The recent case of Venturi & Co. LLC v. Pacific Malibu Development Corp. (B205789 & B206774, Cal. App. 2d Dist., Apr. 10, 2009) reminds us that persons who perform services for which a real estate broker's license is required, but who do not hold a valid license, face the undesireable prospect of being uncompensated for such services. However, unlicensed persons who contract to perform both broker's services and related "non-professional services" (i.e., services for which no real estate broker's license is required) may still be entitled to compensation for the non-professional services.
How does one know whether they can be compensated for performing real estate related services? First, look at the applicable statutes. Section 10136 of the Business and Professions Code allows only licensed real estate brokers to receive compensation for real estate brokerage services. That section states:
"No person engaged in the business or acting in the capacity of a real estate broker or a real estate salesman within this State shall bring or maintain any action in the courts of this State for the collection of compensation for the performance of any of the acts mentioned in this article without alleging and proving that he was a duly licensed real estate broker or real estate salesman at the time the alleged cause of action arose." Cal. Bus. & Prof. Code § 10136.
Then, we proceed to Business and Professions Code Section 10131 which defines a “real estate broker” as one who:
-- (a) Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity. [However, one who simply finds and introduces a prospective buyer to a person who wishes to sell his property, and does not engage in any negotiating to consummate the transaction, need not be licensed by the state in order to recover a commission for his services. Lindenstadt v. Staff Builders, 55 Cal. App. 4th 882, 886 n.3 (1997).]
--(b) Leases or rents or offers to lease or rent, or places for rent, or solicits listings of places for rent, or solicits for prospective tenants, or negotiates the sale, purchase or exchanges of leases on real property, or on a business opportunity, or collects rents from real property, or improvements thereon, or from business opportunities.
--(c) Assists or offers to assist in filing an application for the purchase or lease of, or in locating or entering upon, lands owned by the state or federal government.
--(d) Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity.
--(e) Sells or offers to sell, buys or offers to buy, or exchanges or offers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or on a business opportunity, and performs services for the holders thereof.
Third, look at the actual services you or your company are performing and determine whether they are services that can only be performed by licensed real estate salesman or brokers.
Facts of Venturi Case
In June 2003, appellant Venturi and Pacific Malibu entered into a contract involving development of a resort on the Bahamian island of Little Exuma. Under the contract, Venturi agreed to serve as a financial advisor and find financing for the Little Exuma project through a private placement of equity, preferred stock, debt securities, or a combination of those financial instruments, which collectively the contract called “Securities.” The contract called for Venturi to provide the following services:
review the proposed development costs, business operations and financial requirements of the Project;
assist Pacific Malibu in preparing information materials and documents with regard to a Placement, including an executive summary, confidential information memorandum, term sheets and related due diligence information in connection with the Project;
assist Pacific Malibu in formulating a marketing strategy for the Securities, including identifying and contacting selected parties with regard to a Placement, scheduling meetings with such parties and participating in meetings and/or relevant discussions relating thereto;
advise Pacific Malibu as to the strategy and tactics of negotiations in connection with the Placement and, if requested, assist in the negotiations with the related parties; and
provide such other financial advisory and investment banking services as may be mutually agreed upon.
Pacific Malibu agreed to compensate Venturi with two possible fees: (1) upon “completion of a Placement,” a "Monthly Advisory Fee" of $30,0000 for at least three months “at the close of any such Placement;” and (2) a “Success Fee” to appellant “promptly upon consummation of any Placement of Securities.”
The amount of the success fee, depended on Venturi’s role in the consummated placement: (a) 5% if Venturi either introduced Pacific Malibu to the party who provided financing, or participated in “active negotiations” with that party; or (b) 1% if Venturi neither introduced the party providing financing nor negotiated the financing.
After signing the contract, Venturi contacted more than 60 potential sources of financing for the project. However, in the end, Pacific Malibu did not receive financing from any source that appellant had identified.
Pacific Malibu terminated the contract in January 2005. Two months earlier, however, Pacific Malibu had signed a term sheet with the Talisker Group. Venturi was not involved in Pacific Malibu's negotiations with the Talisker Group or in the placement of Securities with that group. Nevertheless, Venturi claimed it was entitled to the 1% Success Fee following the placement. Pacific Malibu refused to pay, and the litigation began.
Venturi sued for breach of contract and, alternatively, for "quantum meruit" to recover the reasonable value of its services.
Pacific Malibu argued that Venturi could not recover either for breach of contract or quantum meruit because Venturi provided the services of a real estate broker by soliciting financing for the Little Exuma project yet did not have a broker’s license. In turn, Venturi argued that it properly provided real estate broker's services because one of its managing principals (Jane Venturi), had a real estate sales license and was employed by an unnamed real estate broker at the time that Pacific Malibu signed the term sheet with the Talisker Group. The trial court found Venturi was not entitled to any compensation, and the decision was appealed.
The court of appeal agreed that Venturi performed services for which a broker's license was required by: (1) helping find possible sources of financing for the Little Exuma project; and (b) helping negotiate the placement of Securities to procure that financing. But it also found that the contract called for Venturi to provide services different from a real estate broker: (a) reviewing the project’s costs and financial requirements; (b) helping Pacific Malibu prepare information materials and documents related to financing the project, and to help formulate a marketing strategy to secure financing; and (c) providing mutually agreed upon financial advice and investment banking services.
The court of appeal affirmed that Venturi could not receive compensation for providing real estate broker services to Pacific Malibu because Venturi was not a licensed broker. The court of appeals rejected Venturi's argument that Jane Venturi's status as a real estate agent working under an unnamed broker permitted Venturi to perform broker's services, noting that a broker under whose authority a salesperson may act must itself be a party to the real estate contract, which was not the case here.
However, the appellate court found that the trial court failed to consider whether Venturi might be entitled to recover for other services called for under the contract which did not require a broker's license. See, e.g., Executive Landscape Corp. v. San Vicente Country Villas IV Ass'n, 145 Cal. App. 3d 496, 499-500 (1983) (statute barring unlicensed contractor from receiving fees for some services did not prohibit recovery for work not within scope of licensing statute). The case was returned to the trial court for further proceedings on that issue.
Attorney Commentary: There are several issues to analyze in entering into and structuring agreements regarding real estate transactions that are required to be performed by a licensed broker. First, if your services would require being licensed as a broker, your contract may be unenforceable. This is similar to not having a valid contractor's license when one seeks to enforce a contract for contracting work.
Second, those in the real estate, foreclosure and loan modification business can expect to receive close scrutiny by the Department of Real Estate (DRE) to ensure compliance with licensing requirements. Business and Professions Code § 10131(d) requires anyone who "[s]olicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity" to have a real estate broker's license. All it takes is one unhappy customer to make a complaint to trigger an inquiry.
If you or your company receives a Desist and Refrain Order from the DRE, you should immediately contact an attorney to respond within the deadline and analyze whether the Order has any merit.
Third, persons performing real estate finance and loan modification services without a license face not only the prospect of going uncompensated, but also criminal liability. Business and Professions Code § 10139 provides that any person acting as a real estate broker without a license shall be guilty of a public offense punishable by a fine not exceeding twenty thousand dollars ($20,000), or by imprisonment in the county jail for a term not to exceed six months, or by both fine and imprisonment; or if a corporation, be punished by a fine not exceeding sixty thousand dollars ($60,000).
Any questions or comments should be directed to: tgreen@greenassoc.com. Tracy Green is a principal at Green and Associates in Los Angeles, CA. The firm focuses its practice on the representation of licensed professionals and businesses in civil, business, administrative and criminal proceedings, including real estate brokers and salespersons.
