Thomas v. Daubs: Business Broker May Not Collect Fee Without Real Estate License

In Thomas v. Daubs, the Appellate Court of Illinois affirmed a lower court decision holding that business brokers involved in the sale of a landfill were not entitled to a finder’s fee since they were not licensed to engage in the real estate business. The plaintiffs in this case, William and Robert Thomas, claimed that they were business brokers and that they had an oral agreement with Daubs Disposal Service and Daubs Landfill, Inc., whereby Daubs would pay them an agreed-upon finder’s fee if they obtained a buyer for Daubs’ regional solid waste pollution control facility, the rights to the environmental permits to operate the facility, the real estate for the landfill and the equipment. The Thomases claimed to have found the purchaser who bought the business for $3.3 million and they brought suit against Daubs for payment of the finder’s fee. Daubs moved for dismissal of the case, arguing that since the Thomases were not licensed under the Illinois Real Estate License Act (the "Act"), they were precluded from receiving a fee. The trial court agreed with Daubs and dismissed the case.

On appeal, the Thomases claimed that the deal involved the sale of a business, not the sale of real estate, and therefore that the Act did not apply. Daubs argued that the Act applied because the real property was more than incidental to the transaction. As the appellate court explained, courts in other states which have real estate licensing statutes similar to Illinois’s have addressed the issue of whether someone engaged in selling businesses is required to hold a real estate license when real property is part of the business assets, and the courts have taken three different approaches.

Under the first approach, courts in Nebraska, Kansas, Missouri, Kentucky, Arizona and Tennessee have held that if the sale involves any real estate, no matter how little, an unlicensed broker may not collect a commission. The thinking behind this approach is that the transaction is seen as a whole and would not have transpired without the real estate aspect. Under the second approach, a minority view known as the "New Jersey rule," or the "pure severability rule," if the non-real estate portion of the transaction can be valued, then the broker is entitled to a commission for that portion of the transaction. The rationale for this test is that it would be unfair for the client to use the services of a broker and then refuse to pay a commission. According to the third approach, courts in New York, Arkansas, Colorado and Mississippi have held that a business broker may collect a commission if the real estate portion of the transaction is "merely incidental" to the deal. Courts following this approach point to the legislative intent behind the real estate licensing statutes, which is to protect unsophisticated home buyers, as opposed to the more sophisticated individuals and entities involved in buying and selling businesses.

The Thomas court used the third approach, under which a business broker who is not licensed to engage in the real estate business would be entitled to receive a fee if the real estate portion was merely incidental to the transaction. The court determined that the real estate component of this transaction, which involved 180 acres, was not merely incidental, but rather, was of great importance. It therefore affirmed the lower court’s decision that since the Thomases were not licensed under the Act, they were not entitled to receive a fee.

Thomas v. Daubs 291 Ill. App.3d 682, 684 N.E.2d 1011 (Ill. App. Ct. 1997) .