4 Sale News - BROKERS; LEASING BROKERS; COMMISSION

BROKERS; LEASING BROKERS; COMMISSION Thursday, June 21, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law

HGCD Retail Serv. v. 44-45 Broadway Realty, 826 N.Y.S. 2d (A.D. 1 Dept. 2006).

BROKERS; LEASING BROKERS; COMMISSION:

A broker was not entitled to its commission in a failed real estate transaction where, following a dispute, the parties settled their claim with tenant paying a substantial settlement and the lease being cancelled. No commission was payable because a condition precedent to the landlord's obligation to pay the commission, namely the tenant's payment of "rent," never occurred.

Landlord entered into a brokerage agreement with a broker whereby landlord agreed to pay the broker a commission of approximately $1.4 million, the first quarter due after all commission payment conditions were satisfied and the remainder payable in eighteen equal installments, commencing after the tenant makes a rent payment other than the first month's rent due upon execution of the lease. The commission payment conditions include: (i) execution and delivery of the lease, (ii) landlord's delivery of possession of the leased premises to the tenant and (iii) that tenant is not in default in the payment of rent.

After the lease was executed, an issue arose as to whether landlord delivered to tenant possession of the premises. Both landlord and tenant commenced lawsuits against each other, the tenant claiming that the landlord had failed to complete the landlord's work and the landlord alleged that the tenant failed to pay rent when due. Both actions were settled and as a part of the settlement, the tenant paid the landlord $8.75 million and the lease was terminated.

Two months later, the broker sent the landlord an invoice for its commission and when the landlord replied that no commission was due, the broker commenced the present action. The court found that the unequivocal language of the brokerage agreement conditioned payment of the balance of the commission on the tenant's payment of rent. The court noted that although the tenant's payment of rent was not a commission payment condition, it was nonetheless a condition precedent to the landlord's obligation to pay the first quarter of brokerage commission because ignoring this condition, would undermine the fact that the balance of the commission was only due once rent was paid.

In addition, the tenant's settlement payment neither satisfied tenant's obligation to pay rent nor eliminated its obligation to pay rent. As a result, the court held that the broker was not entitled to its commission.

Comment 1: One supposes that the broker would have the right (unless now collaterally estopped) to litigate the issue of whether the landlord in fact breached the agreement and gave the tenant the right to walk out of the agreement, thus depriving the broker of the commission. But without the involvement of the tenant, such an enterprise certainly would be expensive and high risk.

Comment 2: It would be difficult for the broker to draft around this eventuality, since likely the landlord would stick to the position that no matter how large the settlement, if the landlord doesn't get a lease obligating the tenant to pay rent for the term, the broker ought not to be compensated. The landlord has a point, of course, if in fact (as the landlord would maintain here) it was the tenant that in fact was in default and spoiled the deal.

Comment 3: Although there is no formal commission payable here, is there quantum meruit for whatever amount the settlement exceeded landlord's costs in dealing with the problem? In other words, should broker be compensated to the extent that the settlement represented landlord's lost expectation of rent? Why not?