Last month, the U.S. District Court for the Eastern District of Virginia held that a state-licensed real estate company was unable to collect its commission on a real estate lease transaction because a key employee involved in the lease transaction was not licensed as a real estate sales person.

The real estate company, which is appealing the decision, sued a property owner last year for breach of contract after the property owner refused to pay a $6.6 million commission on a transaction the real estate company negotiated as the exclusive leasing agent for the property owner. The property owner originally asserted that the total commission owed was substantially lower, based on what it claimed were oral agreements that were reflected in the written submissions made to the tenant. However, during discovery in the case, the property owner learned at least one of the real estate company’s employees involved in the leasing transaction was not licensed as real estate salesperson or broker and asserted that as such, the real estate company is not entitled to receive any commission.

As the court explained, Virginia law requires that “‘every employee or independent contractor who acts as a salesperson’ for a brokerage firm, such as [the real estate company in this case], ‘holds a license as a real estate salesperson or broker[]’ and that ‘[n]o individual shall act as a broker without a real estate broker’s license from the Board.’” The company did not contest that the employee at issue was unlicensed, but rather argued that the employee did not engage in activities that required licensing. In the company’s view, state law requires a license only to make an offer to lease or to negotiate or enter into a lease, and that in this case the formal lease offers were made by and in the name of the property owner, not the real estate company or any of its employees.

The court rejected the company’s interpretation of the statute, explaining that such a “narrow, hyper-formalistic reading of the licensing requirements would effectively eliminate the need for a license by most persons centrally involved in a leasing transaction on behalf of an owner.” The court reasoned that the statute’s definitions, as reflected in the range of activities a licensee is authorized to perform and the limited scope of services an unlicensed person can provide, “are clearly intended to capture the realities and breadth of activities that make up the leasing process, not the specific, more formal events necessary to consummate a transaction.”

The court held that even though the company was licensed as a real estate broker, it was prohibited from receiving any commission it otherwise would be entitled to receive under its agreement with the property owner because the individual employee lacked the required license. The court acknowledged that there “is no explicit statute or judicial decision that imposes such a prohibition under Virginia law,” but concluded “easily” based on public policy that an individual’s failure to have a license precludes the company from receiving any commission in this case. The court explained that (i) the company’s license did not cover the individual; (ii) the company certified that its covered employees would hold the required license, and (iii) the company had a statutory duty to ensure that its services were carried out in accordance with the state licensing requirements.

The company recently filed a notice that it is appealing the case to the Fourth Circuit; briefing has not yet commenced.