This article points out the activities a broker is allowed to undertake when negotiating interstate real estate transactions for a fee.

Brokers go home to collect

Real estate investors migrate regionally to areas of increasing employment and ownership opportunities. Economic trends transgress state borders, compelling California real estate brokers to expand their brokerage activities across state lines on behalf of investors, homeowners and buyers.

However, real estate and licensing laws differ from state to state.

Consider a California-licensed real estate broker who is contacted by a California resident to locate a buyer for North Carolina property.

The broker locates a buyer, with or without the help of a North Carolina-licensed broker. The purchase agreement, which includes a brokerage fee provision, is prepared, signed by the buyer and delivered to the seller, all from the broker’s California office.

Later, the seller cancels the transaction. The California broker demands his fee from the seller.

The seller claims the broker cannot collect a fee since the broker is not licensed in North Carolina.

Can the California-licensed broker collect a fee under California law without also being a North Carolina-licensed real estate broker?

Yes! The broker performed all significant brokerage services in California – the state in which he is licensed to perform brokerage services. [Consul LTD. v. Solide Enterprises, Inc. (9th Cir. 1986) 802 F2d 1143]

However, as you will see, not all activities need to be performed in California to enforce collection of the fee under California law.

California’s closed-door policy

A broker licensed in another state may not come into California and perform any brokerage activity unless he first obtains a California real estate broker’s license. [Calif. Business and Professions Code §10137]

However, an out-of-state broker can cooperate with a California broker on the sale or exchange of California real estate and, under a fee-splitting agreement, collect a share of the California broker’s fee. [B & P C §10137]

Thus, California has:

• a closed-door statute prohibiting out-of-state brokers from performing brokerage activity in California [B & P C §10137]; and
• a cooperation statute, allowing California brokers to share fees and information with out-of-state brokers. [B & P C §10137]

Out-of-state brokerage

States which permit fee splitting and information sharing with out-of-state brokers rarely permit out-of-state brokers to travel into the state and perform brokerage activity.

Consider an Oregon broker who asks a California broker to cooperate with him by finding a California buyer for Oregon property.

The California broker locates a California buyer. The broker goes to Oregon and conducts negotiations which lead to the California buyer purchasing the Oregon property.

On closing, the California broker requests his share of the fee as promised by the Oregon broker.

However, the Oregon broker claims the California broker is barred from collecting a fee from him on the sale of the Oregon property since the California broker is not licensed to perform any brokerage services in Oregon, a “closed-door” state.

The California broker claims he is entitled to collect a fee since Oregon permits cooperation and fee splitting between Oregon and out-of-state brokers.

However, the California broker cannot collect his agreed-to share of the fee under Oregon law. Oregon merely permits a sharing of information and fee splitting with out-of-state brokers. Oregon, like California, does not create an exemption under the fee-sharing statute which would allow an out-of-state broker to perform any brokerage activities (sale negotiations) in Oregon.

Although Oregon brokers may split fees with out-of-state brokers, out-of-state brokers lose their right to share a fee if they conduct brokerage activities while in Oregon. [Fields v. McNab (1984) 70 OrApp. 154]

Washington, Oregon, Nevada and Arizona also have both:

• a closed-door statute; and
• laws permitting fee splitting and the exchange of information between home-state and out-of-state brokers. [Revised Code of Washington §18.85.330; Oregon Revised Statutes §696.290; Nevada Revised Statutes §645.605; Arizona Revised Statutes §32-2163]

For example, Nevada permits interstate cooperation, but requires out-of-state brokers who wish to conduct brokerage activity while in Nevada to first obtain a certificate of cooperation from Nevada’s Real Estate Commissioner. [Nev. Rev. Stat. §645.605]

California brokers interested in obtaining a certificate of cooperation should write or call the Nevada Department of Real Estate at:

788 Fairview Drive #200

Carson City, NV

89701-5453

(775)687-4280

http://www.red.state.nv.us

Brokers will need to submit an application, a history record from the California Department of Real Estate (DRE), and a $150 filing fee to obtain a one-year Nevada certificate of cooperation. [Nev. Rev. Stat. §645.830]

Arizona provides for the licensing of out-of-state brokers, enabling them to broker Arizona real estate without cooperating with an Arizona broker. [Ariz. Rev. Stat. §32-2125.02]

Brokers interested in obtaining an Arizona nonresident broker’s license should write or call the Arizona Department of Real Estate at:

2910 North 44th St. Suite 100

Phoenix, AZ 85018

(602) 468-1414

http://www.re.state.az.us

Out-of-state brokerage activity

A California broker avoids transgressing the licensing laws of another state when:

