Pennsylvania broker sues to end physical office rule

Under Pennsylvania law, real estate brokers licensed by the state are required to maintain a physical main office in the state. However, one broker is looking to challenge this requirement, which he considers outdated and anticompetitive. 

In mid-May, Kevin Gaughen, the broker-owner of Lemoyne, Penn.-based Gaughen Home Realty, filed a lawsuit in the Commonwealth Court of Pennsylvania against the state’s Bureau of Professional and Occupational Affairs and its Real Estate Commission, arguing that the law violates the Pennsylvania Constitution because it “is unreasonable, unduly oppressive and patently beyond the necessities of the case.” 

According to Gaughen’s claims, he spends roughly $35,000 a year on rent, taxes, utilities and insurance to maintain the 1,000-square-foot converted office he’s had since 2017. The office is one of three units in a multi-family property Gaughen purchased in 2010. He converted the unit to an office in 2017 to comply with the state law, while the other two units are currently actively rented to residential tenants according to the complaint. 

Letter of the law

Under the law, a broker must maintain a main office in Pennsylvania unless the broker maintains a main office in another state where they hold an equivalent broker license. The law was enacted in 1989, but the statutory authority for the regulation comes from the state’s Real Estate Licensing and Registration Act, which was enacted in 1980, which is the modern statute governing real estate licensing in the state.

However, the state’s original real estate broker licensing law was enacted in 1929 and was known as the Real Estate Brokers License Act of 1929. In his complaint, Gaughen claims the physical office requirement dates back to the original 1929 law. 

“No one seems to know why we have this requirement on the books, and I felt that it was time for someone to challenge it, so that’s what we are doing,” Gaughen told HousingWire.

According to the law, the Pennsylvania Real Estate Commission may conduct office inspections up to four times a year. In the lawsuit, Gaughen claims inspectors come equipped with a checklist that requires the office to have a landline phone, filing cabinets, a conference table and a sign outside. If the office is in a residential home, the law requires it to have a separate entrance. The Commission can fine brokers if their office is found to be non-compliant. 

In a video posted on Instagram by Institute for Justice, which is one of the law firms representing Gaughen, he claims that he doesn’t use his office for anything. However, he must maintain the office to comply with state law. 

“Every two years they come by and they check to make sure I still have this stuff. In the last nine years, I’ve had more inspectors here than clients,” he said in the video. “I don’t believe that the office requirement is fair. I think it’s anti-competitive, and I think it was put in place by larger brokers to prevent smaller brokers from entering the market.”

Gaughen goes on to explain that he normally meets clients at their properties or the property they are touring, which is also where he typically does most of the contract signing as well. 

“All of this is needless,” he said. “There’s no need for this space. There’s no need for this expense.”

Hurting the little guy

In the complaint, Gaughen and his legal team wrote that the recurring costs he incurs by having to maintain the office make it “difficult for [him] to compete with larger, established real estate firms, with greater annual revenue and the ability to spread out the fixed costs.”

“In other words, the office requirement protects established brokerages from honest competition,” the filing states.

Gaughen told HousingWire that the requirement adversely affects him and his clients.

“This is a small office and I’ve only ever had, at most five employees working for me at once, but that $35,000 really eats into my profit,” he said. “A bigger company, like a REMAX or a Keller Williams, can more easily absorb those costs, but to open a small independent office, that requirement is a big hurdle. They put this law into place on purpose to help the big guys and hurt the small firms.”

The lawsuit also argues that the office requirement takes housing out of the market, since brokers, like Gaughen, often use converted residences. 

“By using this as an office, by the government forcing me to have an office, I am taking a home away from somebody else,” Gaughen said in the video of the former apartment he converted into his office. “This could be an apartment that somebody could live in and, in fact, it was before I turned it into an office.”

Office requirements in other states

Despite the pushback, the state is not alone in requiring brokers to have a physical office in the state. Other states with similar requirements include Virginia, Maryland, New Jersey, Florida, Oklahoma and Alaska. 

Illinois also has a requirement for an office but it can be physical or virtual. However, like Pennsylvania, most of the states that require a physical office do have an exemption for a broker that is out of state and just holds a license in their state. 

The Pennsylvania Real Estate Commission did not immediately return HousingWire’s request for comment.