GEC H.B. 1650 75(R)BILL ANALYSIS BUSINESS & INDUSTRY H.B. 1650 By: Place 4-10-97 Committee Report (Substituted) BACKGROUND Currently, a real estate broker may not obtain a lien on real property to secure the payment of the broker's commission arising from a commercial real estate transaction. PURPOSE To enable a real estate broker to obtain a lien on commercial real estate to secure the payment of the broker's commission arising from a commercial real estate transaction. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subtitle B, Title 5, Property Code by adding Chapter 62 to provide as follows: Subchapter A: (1) Applies only to commercial real estate. (2) Provides for definitions: * "broker" includes a real estate broker and licensed or certified appraisers, and excludes residential rental locators; * "commercial real estate" means all real estate except residential, homestead property, or real estate that is zoned or restricted for single-family use. * "commission" means a broker's compensation; * "commission agreement" means the written agreement entitling the broker to a commission; * "future commission" means compensation due a broker that is contingent on a future event; * "real estate" is as defined by the Real Estate License Act. Subchapter B: (1) Entitlement to Lien: * If a broker has a commission agreement signed by an owner, the broker is entitled to a lien on the property. * If a broker has a commission agreement signed by a buyer, the broker is entitled to a lien on the property purchased by the buyer. * If a broker has a commission agreement signed by a tenant, the broker is entitled to a lien on the tenant's interest in the property. * The lien is available only to the broker and not to an employee or independent contractor of the broker. * The broker's entitlement to the lien must be disclosed in the commission agreement. (2) Waivers: * Waivers of the broker's entitlement to file a lien are void. (3) Filing of Lien: * The notice of the broker's lien is filed with the clerk of the county in which the property is located. * The clerk is to index and cross-index the notice of lien. (4) Contents of the Notice of Lien: * The notice of lien must contain the amount due, the name of broker, the license number of broker, the name of owner, the name of persons owing the commission, a description of the real estate and the interest to which the lien attaches, and a copy of the commission agreement. (5) Notice of the Filing: * A broker must mail a copy of the notice of lien within 1 business day after filing the notice of lien to the owner of the interest to which the lien attaches, and any named prospective buyer or tenant if a contract for the sale or lease of the property is in effect. * Notice is complete when sent by certified mail. (6) Inception of Lien: * The broker's lien attaches on the date the notice of lien is filed of record. * A lien securing the payment of a commission that is payable in installments is not enforceable until the payments are due. (7) Priority: * Prior recorded liens have priority, including those liens securing revolving credit and future advances. * A mechanic's lien that relates back to a date before the broker's lien is filed has priority. * The broker's lien is not enforceable if it is not recorded before the owner conveys the property to another. (8) Subordination: * If the owner sells the property to which a broker's lien attaches, the broker's lien is subordinate to the purchase-money first lien, if the buyer records a memorandum that ratifies the broker's lien and if the buyer assumes the obligations to pay the broker's commissions when due. * If the owner refinances a first lien, a broker's lien is subordinate to the new lien refinancing the prior first lien if the owner records a memorandum that ratifies the broker's lien and the owner's obligations to pay the commissions when due. * If the owner obtains a loan secured by the real estate to repair, renovate, or improve the property, the broker's lien is subordinated. (9) Change in Use of Property: * If a property to which a broker's lien attaches changes in use, the lien is not affected. However, a broker's lien will be unenforceable and extinguished if the property is zoned or restricted for single-family use within 180 days after the date the commission is payable and the zoning or restrictions continue for at least 2 years. Subchapter C: (1) Time to File: * A broker must record the notice of lien after the commission agreement is signed but before the conveyance of the property. * In lease transactions, a broker must record the notice of lien before the 91st day after the commission becomes payable and no later than the date of a future conveyance of the property, whichever is earlier. Subchapter D: (1) Foreclosing the Lien: * A broker can bring suit to foreclose a lien in district court in the county in which the property is located by filing a sworn complaint. * The sworn complaint must: (a) briefly describe the commission agreement and the disclosure in the agreement of the broker's entitlement to the lien; (b) state the date of the commission agreement; (c) describe the services performed; (d) state the amount due and unpaid; (e) describe the real estate; and (f) set out other necessary facts. * The broker must include, as defendants, each person broker knows to have an interest in the real estate that is subordinate to or encumbered by the broker's lien. * The broker's lien remains valid during the pendency of any alternative dispute resolution process. (2) Statute of Limitations: * A broker must bring suit to foreclose a lien within 2 years after the notice of lien is recorded, except as set forth below. * A broker claiming a lien for a future commission must bring suit to foreclose the lien within 2 years after the commission becomes payable. * An owner may compel a broker to bring a suit to foreclose the lien within 30 days after the owner makes demand on the broker to bring the suit. * If suit is not brought within the time required by the statute of limitations, the lien is void and unenforceable. * A broker's lien remains valid for 10 years from the date it is recorded unless renewed by the broker filing a subsequent notice. (3) Assessment of Costs: * The prevailing party in a suit to foreclose the lien is entitled to court costs, attorney's fees, and prejudgment interest. Subchapter E: (1) Release of Lien: * A broker must release the lien within 5 days after receiving a written request from the owner if the commission is paid in full. * A broker must release the lien within 10 days after receiving a written request from the owner if a condition occurs that would preclude the broker from receiving the commission. * The release of lien must be in a form that permits it to be recorded. Subchapter F: (1) Escrow: * If a claim for a lien would prevent the closing of a sale, lease, or mortgage, an escrow account must be established from the proceeds of the transaction in an amount necessary to satisfy the lien and related costs for any interpleader action. Related costs may be deducted by the escrow agent. If an escrow agent is named in a pending contract, the escrow account is to be established with the named escrow agent. * A party may not refuse to close a transaction because of the requirement to establish the escrow account. * The disputed amount is held in escrow until the dispute is resolved, the lien is unenforceable, or the money is interpled. * If an escrow account is established, the broker's lien is extinguished as to the property and becomes a lien on the amount in escrow. SECTION 2. Effective date is September 1, 1997. SECTION 3. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The substitute provides that the bill does not apply to properties that are restricted for singlefamily use. The substitute provides that the broker's lien attaches only to the commercial portion of the real estate if the real estate is zoned for more than one purpose. The substitute expands the definition of "broker" to include appraisers. The substitute provides for a definition of "commercial real estate," "commission," "commission agreement," and "future commissions." The substitute deletes the provision that permits the buyer or tenant to authorize a lien against the property and substitutes a provision that the owner must sign a commission agreement that authorizes a lien against the property. However, a buyer may authorize a lien on the property that the buyer purchases and the tenant may authorize a lien against the tenant's interest. The substitute requires the broker to disclose the broker's rights to the lien in the commission agreement. The substitute provides that waivers of the broker's entitlement to the lien are void. The substitute deletes a provision providing that the failure of the clerk to record or index the notice does not invalidate the lien. The substitute provides that the broker must state in the notice of lien the names of other persons the broker knows to owe the commission. The substitute provides that the broker must describe the property, in the notice of lien, sufficiently for identification and the interest in the property to which the lien attaches. The substitute provides that the broker must include a copy of the commission agreement in the notice of lien. The substitute provides that the broker must also notify a prospective buyer or tenant, as well as the owner, of the lien when filed, if a written contract or lease is pending. The substitute provides that the broker must mail a copy of the notice to the owner and, if required, the buyer or tenant, within one business day rather than within 10 days. The substitute deletes the provision that negates a broker's duty to mail a copy of the notice when the notice is filed within 10 days preceding the date of a transaction that would entitle a broker to payment. The substitute provides that the lien arises and attaches to the interest in the real estate owned by the person owing the commission and does not relate back to the date of the commission agreement. The substitute provides that a lien securing the payment of future commissions is not enforceable until the commissions are payable. The substitute provides that a broker's lien against the interest of a person owing the commission is not valid or enforceable against a grantee, purchaser, lessee, or transferee of an interest in the commercial real estate from the person owing the commission if the deed, lease, or instrument transferring the interest is recorded before the broker's lien is recorded. The substitute provides for subordination of the broker's lien if the owner sells the property and if the buyer ratifies the broker's lien and assumes the obligations to pay the broker. The substitute provides for the subordination of the broker's lien if the owner refinances a first lien and if the owner ratifies the broker's lien and obligations to pay the broker. The substitute provides for the subordination of the broker's lien if the owner obtains a loan secured by the real estate to repair, renovate, or improve the real estate. The substitute provides that a change of use in the property to which a broker's lien attaches does not affect the lien. However, if the property is to be zoned for single-family use within 180 days after the date the commission is payable, the lien is unenforceable and extinguished. The substitutes provides that the notice of lien must be filed after the date the commission agreement is signed and before the owner conveys the property. However, in lease transactions, the broker must record the notice of lien before the 91st day after the date of the event for which the commission becomes payable and no later than the date the person owing the commission conveys their interest in the property to another person. The substitute provides that in a suit to foreclose the lien, the complaint must contain a description of the disclosure of the broker's right to file a lien that was contained in the commission agreement. The substitute provides that the broker name, as defendants in a suit to foreclose the lien, only those persons whose interest is subordinate to or encumbered by the broker's lien. The substitute provides that the broker's lien remains valid during the pendency of any dispute resolution process. The substitute deletes the statute of limitations with regard to enforcement of liens based on options, and provides that a suit to foreclose the lien must be brought within 2 years from the date a future commission becomes payable. The substitute provides that the owner can compel a broker to bring suit to foreclose a lien within 30 days after making written demand on the broker. The substitute provides that if a suit to foreclose a lien is not brought within the time required, the lien is void and unenforceable. The substitute provides that a broker's lien remains valid for 10 years from the date it is recorded unless renewed by the broker filing a subsequent notice. The substitute provides that the person owing the commission shall establish an escrow account from the proceeds of the transaction if a dispute concerning the broker's lien would prevent the closing of the transaction. The amount in escrow will include the disputed commission and related costs. The escrow agent is entitled to deduct related costs from the escrow account. The amount in escrow is held by the escrow agent until the rights of the parties are resolved, the broker's lien is not enforceable, or the funds are interpled into a court of competent jurisdiction. If an escrow account is established, the broker's lien is extinguished as to the property and becomes a lien on the amount in escrow.