• all brokerage activities are conducted by phone, mail or fax from California, the state of the broker’s license [Consul LTD., supra]
• the listing and purchase agreements are negotiated, prepared and handled in the state of the broker’s license (Illinois) [Gold v. Wolpert (7th Cir. 1989) 876 F2d 1327];
• the client knows the broker is licensed in another state (Indiana) [Coldwell Banker & Company v. Karlock (7th Cir. 1982) 686 F2d 596]; or
• the broker only inspects the property, or instructs the buyer to personally inspect the property. [Coldwell, supra]

However, a California broker who sues in another state will be denied his fee by the out-of-state court when he conducts brokerage activities in that state, such as:

• showing the property himself (in Virginia) [Harrison & Bates, Inc. v. LSR Corp. (1989) 385 SE2d 624];
• negotiating between the buyer and seller (in Wisconsin and Oregon) [Paulson v. Shapiro (7th Cir. 1973) 490 F2d 1; Fields, supra]; or
• negotiating, preparing, signing or delivering the listing or purchase agreements (in New Jersey). [Baron & Company, Inc. v. Bank of New Jersey (1981) 504 F.Supp 1199]

Thus, California brokers soliciting and negotiating a transaction across state lines should:

• stay in California;
• conduct all negotiations from California by phone, mail or fax;
• include a California choice-of-law provision in all listing fee provisions attached to purchase agreements;
• prepare and send all documents from California;
• require the principals to directly pay him his share of the fee through escrow; and
• sue in a California court.

California brokers who wish to participate in a transaction involving out-of-state real estate while sharing a fee to be received by an out-of-state broker should confirm with the Department of Real Estate in the other state whether he may:

• be paid a share of any fee collected by the out-of-state broker; and
• travel into the other state to conduct activities such as inspecting, showing the property or preparing documents.

Visiting out-of-state property

California brokers are charged with knowing the condition of the properties they sell. This requires brokers to personally inspect property they have listed for sale or, in the case of four-or-less residential units, to obtain a home inspector’s report.

However, California brokers are typically barred by other states from showing out-of-state property.

Consider a California broker who is cooperating with an Oregon broker to find a buyer for Oregon property. The California broker is prohibited from showing the Oregon property.

However, the California broker should:

• accompany his California client and the Oregon broker on an inspection tour of the Oregon property; and
• allow the Oregon broker to show the property to his California client.

The California broker should then write a memo to the Oregon broker, thanking him for showing the property to the California client. The memo provides written evidence that the California broker did not show the Oregon property. [See first tuesday Form 525]

Claims by principals against a broker

A broker may be compelled to appear before the courts of another state when:

• he is sued by a resident of the other state; and
• he performed extensive brokerage activities in the other state. [University Financing Consultants, Inc. v. Barouche (1983) 148 CA3d 1165]

Which court does the broker use

Sometimes, buyers and sellers who have agreed to pay a broker a fee breach their agreement to pay the fee.

Brokers suing to collect their fee on an interstate transaction might sue in:

• federal courts, when the amount of the fee exceeds $75,000 [28 United States Code §1332];
• courts in the state which issued the broker’s license; or
• courts in a state where the broker does not hold a license.

However, a broker should always attempt to collect his fee in the state of his licensing since:

• state courts often dismiss actions brought by out-of-state licensees [Fields, supra; Beggs v. Lowe (1973) 89 Nev. 547]; and
• the broker will likely receive more favorable treatment in the state of his licensing.

For an example of home-court favoritism, consider a California broker who lists Arizona property for sale. The broker goes to Arizona to:

• prepare and sign the listing agreement with the seller; and
• conduct sale negotiations with a buyer.

The purchase agreement is prepared in California and forwarded for signatures to each party in his respective state. The escrow instructions are drafted in Arizona, but escrow is opened in California.

However, the buyer cancels escrow before closing based on a misrepresentation by the seller.

The broker demands the Arizona seller pay his fee since the broker fully performed his duties under his listing agreement with the seller.

The seller refuses to pay the brokerage fee, claiming the Arizona-signed listing agreement was invalid since the broker was not licensed in Arizona to:

• solicit sellers; or
• handle any negotiations or documents.

The California broker sues the seller in a California court to collect his fee.

The seller further claims the broker cannot sue in California since substantial brokerage activity occurred in Arizona.

Despite all the broker’s activities in Arizona, which were improper under Arizona law, the California court held the broker can sue the out-of-state seller in California under California law since the most substantial brokerage activity – the preparation of the purchase agreement – occurred in California. [Cochran v. Ellsworth (1954) 126 CA2d 429]

Choice-of-law

Brokers involved in interstate real estate transactions must include a “choice-of-law” provision in their listing agreement with their client, be he a buyer or seller, landlord or tenant, or lender or borrower. A California choice-of-law provision mandates that disputes arising from the brokerage fee arrangements are to be decided based on California law, even if litigated in federal or out-of-state courts. [See first tuesday Forms 102 §4.7 and 103 §4.3]

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