Over half of the states have enacted commercial broker lien statutes which allow brokers to file liens for the full payment of commissions on sales or leases. In Illinois, the statute is known as the Commercial Real Estate Broker Lien Act, 770 ILCS 15/1, et seq. (the "Act"). While this memo cites the Illinois Act, the general principles discussed herein are equally applicable to all states with broker lien laws. Historically speaking, broker lien laws were enacted to address the problem of commercial brokers completing a lease or sales transaction that were subject to a listing or commission agreement, only to receive a fraction of the agreed upon fee, or sometimes no fee at all. Brokers' inability to collect the full fees they were owed was particularly problematic during real estate downturns. As a result, commercial brokers sought the statutory right to place a lien on the property in question as a means to ensure the commission would be paid.
The Illinois Act applies to any "commercial real estate", which is defined as any real estate located in Illinois other than (i) real estate containing one to six residential units, (ii) real estate on which no buildings or structures are located, or (iii) real estate classified as farmland for assessment purposes (770 ILCS/15/5). The Act does not apply with respect to single family residences such as condominiums, townhouses, or homes in a subdivision when sold, leased or otherwise conveyed on a unit by unit basis even though the units may be part of a larger building or parcel of real estate containing more than six residential units (770 ILCS 15/5). Most other states with broker lien laws also allow liens only against commercial property, but what constitutes "commercial property" varies somewhat from state to state. In most states that have enacted such statutes, brokers may file liens with respect to commissions owed for both sales and leases. See, e.g., 770 ILCS 15/10.
In the overwhelming majority of states with broker lien laws, a written brokerage agreement is required for a broker to have a lien against the real property or sale proceeds. Broker's liens are typically not afforded any preference, and in states with statutes that specifically address the issue, the general rule is that if there are other prior recorded liens, mortgages, encumbrances, deeds of trust, assignments of rents, etc., those liens will be given priority over any subsequently recorded broker's lien. In Illinois, the broker's lien must generally be filed within ninety days after the lease has been signed and ninety days after the tenant takes possession of the premises. See, 770 ILCS 15/10(d) and (e).
Landlord's should routinely require their brokers to deliver a lien waiver when the broker receives a commission for a lease. The lien waiver is a very simple and short form. For example, the form needs to recite the name of the owner/landlord, the name of the broker, the name of the tenant, the premises and property for which the commission is due, and the amount of the commission. The lien waiver should also recite that in consideration of the broker's receipt of the commission, the broker is waiving any lien rights it may have in the subject property. In Illinois, for instance, the lien waiver may contain language along the following lines:
"In consideration of XX,XXX Dollars ($XX.XXX) [the commission amount] representing the entire commission due and payable with respect to a lease with the above-referenced Tenant, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned Broker hereby acknowledges receipt in full of all commissions, fees or other consideration due the undersigned Broker in connection with the lease of the Premises, and the undersigned, for itself, its personal representatives, successors and assigns, does hereby waive and relinquish any and all rights, claims and liens which the undersigned may now or hereafter have in and to the Property or any part thereof, the building or buildings thereon, and the tenant spaces therein, if any, on account of services heretofore furnished, or which may be furnished at any time hereafter, by the undersigned for the leasing of the above-described Premises to Tenant, including, without limitation, any rights, claims and liens of Broker pursuant to the Commercial Real Estate Broker Lien Act [insert the appropriate statutory reference if the property is in another state], or pursuant to any other statutes or the common law of the state in which the Premises is located relating to commercial real estate broker's liens."
If the commission is payable in installments, such as one-half due on lease execution, and the remaining one-half due when the tenant opens for business, then the landlord should be requesting two lien waivers – a partial waiver of lien to date when the first installment is paid, and a final waiver of lien when the last installment is paid. In such a situation, the above language would need to be adjusted accordingly.
The simple step of asking brokers to provide a customary lien waiver as condition to receipt of commission can save a landlord from potential headaches and litigation down the road. In fact, a landlord should consider including an express obligation to provide lien waivers in its listing or brokerage agreement with the broker. This way, there will be no surprises when the landlord subsequently requests such a waiver in connection with a lease that has been executed after the brokerage agreement has been signed. Moreover, by requiring brokers to provide lien waivers, the landlord can potentially avoid a dispute if the broker later attempts to claim that it was not paid the full commission it was owed under the listing agreement.
It is difficult to understand why the habit of requesting lien waivers from brokers is not nearly as widespread as the custom of requiring lien waivers from a tenant's general contractor and subcontractor when a tenant makes alterations to its space. To a property owner, all liens or potential liens have adverse consequences which can and should be avoided. As a matter of custom, landlords and owners should require their brokers to provide lien waivers upon the receipt of any commission payment. Not only is this a good, sound business practice, it is a simple low-cost step which provides additional protections and may help to prevent future disputes.