Broker beware: Multi-state transactions under different rules.

New York brokers who become involved in multi-state transactions often face issues which are far more complicated than the ordinary sale or lease within New York state.

We believe that a broker should, at the very least, be aware of the various legal issues involved in these transactions. With some insight, the broker can gain a decided advantage in the event litigation becomes necessary.

First, it should be noted that there is no uniformity among the fifty states regarding brokerage law. Each state may act independent of its neighboring state in determining the enforceability of a real estate brokerage commission agreement. An example of this is New York, where an oral brokerage agreement is enforceable while in New Jersey, the same brokerage agreement must be written in order to be enforced.

Notwithstanding these differences, one principle of brokerage law is fairly constant throughout the states: without a license or a reciprocal license from a particular state, a broker may not perform brokerage services in that state. Brokerage services have been defined by the courts as conduct of brokerage activity within that state. This brokerage activity may be as trivial as driving by a tract of land to inspect the neighborhood. There are cases where a unlicensed broker performing a similar service has forfeited his right to collect a commission.

Seven states have reciprocal contractual arrangements with New York, and with minimal effort, licensed New York brokers may obtain reciprocal brokerage licenses. This ensures a broker's right to perform brokerage services and to litigate for his commission in the reciprocating state and perhaps, in New York as well. It is important to note that each state's reciprocal contract with New York may differ and as such, should be reviewed accordingly. The states with which New York has reciprocal contracts are: Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, Oklahoma and West Virginia.

There are a number of reasons why a broker seeking commissions on a multi-state transaction should select the New York courts for jurisdiction over the matter. Jurisdiction has been defined as: "The [court's] authority to hear and decide a case" and "as the court's authority to subject a defendant to its processes."

We have found New York to be a more desirable state for a broker to try a brokerage commission case even though we have found that New York juries are fairly conservative in awarding damages, even to a New York broker. Although we have less experience with foreign state juries, we can speculate that a foreign jury would be much less inclined to award money damages on a New York broker's claim. Accordingly, it may be important to ensure, if possible, that a broker try his case in New York.

Jurisdiction by the courts of New York may be obtained on a defendant by personal service of a summons and complaint if the defendant works or resides in New York. If a defendant is not present at either place, service may be effected by leaving the summons and complaint with a person present at the residence or place of employment of the defendant. Even when a defendant neither works nor resides in New York, New York courts can still obtain jurisdiction through its "long-arm statute." Under this statute, service may be effected outside New York as long as the defendant has had significant contact with New York. Knowledge of this statute could prove invaluable to the New York broker.

In addition, it is important to note that in specific situations, there are New York statutes that permit the parties to select New York as the place of trial where New York law would be applied. In addition to the factors set forth above, choosing New York as the place of trial is obviously more economical for the New York broker, both for pre-trial proceedings and for the actual trial.

Brokers should recognize that the courts frequently decide the place of trial and the applicable law to be applied by using the "center of gravity theory," i.e., choosing the state which is most involved in that particular transaction. The enlightened broker may use this theory to his advantage.

New York brokers unlicensed in a particular foreign state frequently use a "referral" technique in a multi-state transaction, whereby they refer a client to a broker licensed in that foreign state. Under this type of arrangement, the foreign state broker will pay the New York broker an agreed upon percentage of any commission. There are some problems with such an arrangement, the principal one being whether the foreign state will permit its licensed broker to engage in such practice. If the New York broker makes this type of referral arrangement and it is not permitted by the foreign state, the New York broker may forfeit his referral commission. Our research indicates that at present, all states except Florida permit this practice. It is crucial for the broker to understand the current laws and regulations of the foreign state before entering into this type of referral arrangement.

The New York broker should also be aware that there are several states that permit "cooperative agreements" with a broker licensed in a foreign state. Under such an arrangement, a New York broker is permitted to perform brokerage services in a foreign state even without a license. Only a small number of states allow this arrangement, so we urge extreme caution before attempting this procedure.

It is important to note that the issues addressed in this article are no substitute for the advice of a knowledgeable attorney. Moreover, state laws governing broker activities are constantly changing and extra caution is therefore suggested.

Jay J. Gurfein is the principal of The Law Offices of Jay J. Gurfein. He is a frequent lecturer at brokerage seminars and was on the faculty of New York University School of Continuing Legal Education. Tracey B. Paer is an associate at the law firm.