The Commission Escrow Act
The Commission Escrow Act

In residential real estate transactions, sellers and buyers frequently rely on the expertise of licensed real estate brokers to show properties, negotiate terms of a sale, attend inspections and otherwise bring deals to closing. The services – and the payment of the commission due – are typically memorialized in a contract between the seller and the broker (who, when applicable, splits the commission with the buyer’s agent). The commission is generally paid at the closing by the seller. Occasionally, however, the situation arises where the seller fails or refuses to pay the commission despite having closed on the sale of the property.

In New York, a broker is not entitled to file a lien against the property in order to ensure payment. The State, however, does provide brokers with a mechanism to make recovery of their commission a bit easier in the event a payment issue arises. The broker may file an affidavit of entitlement to the commission in the county clerk’s office in the county where the property is located pursuant to Section 294-b of the Real Property Law, also known as “The Commission Escrow Act” (the “Act”). Under certain circumstances, the Act also requires a seller to deposit the lesser of the net sales proceeds from the sale or the unpaid commission with the county clerk. The broker must take the steps identified below in order to benefit from the deposit requirement. First, the Act requires that the broker have a written brokerage agreement with the seller that includes the following provision:

At the time of closing, you may be required to deposit the broker’s commission with the county clerk in the event that you do not pay the broker his or her commission as set forth herein. Your obligation to deposit the broker’s commission with the county clerk may be waived by the broker.

Next, the broker must file the affidavit of entitlement with the clerk of the county where the property is located before the deed is delivered to the buyer. The affidavit must include the name and license number of the broker; the name of the responsible party for commission; the name of the seller or the person authorizing the sale; a copy of the agreement; description of the property involved; the amount of the commission earned; description of the broker’s services; and the dates services were provided. The affidavit, though not a lien, is placed in the lien docket for that property. Once the broker files the affidavit of entitlement with the county clerk and pays the fees associated with such filing, the broker must notify the seller and seller’s attorney (if the broker has the attorney’s contact information) of the filing within five (5) business days. The seller must then deposit the amount demanded in the affidavit with the county clerk.

If the seller is required to make the aforementioned deposit and fails to do so, then, in any action brought by the broker in which it is determined that the broker is entitled to compensation, the broker will also be awarded costs and reasonable attorneys’ fees. This serves as an incentive for the seller to comply with the deposit requirement of the Act.

Once the deposit is made, the Act requires that the broker commence an action within sixty (60) days from the date of the deposit. If neither the broker nor the seller commences an action within such time period, then the seller is entitled to an order directing a return of the deposit. However, this order does not impact the broker’s claim for commission.

The Commission Escrow Act serves to provide some leverage to a broker whose commission was wrongfully withheld by temporarily diverting a portion of sales proceeds due to the seller to the county clerk’s escrow account. However, to be entitled to utilize this remedy, the broker must have a well-drafted agreement with the seller. The transactional team at Cuddy & Feder can provide sellers and brokers with guidance to help promote a successful broker-seller relationship.

The following materials, and all other materials on this website, are intended for informational purposes only, are not to be construed as either legal advice or as advertising by Cuddy & Feder LLP or any of its attorneys, and do not create an attorney-client relationship between you and Cuddy & Feder LLP. Please seek the advice of an attorney before relying on any information contained herein.

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