The Biden administration seeks to end use of non-compete agreements in employment practices. How will that impact the real estate industry?
In virtually all sales of brokerage firms we are aware of, those who receive a gain from the sale of their realty company enter into restrictive covenants which include non-compete, non-solicitation and non-disclosure agreements. The time period of these covenants ranges from a low of three years to as long as 10 years, and the geography they cover ranges from 100 miles from the location of the seller to as much as several states. In some cases, when firms are recruiting agents through the provision of financial assistance of some kind, even the agents and teams are often required to enter into some form of these restrictive covenants with many of the same features.
It appears that the move by the Biden administration to end non-compete agreements may not have a significant impact on practices currently in place in our industry. However, it could have a large impact were the Biden administration broaden their attempted prohibition to include non-solicitation. In such a case, we would think this could cause purchasers of residential brokerage firms to amend their acquisition activities and at the least restructure the terms of their purchase agreements.
Little enforcement of non-compete provisions
Over the past 30 years of consulting to the brokerage industry and the merger and acquisition of brokerage firms, RealTrends has been called to testify several times about these restrictive covenants — non-compete agreements. In almost every case, the defendants were brokerage owners who violated their restrictive covenants either by competing with the purchaser of their firm, soliciting agents and employees of their former company or both. In almost every case that we can recall, judges did not enforce the non-compete provisions of the restrictive covenants but almost always enforced the non-solicitation part of the restrictions.
So, the legal system seems be saying that a non-compete agreement is no always valid, that they will not restrict someone’s right to do the work they were trained for, and that person may not do that work in a way that causes direct harm to the entity that paid them money for their brokerage firms. The list of persons covered by these restrictive covenants in an acquisition generally includes anyone who financially benefitted from a sale.
What about non-solicitation?
Such restrictive covenants are also in place at many leading brokerage firms for their sales management personnel. And again, in the cases we are familiar with, courtrooms have found that while the non-compete agreement portions of the restrictive covenants are not normally upheld, the non-solicitation and the non-disclosure parts of the covenants are upheld — stringently in some cases.
If non-compete and non-solicitation agreements are non-enforceable, either for sellers of brokerage firms or for their sales management employment practices, it could cause significant change in both areas.