June 9, 1995

D.C. Refuses to Enforce Finder’s Agreements

The Corridor Real Estate Journal
The District of Columbia Real Estate Licensure Act of 1982 prohibits acting as a real estate broker unless one is licensed as a broker under the act, and prohibits courts from enforcing claims for unpaid fees to non-licensed brokers for broker-like activities.

In RDP Development Corp. V. Peter N.G. Schwartz, recently decided by the District of Columbia Court of Appeals, this law was interpreted very broadly to deny recovery by a prominent real estate developer who, in exchange for the promise of a fee, had agreed to facilitate negotiations between the government of the District of Columbia and a local property owner for the leasing of office space.

The District of Columbia Real Estate Licensure Act of 1982 defines a "real estate broker" as one who "for a fee, commission, or other value consideration, lists for sale, or sells, exchanges, purchases, rents or leases real property."

The act goes on to say that no person acting in the capacity of a real estate broker may bring a lawsuit in the D.C. courts to enforce the payment of fees for these services.

Since the passage of the act, individuals have purported to avoid these restrictions by structuring compensation for non-licensed brokers acting in a broker-like capacity as "finder’s fees," "consulting fees" and the like.

With the decision in the RDP Development case, however, the Court of Appeals has clearly indicated that, no matter what these agreements are called or how they are structured, the courts intend to prohibit compensation to non-licensed brokers for a broad range of broker-like activities and will not enforce such agreements.

In RDP Development, the owner of One Judiciary Square negotiated in 1990 with R. Donahue Peebles, a D.C. developer, to obtain Peebles’ assistance in leasing office space to the District of Columbia.

Since Peebles was not a real estate broker under D.C. law, there was no formal brokerage contract involved, but rather a simple letter agreement with the property owner that contained the following language:

This letter shall confirm our agreement pursuant to which RDP Development Corporation [Peebles] shall consult with [the property owner] and contribute your good faith effort in regard to presenting our leasing proposal to the District of Columbia and you marketing the suitability of our One Judiciary Square Building to the District. In the event you assist us as above with the leasing requirement, and we subsequently enter into a lease or leases with the government of the District of Columbia or any agency or instrumentality thereof, we agree to pay you [an amount equal to one and three quarters percent (1.75%) of the face lease value for the lease term not to exceed tend (10) years] ...

This language was agreed to after Peebles raised specific concerns that an earlier draft of the agreement was unenforceable because it appeared to be a brokerage contract.

Subsequently, Peebles participated in negotiations with the District on behalf of the property owner, he met with D.C. officials attempting to persuade them to lease space at One Judiciary Square, and he offered suggestions and proposal to the District regarding possible uses and the suitability of the building for the District’s needs.

When the property owner entered into a contract to sell the building to the D.C. government and lease the underlying land, the owner refused to pay the "consulting fee" and Peebles filed suit.

In RDP Development, the trial court determined that even though the agreement attempted to avoid such characterization; Peebles was acting as a real estate broker and in such a capacity was barred from suing to recover any unpaid compensation.

On April 20, 1995, the appellate court upheld this decision and suggested that the act should be interpreted very broadly to prohibit compensation to non-licensed brokers for a wide range of activities.

The Court of Appeals noted that the act’s broad definition of "real estate broker" was designed to cover just the type of activities in which Peebles engaged, including the negotiation of real estate contracts.

While Peebles tried to argue that the act should be interpreted more narrowly to exclude conduct that occurred prior to official negotiations, the court did not agree and found this distinction "incompatible with the broad protective purposes of the act’s licensure requirements."

The court also noted that the fact that Peebles’ compensation was structured as a commission payable on a contingency basis, with the amount of the commission based on the value of the transaction, validated its characterization as a broker’s arrangement.

For professionals accustomed to collecting or negotiating consultant’s fees or finder’s fees in real estate transactions in the District, this decision casts doubt on the future enforceability of agreements with non-licensed brokers acting in "broker-like" functions such as networking, pre-negotiating and coordinating negotiations in the District of Columbia.

One case that the court relied upon in its decision characterized a "real estate broker" as an "intermediary or middleman whose function and duty is to bring together the buyer and seller or owner or lessee." Kassatly v. Yazbeck, 734 F.Supp. 13, 15 (D.D.C. 1990).

The court in Kassatly v. Yazbeck also discussed the legitimacy of a "finder fee" in a real estate transaction and noted that if a person participated in any part of a negotiation, then the person should be considered a real estate broker who must be licensed before he or she can collect a commission.

This conclusion leaves one to believe that a "finder’s fee" for a non-licensed intermediary in a real estate transaction will be enforced by the courts only if that person avoids participation in any negotiations and simply limits his activity to merely introducing the parties.
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