No reason to panic

By the time this article is published, most REALTORS® will be aware of a decision by the United States Supreme Court that stands for the proposition that the Fifth Amendment of the United States Constitution does not protect the rights of an individual real property owner from
having their property taken by the government for use by another private property owner. While this decision has rightfully outraged advocates of private property rights, the good news is that it has no application in the state of Michigan due to a decision rendered by the Michigan Supreme Court last year.

The decision by the United States Supreme Court in Kelo v City of New London (the “New London case”), stands generally for the proposition that the rights of individual real property owners must give way to plans of the government for redevelopment by other private property owners if the government determines that such redevelopment will generally lead to economic rejuvenation in the area. If the current private property owners do not wish to sell their properties, the government may take them through condemnation, according to the United States Supreme Court, as the Fifth Amendment of the United States Constitution permits such a taking for the “public use.”

In the New London case, Wilhelmina Dery, one of the private property owners, lived in a house that has been in her family for over 100 years. Dery herself was born there in 1918. In 1946, she and her husband Charles moved into the house and hoped to keep their family close by. Thus, their son moved in next door with his family in a house that he received as a wedding gift, while the other private property owner, Suzette Kelo, moved into a neighboring house in 1997. Kelo made extensive improvements to her home, which she sought to keep, at least in part, because of its view of the water.

Unfortunately for the Derys and Ms. Kelo, their homes were in an area that the city of New London wished to redevelop into a waterfront conference hotel, which included restaurants and shopping. Residential and commercial marinas were likewise scheduled for construction in addition to a number of office buildings. And a portion of the area was to be reorganized into an urban neighborhood site with approximately 80 new residences. The city of New London, through the New London Development Corporation, estimated that the redevelopment would create more than 1000 jobs, increase tax and other revenues, and help revitalize the city.

It is important to understand that no allegation charged Ms. Kelo’s property, the Derys’ property, nor any of the other properties the city of New London wished to condemn as either blighted or in poor condition — any middle class American would find the homes acceptable; they were condemned only because they happened to be located in the
planned development area.

Nevertheless, the United States Supreme Court determined that the taking of Ms. Kelo’s and the Derys’ perfectly serviceable homes for use by another private entity was permissible as a “public use” within the meaning of the Fifth Amendment to the United States Constitution. Four members of the United States Supreme Court saw it completely differently. Justice O’Connor began her dissent by referencing a 1798 decision rendered by Justice Chase. Justice Chase
— in providing an example of what would not be a proper exercise of legislative authority — stated that any law that takes property from A and gives it to B is against all reason and justice and thus concluded that the people would not entrust a legislature with such powers. Following Chase’s example, Justice O’Connor stated:

Today the Court abandons this long-held, basic limitation on government power. Under the banner of economic development, all private property is now vulnerable to be taken and transferred to another private owner, so long as it might be upgraded, i.e., given to an owner who will use it in a way that the legislature deems more beneficial to the public—in the process. Fortunately, the New London case will have no application in Michigan. In the final paragraph of the majority’s decision, it is stated:

We emphasize that nothing in our opinion precludes any State from placing further restrictions
on its exercise of the takings power. Indeed, many States already impose “public use” requirements that are stricter than the federal baseline. Some of these requirements have been established as a matter of state constitutional law….The United States Supreme Court actually referenced the Michigan Supreme Court’s 2004 decision in County of Wayne v Hathcock in 2004 as one such example of “further restrictions”.

In County of Wayne v Hathcock, Wayne County sought to undertake the grand scheme of redevelopment not unlike the situation in New London. Construction at the Wayne County Airport raised concerns from neighboring landowners regarding noise due to increased air traffic. In order to eliminate these problems, Wayne County, funded by a partial grant from the FAA, purchased approximately 500 acres in nonadjacent plots scattered in a checkerboard pattern in the southern region of the airport. The string attached to the money from the FAA was that any properties acquired by Wayne County were to be put into an economically productive
use. In order to meet this requirement, Wayne County, through its Jobs and Economic Development Department, decided to construct a large business and technology park
with a conference center, hotel accommodations, and a recreational facility. The project, which became known as the “Pinnacle Project,” was to be a state-of-the-art business and technology park comprised of 1300 acres next to the Wayne County Airport; it was expected to create 30,000 jobs and add $350 million in tax revenue for Wayne County.

Having acquired 500 acres, Wayne County negotiated the purchase of another 500 acres within the Pinnacle Project area. The county then determined that it needed an additional 46 parcels contained within the project area for the business and technology park, but the particular parcels
were all owned by private property owners and all presently being used for lawful residential or business purposes. On July 12, 2000, Wayne County adopted a resolution that would authorize the condemnation of the remaining 46 parcels. In conjunction with the condemnation, offers were made to the owners of all 46 parcels. Owners of 27 parcels accepted the offers. This left only 19 parcels that needed to be condemned for the business and technology park.

The 19 owners contended that Wayne County’s purchase of their property for resale to a private developer violated the Michigan Constitution, which requires that any condemnation be for a public use. The property owners lost at the trial court and at the Michigan Court of Appeals, as those courts were bound to follow the Supreme Court’s 1981 Poletown decision.

