Put your finder's fee arrangement in writing to avoid any disputes

Many developers use the services of "finders" to locate opportunities to invest in and/or develop properties. While the use of finders is common, developers sometimes fail to put the terms of the agreement with the finder in writing. Without a written agreement, a dispute may arise concerning the services to be performed by the finder and the compensation to be earned by the finder resulting in costly litigation and damages far in excess of which the developer believed were to be paid to the finder for its services. The New York Statute of Frauds requires that any agreement concerning the negotiation, sale or purchase of real estate or any business opportunity (e.g., an investment in a real estate development) be in writing to be enforceable. To rely on this rule of law is very dangerous because there are exceptions to that rule, such as the fact that a licensed real estate broker or salesman does not need a written agreement to enforce the terms of an oral agreement for a finder's fee. Some attorneys will rely on the argument that an oral agreement violates the statute of frauds because the services of the finder cannot be performed within one year pursuant to the terms of the oral agreement. Such an argument is very fact intensive and is at times very hard to prove. Moreover, it has been this writer's experience that a court will find a way to enforce an oral agreement for a finder's fee when the only defense proffered by the developer is that the oral agreement violates the statute of frauds. As set forth above, there are two reasons why an agreement with a finder should be in writing. The services to be performed by a finder may vary widely from transaction to transaction. A finder may be used solely to locate a piece of real estate for purchase only and not for development. However, there are situations where a finder goes out and identifies a potential project for development. Is the finder's scope of services simply to find the investment or development opportunity, or is it to perform any functions with respect to the development of the project after the investment is made in the development? Without a written agreement setting forth in detail the scope of the finder's responsibilities, a developer may find itself in a dispute over the extent of the finder's services. Moreover, without a written agreement, a dispute may arise in the amount of money that the finder should be paid. How does a court determine the compensation to be paid to a finder where there is a dispute as to the terms of an oral agreement, or where the developer and finder never agreed to a compensation formula? In the case of a sale or purchase of a piece of real estate (without a development component), the compensation may be determined by using the commission customarily paid to a real estate agent in the jurisdiction where the services were performed. That is the easy situation. The difficult situation to resolve is where the finder has more responsibilities, such as negotiating loans, raising equity and supervising or monitoring the development over the course of a year or more. With a varying set of responsibilities on a case by case basis, there is no set rule of damages that a court can follow to determine the compensation to be paid to a finder. There are no formulas and there is no case law which utilized expert witness testimony that a court may rely on in determining the amount of compensation. Without any such formulas or case law for guidance, the finder can claim that he is owed any amount of compensation. Without a written agreement setting forth the compensation to be paid, the litigation becomes a "he said, she said" battle. Such a battle of oral testimony will result in, at the very least, a very costly litigation and also leave the developer subject to a potential large liability when the compensation that the parties agreed to (or which would be fair) was far less than the finder is claiming. Andrew Richards, Esq., is a partner with Kaufman Dolowich & Voluck LLP, Woodbury, N.Y.