Lieb at Law: Are Pocket Listings Legal?
A real estate broker whispers to you that they have an off-market listing that is to die for, but you have no idea what an off-market listing is. More so, the way the real estate broker told you about the listing just sounds to you like something is not right about the transaction. Is this pocket listing even legal?
A pocket listing means that the real estate broker has a listing that is not being advertised to the public markets. Isn’t that an illegal monopoly? In the State of New York, contracts or agreements that refrain trade are illegal and void pursuant to the General Business Law §340, or what is commonly referred to as the Donnelly Act. The Donnelly Act is New York’s version of the federal Sherman Antitrust Act where the state and federal laws require identical basic elements.
The Donnelly Act states, in pertinent part, as follows:
1. Every contract, agreement, arrangement or combination whereby … Competition or the free exercise of any activity in the conduct of any business, trade or commerce or in the furnishing of any service in this state is or may be restrained … is hereby declared to be against public policy, illegal and void.
Does a pocket listing violate the Donnelly act?
Isn’t it illegal for a real estate broker to conspire to limit sales to only those arranged by his brokerage firm? Interpreting the Donnelly Act, the Appellate Division of the State of New York explained, in Benjamin of Forest Hills Realty, Inc. v. Austin Sheppard Realty, Inc., that a claim brought under the Donnelly Act requires a showing of four requisite elements to prevail, including: “(1) identify the relevant product market, (2) describe the nature and effects of the purported conspiracy, (3) allege how the economic impact of that conspiracy is to restrain trade in the market in question, and (4) show a conspiracy or reciprocal relationship between two or more entities.” Therefore, the fact that a pocket listing sounds like a monopoly, as that term is utilized in colloquial parlance, isn’t enough to violate the law. Instead, an illegal monopoly requires an additional showing of “the relevant market factors” elements of a properly framed cause of action.
What is the definition of relevant market factors with respect to a pocket listing?
Not so, said the Court in the New York County case of Simon & Son Upholstery v. 601 West Assoc., which ruled “[a] single building cannot constitute a relevant geographic market under the Donnelly Act.” In fact, to violate the Donnelly Act, “a relevant product market must include all products that are reasonably interchangeable and all geographic areas in which such reasonable interchangeability occurs,” according to the Benjamin of Forest Hills Realty, Inc. appellate court. Simply stated, because a real estate broker’s real estate business does not solely concern just one pocket listing or just one brokerage commission opportunity, but instead an entire real estate market as a whole, a pocket listing, in isolation, does not constitute a violation of the Donnelly Act.
A pocket listing does not give rise to a lawsuit.
In all, a pocket listing does not give rise to a lawsuit by another brokerage firm against the listing brokerage for anticompetitive practices under the Donnelly Act. However, irrespective of how the listing is advertised or the commission is offered to be split between cooperating brokerages (that is, one broker lists the property and may offer to share part of the commission with the brokerage that procures the purchaser), a “listing broker cannot refuse to work with a buyer’s broker,” according to a January 24, 2001 Opinion Letter by the New York Department of State. Once learning of a pocket listing, a prospective buyer is free to hire their own real estate broker to obtain representation while negotiating the transaction. Nonetheless, to be clear, the Opinion Letter also states that “[t]he listing broker is not, however, obligated to share the sales commission with the buyer’s broker unless, prior to the sale, the two brokers have agreed to do so.”
Universal Co-Brokerage Agreements
Therefore, while every buyer is free to hire their own real estate broker, even on a pocket listing, the buyer may have to independently compensate their own real estate broker. This is not unique to pocket listings. In fact, the only time that a buyer’s agent is compensated by the listing agent, and not directly from the buyer, is where the listing brokerage firm and the buyer’s brokerage firm have a co-brokerage agreement between them. On the East End, we have two distinct Universal Co-Brokerage Agreements to create a general market of shared commissions between brokerage firms, thereby permitting buyers to hire their own real estate brokers without having to independently compensate such brokers. These Universal Co-Brokerage Agreements exist where property is either advertised on MLS-Stratus or OREX-RealNet. However, a pocket listing is not advertised so these Universal Co-Brokerage Agreements will be inapplicable and as a result, a buyer on a pocket listing will likely have to compensate their own broker should they desire representation on the deal.
Andrew M. Lieb, Esq., MPH, is the managing attorney of Lieb at Law P.C. and a contributing writer for Behind the Hedges.