The Michigan Supreme Court found that there was plenty of evidence in the record that the Pinnacle Project would benefit the public. However, the Michigan Supreme Court then found that the condemnation and the subsequent transfer of the 19 parcels to private entities to develop the Pinnacle Project was not consistent with the common understanding of the term “public use” at the time the Michigan Constitution was ratified. In other words, it violated the 19
property owners’ constitutional rights by condemning their property under these circumstances.
The Michigan Supreme Court then described three circumstances under which private property could be condemned by the government for subsequent use by another private property owner: if it involved “public necessity of the extreme sort otherwise impracticable” — this would
include condemning land for construction of a railroad; if in its subsequent use by another private property owner, the owner remained accountable to the public in its use of the
property — an example would be a petroleum pipeline constructed by a private property owner on condemned property heavily regulated by the state; and when selection of the land to be condemned is itself based upon public concern — this would include the condemnation of blighted housing where the government’s controlling purpose is to remove unfit housing and thereby advance public health and safety.

It is unfortunate for the Derys that their home was situated in Connecticut and not in Michigan. Wilhelmina Dery would not face the prospect of being forced out of the home in which she was born if it was situated in Michigan. The Michigan Constitution, according to the Michigan Supreme Court, simply does not permit the government to condemn perfectly serviceable homes so that another private owner can use the property for some grand development scheme.

It should likewise be noted that the Michigan Supreme Court’s decision in Wayne County v Hathcock was unanimous — not a single judge supported the notion that unblighted private property could be condemned for development by another private owner. While it is difficult to understand how the United States Supreme Court reached its conclusion in the New London case, the Michigan Constitution protects its citizens from having their property taken by the government for use by another private owner.

Administrative Fees — A Reminder

Many REALTOR® firms in Michigan charge sellers and buyers a closing fee – sometimes called an administrative fee processing fee, compliance fee, closing fee, etc – usually to recover overhead costs attributable to any given transaction.

A couple of years ago, it was contended by HUD that the charging of such fees could be a violation of the Real Estate Settlement and Procedures Act of 1974 (RESPA). HUD, in its October 2001 policy statement, interpreted RESPA as prohibiting a service provider, e.g., a REALTOR® firm, from charging a consumer a fee where no work or only nominal or duplicative work is done or the fee is in excess of the “reasonable value” of the service actually provided. In response,
REALTORS® were advised that they should not charge “administrative fees” for services previously performed for only a commission.

From the outset, MAR disagreed with HUD’s interpretation of RESPA. Section 8 of RESPA simply did not address a situation where a REALTOR® firm charged an administrative fee to a buyer or seller; a violation of Section 8 of RESPA only occurs when referral fees or kickbacks are illegally shared with a third party. Obviously, when a REALTOR® firm charges an administrative fee and keeps it, it is not sharing the fee with any third party.

Ultimately, HUD backed off of its claim that “administrative fees” charged by REALTOR® firms for work that was “duplicative” or where there was no additional service provided violated RESPA.

REALTORS® may charge whatever administrative fees buyers and sellers are willing to pay — there is no regulatory limit on the amount of fees. If REALTORS® are advised that administrative fees are illegal, they should listen very carefully; it is most likely they’re being told that they cannot split administrative fees with third parties — not that they can’t simply charge and collect the administrative fees for themselves.

Earning a Commission — A Different Twist

A recent decision by the Michigan Court of Appeals adds a new twist to the analysis as to when and how a REALTOR® earns a commission. Traditionally, it has been believed that depending on the wording in the listing agreement, a REALTOR® earns a commission when he procures a buyer who presents a full, unconditional cash offer at the listed price or, alternatively, the seller accepts an offer on other terms and conditions acceptable to the seller. However, in a recent
case, the Michigan Court of Appeals applied a different analysis.

On April 11, 2002, a property owner entered into an exclusive listing agreement with the broker. The property was listed at a price of $142,500. The broker was to receive a 10 percent commission. The listing agreement provided as follows with regard to the broker’s right to be paid a commission:
If [the broker] or anyone including [the property owner] are able to secure a purchaser at the
price recited above, or in the alternative, on terms satisfactory to [the property owner], . . .
[the property owner] will promptly consummate such transaction and [the property owner] will
pay [the broker] a [ten percent] commission. The broker obtained a buyer who offered the list price of $142,500. The buyer’s offer to purchase at the list price was not unconditional. Allegedly, the buyer’s offer contained five significant terms: the owner of the property to pay for title insurance and a survey; that the offer was contingent upon a phase I environmental assessment and that the property owner pay for a phase II environmental assessment, if one was necessary; and finally that the property owner warrant title to the property.

The property owner rejected the offer submitted by the broker, as the conditions sought by the buyer were not acceptable. The broker then sued for its commission in the amount of $14,250. The Court of Appeals affirmed the decision by the trial court that the broker was entitled to its commission of $14,250, determining that under the terms of the listing contract, there were two alternative methods of performance by which the broker could obtain its commission.

First, obtain an offer at the list price. Second, obtain an offer that contained terms and conditions acceptable to the property owner. The Court of Appeals did not construe the requirement that the broker secure a purchaser at the list price to mean that the offer at the list
price had to be free of conditions. The fact that the conditions in this case included payment for title insurance, survey and phase I environmental by the seller did not deter the court from finding that the broker was entitled to its commission since the offer was at the list price.

Again, prior to the decision in this case, it was generally understood that a full-price offer had to be unconditional in order for a broker to earn its commission under the typical terms of a listing agreement. I recommend that REALTORS® who obtain a full-price offer for a seller with conditions that cause the seller to reject it may wish to have their lawyer review this case to determine if they still can recover their commission.