that a couple of things may happen,” Heller said. “No. 1, the same buyer is going to be brought in by two different agents. No. 2, somebody’s going to walk in the door who says, ‘I work with such-and-such registered broker,’ and he’s lying … but he’s going to be entitled to a commission.”
If the developer refuses to pay, he or she could be sued. Heller said that his recommendation for developer clients to sign commission agreements is a labor-intensive way of avoiding a lawsuit.
“People have said, ‘You’re just imagining things – nothing could go wrong,’” he said. “But the way it’s done currently, I say that something has to go wrong. The developer is signing an agreement with a [co-broker] who he’s never even met.”
The response
Most development marketers interviewed for this article said they hadn’t been asked to sign commission agreements between the co-brokers and the developer for each unit sold.
“It doesn’t sound very practical from a business standpoint,” said Shaun Osher, the founder and chief executive officer of Core Group Marketing. “I haven’t consulted my attorney on this, but I don’t think my company would do it. As far as I’m concerned, the documents we have protect developers. I represent developers, and I don’t see a situation where the developer is at risk.”
Andrew Gerringer, an executive vice president and head of the development marketing group at Prudential Douglas Elliman, said he had never encountered the individual commission agreements.
“Usually, I would hear of something like this, unless it’s something new, and this lawyer’s one of the guys on the forefront, and it hasn’t reached critical mass yet,” he said. “And that’s entirely possible.”
Angela Ferrara, a director and vice president of sales at the Marketing Directors, said the group was asked by the developer to sign the individual commission agreements on one development.
“We had this happen on one project, and it’s because the attorney – I wanted to kill him – convinced his client that he should do it that way,” she said.
Ferrara said that she believed the current brokerage agreements used by the Marketing Directors protect the developer, even from cases where the purchaser brings another co-broker into the picture.
“In those cases where we think there’s something funny going on, we actually have the purchaser sign an outside, separate indemnification should anybody come forward,” Ferrara said. “That’s to protect us and to protect the developer.”
Part of the problem may be that all the companies that do new development marketing use different brokerage agreements, said Karen Duncan, director of sales for Brown Harris Stevens at the Apple Bank Building Condominium.
“There are so many new developments coming on line, and there is so much confusion, because every single outside brokerage agreement is different,” she said.
Duncan said she is the co-chairwoman of the new development committee formed in November by the Real Estate Board of New York to launch an initiative to come up with a generic outside brokerage agreement for new development projects.
“We’re working on a universal outside brokerage agreement that sponsors would agree to sign with the selling agency that would protect the sponsor, the selling agent and the outside brokerage company bringing a buyer to a new development,” Duncan said.
Duncan said that she and others on the committee feel it may be appropriate to have a lawyer involved in the process.
“I understand what this lawyer is saying in terms of protecting his clients,” she said. “This is the perfect reason why it would be a good idea to have an attorney involved.”