On Oct. 5, 2010, Michigan Governor Jennifer Granholm signed into law Senate Bill 610, which permits real estate brokers to assert against “commercial real estate” a lien for unpaid brokerage fees incurred in connection with the sale or lease of that same realty. This legislation, outlined below, directly impacts not only buyers and sellers of real estate and their brokers but also mortgagees and other persons holding a lien on the affected real estate. The following is an analysis of this bill’s main provisions.

A. Who and What Is Covered by the Act?

The lien granted under this statute is available only to individuals licensed as a real estate broker under Michigan’s Occupational Code and cannot be claimed by an “employee , agent, subagent, or independent contractor” of a licensed broker. The lien can only attach to “commercial real estate” which is defined in the negative as “real estate or an interest in real estate that is not any of the following: (i) real estate zoned for single family use and on which no building or structure is located; (ii) real estate on which four or fewer residential units are located; and (iii) real estate on which more than four residential units are located if the units are single-family units…that are sold, leased or otherwise conveyed on a unit-by-unit basis.”

B. What is Necessary for the Lien to Attach to the Real Estate?

In order for a licensed real estate broker to obtain attachment of its broker’s lien on commercial real estate, all of the following circumstances must be present:

• the broker has a written commission agreement and is entitled to a commission under that agreement; and

• the broker records its claim of lien in the county in which the real estate is located before the property is conveyed, unless certain exceptions specified in the act apply.

The primary exceptions to the rule that require recordation of the lien before the conveyance is made are as follows:

• if the broker’s commission is due in installments, and at least one installment is due after the conveyance, then the claim of lien may be recorded after the conveyance and before the post-conveyance installment or installments are due. In any event, however, the claim of lien must be recorded under these circumstances by no later than 60 days after the conveyance is made.

• if a broker is due a commission on a lease of commercial real estate, the broker may record a claim of lien within 60 days after the lease is executed. The lien will attach after both of the following occur: (i) the claim of lien is recorded; and (ii) the lessee takes possession of the leased realty.

• if a broker has a written agreement with a potential buyer to act as its agent, then the lien will attach when both of the following occur: (i) the buyer purchases or accepts the conveyance of the realty; and (ii) the claim of lien is properly recorded.

• with respect to an option to purchase real estate in the future, a broker may record a claim of lien at any time after the signing of the option and before the conveyance pursuant to the option occurs. However, this lien attaches only after both of the following occur: (i) the claim of lien is recorded; and (ii) the real estate is conveyed pursuant to the option.

C. What Must Be Included in a Claim of Lien?

The act requires that the claim of lien contain all of the following items in order for it to be effective: (i) the name and real estate license number of the claimant; (ii) the name of the owner of the real estate; (iii) the amount of the lien; (iv) the legal description of the subject realty as an attachment; (v) a copy of the brokerage agreement as an attachment; (vi) a statement that the information in the claim is “true and accurate to the knowledge of the signer; and (vii) the notarized signature of the broker or a person authorized to sign on the broker’s behalf. The act also contains a form of a claim of lien that will satisfy the statutory requirements if the claim is in “substantially the same form” as the model. Any claim of lien not recorded in compliance with the act will be “void and unenforceable.” By no later than 10 days after the claim of lien is recorded, the broker must transmit a copy of the lien to the record owner of the subject realty and to the party who signed the commission agreement. These copies must be sent by registered or certified mail, return receipt requested to the address of the subject realty or must be personally served. If this service requirement is not strictly met, the lien will be void and unenforceable.

D. How Is a Broker’s Lien Enforced?

If a claim of lien has been properly drafted, signed, recorded and served, then the lienor/broker may bring an action to enforce the lien in the circuit court in which the real estate is located. The lienor must file a complaint and an affidavit that the claim of lien has been recorded. In the complaint, the lienor must name as defendants all persons having an interest in the realty when the action is commenced, which interest would be “divested or impaired” by the lien’s foreclosure. The complaint may also contain a breach of contract claim demanding money damages or other remedies. This action, however, must be commenced “within 1 year after the date the commercial real estate broker’s lien attaches.” If this deadline is not met, the lien will be automatically extinguished and may not be revived.

If the circuit court in which the foreclosure action is pending determines that the claimed lien is valid and that the commissions due have not been paid, then the court may enter judgment ordering the sale of all or a portion of the liened real estate. The realty may be redeemed but the redemption period may not exceed four months. The order directing foreclosure must be recorded in the proper county land records.

The foreclosure sale ordered by the court must be conducted as a sale upon an execution of a judgment and is final, subject to redemption rights, upon the entry of an order confirming the sale. If the real estate is not redeemed within the redemption period fixed by the court, then the grantee acquiring the realty at the sale will be vested “with all right, title and interest in the commercial real estate that was subject to the lien.” In the event that the sale proceeds are insufficient to pay the judgment, the court may enter a deficiency judgment against the person signing the commission agreement. In the event that the broker prevails in this action, he may be awarded in the court’s discretion “reasonable attorney fees, court and litigation costs, and prejudgment interest.”

E. Will the Recording of a Claim of Lien Prohibit Closing of the Sale or Lease?

If a recorded claim of lien otherwise would prevent the closing of the sale or lease of commercial real estate, then the parties to the transaction are directed to establish an escrow account from the transaction in an amount sufficient to pay the lien. A buyer or seller cannot refuse to close because of this requirement. The monies on deposit in the escrow account will remain there until the parties rights therein are “a written agreement of the parties, a judgment or order by a court of competent jurisdiction, or any other method agreeable to the parties.”

Upon the deposit of these funds, the broker’s lien will be extinguished and the broker must execute and deliver a written release of lien. A form of release is provided in the act. Nevertheless, an escrow account need not be established if either of the following two circumstances exist: (i) alternative procedures are available that permits the transaction to close provided that all parties agree; or (ii) the proceeds of the transaction are insufficient to pay all liens against the subject realty.

F. What is the Priority of a Broker’s Lien for Unpaid Commissions?

The broker’s lien is subordinate to the lien of a “valid pre-recorded lien or mortgage” on the subject realty. These senior liens include the following: (i) a valid construction lien that is recorded after the claim of lien and that relates back to a date preceding the date on which the broker’s lien was recorded; and (b) a lien securing “revolving credit and future advances of construction loans” that has been recorded before the claim of lien was recorded. In addition, a mortgage on the realty recorded after the claim of lien has been recorded will have priority over the broker’s lien if the mortgagee lacked “actual or constructive knowledge of the lien at the time the mortgagee advanced money under the mortgage.”

G. May the owner of the Subject Realty Take Steps to Force the Broker to Enforce its Claim of Lien?

The owner of the commercial real estate that is subject to a recorded claim of lien (i) may demand that the broker commence an action to enforce its lien; or (ii) if a court action is already pending between the owner and the broker, may demand that an answer be filed in that action after service of the demand. If the broker fails to take the demanded action within 30 days after the demand is served, then the claim of lien will be automatically extinguished. This demand may be served by registered or certified mail, return receipt requested, or by personal service.

H. When Does This Act Become Effective?

This act became effective on Oct. 5, 2010 and applies to all written commission agreements executed after that date.